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As the industry or its products are new, foreign imports are not yet a danger.

Moderate risk

Due to customer demand, there is insufficient volume to keep pace with this need domestically and this allows competitively priced foreign imports to enter the home supply chain.

High risk

The business has a product that is standard and is readily available from overseas competitors at a cheaper price.

Sales - customer/industry concentrated (Porter - degree of rivalry). There are two elements to this that you require to assess:

• sales being customer concentrated - if sales are well spread across a market, with no one customer accounting for say, more than 25% of total sales of a business, then the risk to exposure of one customer withdrawing their business should not have a fatal effect on your customer.

However, if your customer sold 75% of their production to say, only one High Street store, then the risk is extremely high if that one customer cancelled its contract for one reason or another. For example, at renewal of the contract it has found a cheaper supplier, or goes out of business and the contract becomes void, or finds a justifiable reason for breaking the contract (late delivery, quantity not met, inferior quality).

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sales being industry concentrated - the industry has a product that is only sellable into the one market, and then the risk is again high if that industry suffers a reduction in the demand for its products.

Sales - customer/industry concentrated LOW MODERATE HIGH Low risk

Sales are well spread to many customers across many markets or industries.

Moderate risk

There are pockets of concentration of sales to individual customers or markets/industries that make up more than say, 25% of turnover.

High risk

Sales are concentrated on a few customers or markets/industries that make up more than 50% of turnover.

Threat of substitutes (Porter - threat of substitutes)

Here the threat of substitutes refers to products available from other industries and how the elasticity of the price is affected. As a result of cheaper alternatives, demand in the original industry can become flexible and the price charged can fall.

It is important to remember when dealing with the threat of substitutes that in these circumstances it is the risk of alternatives coming from another industry.

Bargaining power of buyers (the price that has to be paid for supplies of raw materials, services, etc) (Porter - buyer power)

This is straightforward and self explanatory. The risk to the industry is high where the end-users of products or services can dictate the price they pay. Can you go into a supermarket and tell the assistant that you do not want to pay Rs. 400 for a tin of beans, but would rather pay Rs. 100? You will be shown the door (politely) and the supermarket can dictate the price at which they sell to you, unless of course another supermarket in the local area was selling at the price you wanted and then that is another risk - competition. For this reason, bargaining power of buyers visiting ii large supermarket or other major retailer is generally seen as a low risk.

Where there are few buyers in a market place or where they purchase a significant proportion of an industry’s output they will be influence prices and will represent a high risk for those induscr.cs ntf manufacture the products or services such as defence con:

Threat of substitutes LOW MODERATE HIGH

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Low risk

The threat from substitute products or services is insignificant, low or even remote, due to strong customer brand loyalty or the patents or licences the company holds for its products.

Moderate risk

There are some substitutes available, but they have not made an impact on demand for existing company products due to their superior quality or brand loyalty or their reputation.

High risk

Substitute products are widely available from different industries and competition has created falling prices, or products of the same or better quality can be obtained elsewhere and there is generally no brand loyalty. Where there are few buyers in a market place or where they purchase a significant proportion of an industry’s output they will be able to influence prices and will represent a high risk for those industries that manufacture the products or services, such as defence contractors.

Bargaining power of buyers

LOW MODERATE HIGH Low risk

Consumers cannot influence the price of goods or services due to limited supply or the dearth of alternatives.

Moderate risk

Consumers may be able to influence selling price to a limited extent, but generally the businesses within the industry can control prices.

High risk

Selling prices of products and services must be competitive due to their general profile and availability of alternatives.

• Bargaining power of suppliers (Porter - supplier power)

This is the flip side of the previous risk item. Considering again a large High Street supermarket, do you think they will be in a strong or a weak position when negotiating with suppliers? You will no doubt have read widely already about the influence that supermarkets or other major High Street retailers can exert on their suppliers; thus in this case supermarkets will again be assessed as low risk.

Competitive situation

Under this heading we are going to finalise the two remaining factors in Michael Porter’s five forces - barriers to entry and degree of outside regulation.

• Barriers to entry (Porter - barriers to entry)

Barriers for an industry to enter a competitor’s market can be significant and unique to that industry. There are a number of factors that can create these barriers:

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cannot be used to produce another product. Normally the costs of obtaining this specialist equipment is expensive; for example, the printing presses of a newspaper can only be used to produce tabloid or broadsheet newspapers and would be totally useless to a small print works that produced books. Specialised plant and machinery can deter new entrants from entering the industry, because if the venture fails, the plant cannot be used for an alternative use or to produce a different product.

Bargaining power of suppliers

LOW MODERATE HIGH Low risk

Suppliers have little or no ability to influence the price of goods or services due to availability of alternatives.

Moderate risk

Suppliers can have some influence on the prices they charge the business for materials and supplies.

High risk

Suppliers have considerable influence over the prices of their goods or services due to limited supply or lack of alternatives.

Economies of scale can be a limiting factor for new entrants and discourage competition. For example, if to break even an operator requires to capture 20% market share, this may be considered too high a price to pay for entering the industry. Often products in industries where economies of scale operate are sold at a premium.

Industry know-how, specialist knowledge, intellectual property rights, copyrights, licences and patents can all restrict entry into an industry and its markets. Possession of these factors restricts new entrants to a market. If a competitor starts to produce without permission a product that has been patented by another business, they are in breach of the rights of the business that owns the patent.

While being barriers to entry, all of these factors are also barriers to exit the industry, as we discussed above. If the barriers to exit are a high risk, then it is only but logical to surmise that the barriers to entry are likely to be a high risk as well.

In summary, markets or industries are: . easy to enter if there is:

- universal technology. - low brand recognition.

- ease of entry to distribution channels. . difficult to enter if there is:

- specialist knowledge, intellectual property rights, copyrights, licences and patents.

- an established brand identity. - distribution channels are restricted.

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. easy to exit if there are:

- simple strategies to fixed asset disposal. - costs of exit are low.

- businesses that are independent of the market and can compete in another market.

. difficult to exit if there are:

- specialised plant and machinery or restricted alternatives of use

- high costs of quitting and these will have a significant adverse impact on shareholder value

- forward or backward integration, as this will affect viability of other businesses owned.

Competitive situation Barriers to entry LOW MODERATE HIGH Low risk

Start-up costs are insignificant with merchandise not easily differentiated and this allows ease of entry into the market.

Moderate risk

Some level of capital investment is needed and access to distribution channels is necessary before new entrants may begin making sales.

High risk

Significant barriers exist because of brand name loyalty, high capital investment requirements, or there is limited access to distribution channels and any of these makes entry into the industry difficult.

Degree of outside regulation (Porter - barriers to entry)

Although we touched on regulation when exploring barriers to entry, it is important that we make a distinction where there are elements of voluntary (or self regulation) and where market forces continue to play an influence on how much regulatory influence applies.

Regulators normally have statutory powers and licence the businesses which operate in their sectors. Without a licence, it would be illegal to operate. Announcements by governments which propose changes in legislation or process requirements can wrong foot businesses.

Risks are often interdependent or one can impact on another area.

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Degree of outside regulation LOW MODERATE HIGH Low risk

There are few, if any, government laws/regulations affecting the industry. The industry could be self regulating.

Moderate risk

There are some government laws/regulations affecting the industry. On the whole the industry is self regulating.

High risk

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government laws/ regulators.

Now that we have analysed all the risk factors, we can use our judgement to arrive at an overall risk rating for the industry. This is what we have been working up to in our analysis - an overall assessment of what the industry risk is. We achieve this by completing the following.

Overall industry/ market rating