Porter’s five forces model provides a better understanding of the industry dynamics.

Industry analysis is one of the crucial elements of the analysis prepared prior to the business model development and other strategic decisions made. Unlike some other more quantitative methods, Porter’s five forces model relies primarily on qualitative assessment.

Porter’s 5 forces model and the industry attractiveness – force: the bargaining power of buyers

Bargaining power of buyers is present when buyers are abusing their power to decrease the purchasing prices, increase the quality, add additional services, etc.

Factors affecting the bargaining power of buyers are:

• Concentration of buyers
• Fragmentation of suppliers
• Alternative sources of supply
• Low switching cost
• The importance of product / service to the customer
• The threat of takeover by the buyer

Michael Porter five forces model and the industry attractiveness – force the bargaining power of suppliers

Bargaining power of suppliers is present when suppliers are abusing their power to raise the selling prices, decrease the quality and dispose the additional services, etc..

Factors affecting the bargaining power of suppliers are:

• Concentration of suppliers
• Fragmentation of customers
• Alternative sources of supply
• High switching cost
• Strong brand of the supplier
• The importance of the transaction to the supplier
• The threat of takeover by the supplier

5 forces model and the industry attractiveness – force the threat of new entrants

The entry of new competitors typically leads to lower profitability of all competitors in the industry.

Factors affecting the threat of new entrants are:

• Initial investment in fixed assets
• Economies of scale
• Experiences
• Access to supply and distribution channels
• Expected retaliation
• Loyalty of customers and suppliers
• Legislation and politics
• Differentiation

Five forces model analysis and the industry attractiveness – force the threat of substitutes

Profitability of the companies operating in the industry is not affected solely by the competition and new entrants, but also by substitutes.

Threat of substitutes involves three dimensions:

• Product for product / service for service substitution
• Substitution of need
• Generic substitution

Porter’s five forces model and the industry attractiveness – force the competitive rivalry

Factors affecting the competitive rivalry are:

• Competitors are in balance
• Low differentiation
• Slow market growth
• High fixed costs in the industry
• High exit barriers

Interested in industry analysis? Please contact us and we will present you the cooperation and our offer!

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Business valuE determinants

Business value is affected by cash flows from operations, changes in net working capital, net investments, growth potential and underlying risks. Any measures improving these determinants will influence the business value.

However, not everything is in the power of companies to influence. Business worth is significantly impacted by macro factors. In this context one should understand the importance of economic climate as well as industry developments and trends. This is why timing to M&A is very important.

Hint: As consultants we often prefer to present the client the value development cycle. Business valuations in various points in time is a good reference point for them to see if they are confident with the business value at a particular time.

Prioritizing the measures – doing the right things counts

The more value the company adds to the supply chain, the more important player it is and higher its business value. For that reason, it is important to understand first the needs and requirements of key stakeholders and ways to meet them effectively and efficiently. Based on that fact, one should then be prioritizing the recommendations shared below … 

Tips & tricks for higher business valuE

Step 1 to higher business value: Ensure high cash flows from operations

– Differentiate your business
– Brand your product
– Tie your clients to your products/services
– Focus on most profitable products and/or services
– Acquire the right sales & marketing techniques and grow your revenue
– Appreciate and retain your key employees
– Establish barriers to enter the market
– Gain bargaining power against other companies in the supply chain
– Exploit large prepayment discounts
– Supervise the COGS
– Enhance the productivity of employees
– Optimize interest rates and taxes

Step 2 to business value boost: Optimize your net working capital

– Establish partnership relation
– Negotiate better payment conditions
– Optimize inventories and inventory turnover

Step 3 to business value maximization: Optimize your net investments

– Be aware of consumer trends
– Choose the right timing for acquiring new technologies
– Carefully plan capital investment – make investments that will support growth
– Increase the capacities in line with demand
– Ensure that the level of investments covers the growth potential
– Optimize financing

Step 4 to business value enhancement: Enhance your future growth potential

– Innovate with business model and come up with creative strategy
– Rethink processes and stick only to those that add value to your clients
– Develop new products and services

Step 5 to high business value: Minimize the risks related

– Keep the level of indebtedness at the level of comparable companies
– Endeavor appropriate product/service mix diversification
– Disperse your sales geographically
– Gain deals of appropriate size
– Supervise the creditworthiness of clients and suppliers
– Assure the level of fixed costs as low as possible
– Inform owners extensively and on a regular basis
– Give priority to transparency

Maximizing the business value is the most important criteria there is in running your business. For that reason it is important to follow the value of your company continuously, strive to bring the value maximization goals closer to the stakeholders involved, introducing the value based management techniques and setting up the KPIs based on business value maximization principles etc.

As a rational investor, one should always keep in mind also the exit strategy. The fact is that as an owner you will not be able to run or follow the company forever, so have a plan how you plan to divest your investment from the very beginning.

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