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Porter's 5 Forces (Tesla Example) - How to do an Industry Analysis - Porters 5 Forces Explained - YouTube
Channel: Learn to Invest - Investors Grow
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Hi I'm Jimmy in this video
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we're looking at how to perform an
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industry analysis using Porter's
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Five Forces and we're going
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to use Tesla as our example.
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So we're going through each of the
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five steps in Porter's Five Forces
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and just so we're all aware.
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This video is intended to be a
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complement to a video I did a few
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months back called The Eight
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Steps to analyzing a company for
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analysis.
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So this is the industry analysis
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portion. That was the company metals
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portion. OK.
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So Porter's Five Forces helps
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us break down in the industry to
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more fully understand the intensity
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of the competition within that
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industry.
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And this is a good place to start
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whenever we're analyzing a company's
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strategy and when we're trying
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to identify the potential strengths
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of that company and the potential
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weaknesses.
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Okay. So let's jump in.
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So the first one of Porter's Five
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Forces is the threat of
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new entrants.
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So with the threat of new entrants
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what we're looking for is we're
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looking for the potential of another
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company coming into in this
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case Tesla's automotive industry
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and competing with the more
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companies that come into the
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industry or the worst that is for
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the companies that are already in
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that industry.
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So ultimately what we're trying to
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do is to determine the threat
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level for each of Porter's Five
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Forces.
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So we're simply going to use
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high medium or low to
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identify that threat.
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Clearly low threat is the best
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possible version and
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in an ideal situation there would be
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a company that had a low threat
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level for all of Porter's Five
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Forces and that would
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mean in theory that the company
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is well positioned for long term
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profitability and dominance within
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their industry.
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So how can we determine the level
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of the threat of new entrants.
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Well in Tesla's case I think it's
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important to focus on barriers to
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entry.
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So here we want to analyze
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how difficult it is for a new
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company to get into the industry.
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Now there are a few different things
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that we could use to determine
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barriers to entry.
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One of them is we could ask
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ourselves Are there economies of
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scale in place already economies
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of scale imply that larger companies
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have an advantage over smaller
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companies since in theory
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it would cost a larger company less
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to make a product versus a smaller
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company. So in the case of the auto
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industry with Tesla yes
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economies of scale are absolutely
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present since large companies
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tend to have the pricing advantage.
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Another thing that we can look at is
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product differentiation.
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And clearly for Tesla in
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the auto industry their product
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is quite different.
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And that gives them a huge
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advantage. It's not easy for
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somebody else to come in and redo
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what they are doing or even
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innovated further than we want to
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consider how much money it costs to
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run the business.
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So once again in the case of Tesla
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it would cost a decent amount of
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money for a new company to come in
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and launch an automobile
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manufacturer.
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So that would make the barriers to
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entry even higher for potential
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new entrants then we'd like to
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consider switching costs.
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So if we look at Tesla's customers
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how expensive or how difficult it is
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for a customer to switch from let's
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say driving a Ford to driving
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a Tesla here we could
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say that it's probably very low
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switching costs if any
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at all. So that's a good thing
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for the competitiveness of this
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particular part of the analysis.
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Now we could go on and on about how
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to analyze economies of scale
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but just so we have some ideas for
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our future analysis of Porter's Five
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Forces.
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Well we can also look at things like
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how accessible is distribution of
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their products or is
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the government going to block it at
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all. This is particularly true for
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oil companies or drilling companies
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things like that.
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So with that in mind and looking
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at the entire picture of Tesla
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in their industry well I'm going to
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say that it's a low threat that
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new entrants are going to come in
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which at the end of the day this is
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a positive thing for test stock.
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Okay. So our next one of Porter's
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Five Forces is the bargaining
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power of suppliers.
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So this is important because
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the less power that a supplier has
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over a business well
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that's better for the business.
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So if we were running let's say
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a lemonade stand and there were
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a 100 different places nearby that
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we could buy lemonades from.
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Well two things would happen.
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First the price of lemonade is
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likely to be quite low.
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And second it's unlikely
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that we're going to run out of
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lemonade anytime soon.
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Both of those are good signs for
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our business.
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In the case of Tesla they actually
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spelled it out quite clearly for us
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in their quarterly and annual
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filings in a section called supply
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risk.
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So in this section they say
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that the majority of their suppliers
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are the only place that they
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can get the necessary components
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that they need for their product.
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So right off the bat we know that
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with this one of Porter's Five
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Forces we know that the threat is
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high and this could be a bad
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thing for Tesla or
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Tesla's business because ultimately
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having limited suppliers
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implies that suppliers could either
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rape raise prices
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or if the supply ever runs into.
