porters 5 Force AnAlysis For Aluminium Industry

Problem Overview
The following details are given for top 10 companies in the Aluminium industry. Sales Variable Costs Adv. expenses Dist. Exp. R&D Expenses Fixed cost Sales growth Quantity (MT) Installed cap (MT)

The objective is to provide recommendations to a firm which intends to exit the industry. The analysis should also include profitability of the firm based on Porters 5 force model.

Porters 5 Force Model

Porters five forces are

The entry and exit barriers The degree of rivalry among similar firms The bargaining power of buyers The bargaining power of suppliers The threat from substitutes Using Porter's analysis firms are likely to generate higher returns if the industry: Is difficult to enter and exit the industry There is limited rivalry Buyers are relatively weak Suppliers are relatively weak There are few substitutes or switching to a substitute is not easy. On the other hands returns are likely to be low if: The industry is easy to enter and exit There is a high degree of rivalry between firms within the industry Buyers are strong Suppliers are strong It is easy to switch to alternatives

Observations
Calculations for parameters are as obtained in excel attached:

Industry

Category

Aluminium

Industry under consideration Coal Supplier for Al Steel Substitute for Al Automobile Buyer for Al

HH1 CR4 Entry Barrier (Breakeven) 0.44 0.95 8.47 0.12 0.24 0.15 0.57 0.81 0.67 28.59 155.73 719665.95

Exit Barrier (Fixed Cost) 0.53 0.86 0.53 0.35

Growth Rate

Cap. Profit Utilization Margin

4.84% 14.52% 16.72% 17.98%

0.95 0.9 0.84 0.97

0.60 0.86 0.49 0.38

1 Threat of new entrants and exit barriers

The entry barrier is comparatively very small for Aluminium industry and this gives an easy entry to a new player. Hence Aluminium has a high threat of new entrants. Similarly the exit barrier for Aluminum is medium and mostly skewed to the lower side. This makes exit barrier also easy for the industry.

2 Degree of rivalry
For Aluminum industry the concentration ratio of the top 4 firms is very high at 95%. Level of capacity utilization is quite high at 95% for each firm and therefore an overall of 95% for the industry. Growth rate is low at only 4.8%. These factors create a strong rivalry among the various companies in this industry.

3 Bargaining power of buyers

The buyer of Aluminium in this analysis is the automobile industry which has a very huge entry barrier and hence there is less chance of getting new buyers. Also the exit barrier is less for the buyer which increases the chance of existing buyers leaving the industry. This gives the buyer a good bargaining power over the Aluminium industry. Also the growth rate of automotive industry is high which creates an increase in demand.

4 Bargaining power of supplier

In this analysis we consider the coal industry as seller to Aluminum industry. Coal is having a lower entry barrier but has a big exit barrier. Also the growth rate of the industry is little higher and the profit margin is the highest among the industries compared. The concentration ratio is also not so high. This gives an equal opportunity for all companies to open up new business. Hence the bargaining power of the supplier is less.

5 Threat from substitutes

The substitute available for Aluminium in this analysis is steel. We can see that steel has a high entry barrier, but has almost the same exit barrier as that of Aluminium. The growth rate for steel industry is much higher when compared to Aluminium industry, but at the same time the profit margin is lesser. Due to this situation steel industry cannot create a price competition to Aluminium industry. The concentration ration for both Aluminium and steel are comparable. Hence steel cannot bring a substitute threat to the Aluminum industry.

Recommendations for exiting the Industry

Even though the profit margin for Aluminium industry is slightly favorable and is on the upper half industry concentration (CR ratio of AI) is very high at 95% for top 4 companies. The industry does not have much diversification which still leads to higher levels of rivalry and price competition. This in turn will lead to decline in profit margin. The growth rate of Aluminum industry is the lowest (4.84) and capacity utilization is maximum (.95) which gives the existing companies very less chance of expansion. Owing to the lower entry barrier for the industry there is always chance of new companies entering the Aluminium industry. Coincidently the exit barrier (Fixed cost .53) is also lower for Aluminium industry. The industry also faces a higher bargaining power from the buyers (if we examine the result in automobile industry) and hence there is still higher price competition which forces the companies to compromise on their profit. These facts and figures clearly shows that if you are not among the top 4 companies in the industry there is very less chance for your profitable survival and growth. Also the overall profit will be less. So as a consultant I would support the decision taken by the company to exit from the industry.