Porter's Five Forces Topic in IBBI Valuation Exam

Porter's Five Forces Topic in IBBI Valuation Exam

The Porter's five forces topic appears under the heading Valuation Applications in the syllabus (https://ibbi.gov.in/SFAsyllabuswef01062020.pdf) for the IBBI valuation examination. IBBI has assigned this heading a weightage of 35%. Within this heading, several other business strategies such as SWOT, PEST, ADL etc are discussed.

Cleary, these are theory areas and a reasonable effort in this section would yield great benefit in the valuation exam. The questions are fairly easy, testing only one’s basic understanding of these topics.

Typically, students ignore these areas and focus on harder topics, looking to score well in those areas. The porter’s five forces are the easiest among the easy topic of business strategies.

From a professional perspective as well, business strategies give the IBBI Valuer the necessary tools to analyse a given business/industry. Therefore, rightly so, business strategies like the Porter’s five forces are tested in the IBBI valuer’s exam.

Let’s read about Porter’s five forces.

Porter's Five Forces may seem as a simple tool in a first glance, but it is quite powerful for understanding the competitiveness

of your business environment. This helps for identifying your strategy's potential profitability.

Five Forces analysis is usually used to identify an industry's structure to work out corporate strategy. Porter's models are often applied to any segment of the economy to know the extent of competition within the industry and enhance a company's long-term profitability.

The Five Forces model has taken the name after Harvard graduate school professor, Michael E. Porter. The tool was created by Harvard graduate school professor Michael Porter, to research an industry's attractiveness and certain profitability. Since its publication in 1979, it's become one among the foremost popular and highly regarded business strategy tools.

This is useful, because, once you understand the forces in your environment or industry which will affect your profitability; you will be ready to adjust your strategy accordingly. With its help you can take fair advantage of a robust position or improve a weak one, as well as taking precautions and avoid taking wrong steps in future.

Porter's Five Forces can be viewed as a business analysis model that helps to understand why various industries are ready to sustain different levels of profitability.

Porter’s Five Forces model is widely utilized to analyze the industry structure of a corporation and also its corporate

strategy. Porter identified five undeniable forces that play a role in shaping every market and industry within the world, with some caveats.

The five forces are frequently utilized to measure competition intensity, attractiveness, and profitability of an industry or market.

Corporations usually do keep an in depth watch on their competition, but they should see beyond the actions of their rivals and examine what other factors could impact the business environment. Porter identified five forces that structure the competitive environment, and which may hurt your profitability. These are:

Competitive Rivalry - This looks at the amount and strength of your competition. How many competitors do you have? Who are they, and in what way do their products and services compare with yours? In cases of intense competition, companies usually attract customers with aggressive price cuts and high-impact marketing campaigns.

Also, in markets with many competitors, your suppliers and buyers can go elsewhere if they feel that they are not getting a deal based on their interests from you. Instead, where competitive rivalry is minimal, and nobody else is doing what you are doing, then you will probably have tremendous strength and high profits.

Supplier Power - this is often determined by how easy it's for your suppliers to play with their prices. How many potential suppliers do you have? How unique is the product or service that they supply, and what is the real possibility (without incurring too many costs) of changing from one supplier to another? The larger the pool to choose from, the better it'll be to move to a less expensive alternative. But with a smaller number of suppliers active in the market, and therefore the more you need their services, the stronger their position and their ability to charge you more. That can impact your profits.

Buyer Power – Has to do with the ability of the buyer to affect and drive your prices down. How many buyers are there, and how big are their purchases? Realistically, how high is the chance for them to give up your products and services for those of a rival? Are your buyers strong enough to enforce their terms on you? When your customer pool is composed only by a few, they have more power and can dictate terms on you, but you are more protected as you increase the number of buyers.

Threats of Substitution - This refers to the likelihood of your customers changing your product or service for another alternative. For example, if you sell a singular software package that automates a crucial process, people may substitute it by doing the method manually or by buying from someone else. Cheap and easy substitutions of your product or services can weaken your position and threaten your profitability.

Threats of Latest Entry - Your position is often prone to suffering from new competitions ability to enter your market. So, take into account all the possibilities on how this can be achieved. How easy is for the competition to penetrate your industry or market? How much would the costs be, and are there rigorous industry regulations? If it takes little money and energy to enter your market it means that your position is weak and you are in danger from new entries. Or if you've got little protection from regulators or for your key technologies, then rivals can quickly enter your market and weaken your position. If you've got strong and sturdy barriers to entry, then you'll preserve superiority in the industry and you can take advantage of it.

Porter’s Five Forces is quite effective in helping the management of a company take an objective look of it. From there, the company, with a great deal of confidence, may strategies and make the next move to achieve its goals.

From this article you must have realised how intuitive appealing and easy to learn the Porter’s five forces is. Student’s unfamiliar with business strategies like ADL, Porter etc assume that these areas are complex and they avoid studying them. But how wrong could they be! Especially students from the three professional streams (Chartered Accountant, Company Secretary and Cost Accountant) find these topics novel.

But remove these misconceptions and embrace these theory areas. You can easily score those 2 or 3 marks in valuer examination that will make the difference between passing and failing. Plus, a great benefit is these learnings stick on for a lifetime. They will benefit you in your future practise areas.