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Manufacturing issues.
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Well that will have a direct
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reflection on Tesla's
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ability to manufacture now in a very
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similar version as this.
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We have the bargaining power of
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buyouts now with Tesla.
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The bargaining power of buyers or
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their customers.
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Well it's actually quite low
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because Tesla sells to so
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many different customers and no one
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customer represents a large
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portion of their revenue.
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Well customers are going to have
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very limited negotiating power.
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And we should look to find this
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information in the annual or
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quarterly filings as well.
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If you're looking for where to find
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so we can see that the bargaining
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power of customers and the
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bargaining power of suppliers are
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very related.
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Take Tesla supplier situation
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where they only have a few
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suppliers.
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Well I'm guessing that test
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is a very large customer of
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those suppliers.
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So in theory Tesla
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would have a lot of lot of
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bargaining power over that
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supplier as a customer.
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So that's sort sort of slices
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both ways.
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The two of them are most likely to
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try to work together and keep their
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business growing.
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Okay so for this force I think it
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makes sense to say that there is a
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low threat when it comes to the
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bargaining power of buyers.
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And next we have the threat of
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substitutions.
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Okay let's think this one through.
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So Tesla makes electric vehicles
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and this is clearly a very
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unique product but
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we don't have to buy an electric
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vehicle.
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We could buy a more traditional gas
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powered vehicle.
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We could buy a hybrid vehicle.
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We could take public transportation.
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So there are other choices Tess's
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vehicle isn't the only choice
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that we have when it comes to buying
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a vehicle. So yes Tesla makes a very
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unique vehicle but that doesn't mean
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that there are no substitutes for
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their product.
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So here I think it makes sense to
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mark down the threat of substitutes
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as a high risk for
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Tesla or high threat for test.
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Okay now we're moving on to our
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fifth and final force in
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Porter's Five Forces rivalry
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among existing competitors.
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So as we could see all the forces
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sort of playing to this one.
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And what we're looking for here is
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things like how many competitors are
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there. In theory the more
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competition that there is the worst
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that is for the companies in that
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industry there is
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likely pressure on margins is likely
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pressure on sales they'd have to do
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more discounts things along those
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lines. But then we want to look at
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things like product differentiation
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or switching costs.
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Now we know that a customer can
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switch fairly easily from
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a one car company to another car
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company.
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And when it comes to differentiation
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well Tesla clearly has tons
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of differentiation when compared to
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their competitors.
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Now clearly we can tell that there
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is a ton of competition within the
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auto manufacturers industry
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and we know that because
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for example Tesla recently reduced
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the price of their Model 3 car.
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There's no reason to cut the prices
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of your vehicles unless there's
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competition out there driving
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customers in a different direction.
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So clearly that would indicate that
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there is high rivalry amongst
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manufacturers in the auto industry.
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Plus we know how many deals or sales
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are being offered by different car
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manufacturers at different times of
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the year.
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All of this points to a high
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threat level when it comes to
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rivalry amongst competitors
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but we don't want to completely
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write off the fact that Tesla
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is in fact a unique vehicle
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and they make very different
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cars.
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And if we want a high quality
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electric vehicle Tesla may
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be the only logical choice.
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So as soon as they get some points
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for how different their product is
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but they're also in the middle of
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a very fiercely competitive auto
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market.
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Well I think that it makes sense for
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this particular one of Porter's Five
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Forces to mark this threat as a
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medium threat.
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Now I want to point out that
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Porter's Five Forces as an analysis
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in general is very company specific
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as you can imagine if we were doing
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the same analysis for Ford
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Well we would this would end up
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looking very different.
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And I think it's important to
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realize that the goal here
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is to more fully understand
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the entire process the entire
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what the company goes through and
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where the future of their business
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possibly lies.
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And as I mentioned earlier in the
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video if we want to do
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a thorough analysis of a company
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I believe this is a good place to
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start.
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And then the other video that I
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mentioned where I called it The
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Eight Steps to analyzing a stock
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a link in the description below if
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you're interested.
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That would be the next place I would
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go to after we do this analysis.
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So please let me know what you think
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of Porter's Five Forces in the
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comments below.
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And do you think that Porter's Five
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Forces are a good way to analyze an
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industry in general.
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Did I leave anything out about tests
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or about the process that you would
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have included.
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And if you haven't done so yet
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please get the thumbs up.
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Hit the subscribe button.
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Thank you for stick with me all the
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way to end of the video now seeing
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