Porter's 5 Forces (Tesla Example) - How to do an Industry Analysis - Porters 5 Forces Explained

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 please get the thumbs up. Hit the subscribe button. Thank you for stick with me all the way to end of the video now seeing the next video.

Channel: Learn to Invest

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Keywords: Investment Ideas, learn to invest, investing for beginners, stock market, porter’s forces, porters 5 forces, porters five forces, threat of new entrants, threat of substitutes, bargaining power of suppliers, bargaining power of buyers, how to analyze an industry, five forces model, porters five forces analysis, porter's 5 forces model, five forces, 5 forces, 5 forces model, porter model, porter's five forces example, 5 forces analysis, tesla

Id: 5F0dI8zaotU

Length: 9min 51sec (591 seconds)

Published: Wed Jul 31 2019