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