CHAPTER 3

INDUSTRY ANALYSIS
3.1 PORTER’S 5 FORCES MODEL
Application of this model can help Asian Paints Ltd to determine the industry
attractiveness and understand its competitive positioning in the market. The
analysis can also be used to make some strategically wise decisions that could
improve the performance of Asian Paints Ltd and ensure long-term survival.

The application of Porter five forces model in real-world context allows

organisations to make wise strategic decisions. Impact and importance of each of
the five forces is context dependent. By using Five Force analysis, Asian Paints
can determine the industry attractiveness, make effective entry/exit decisions
and assess the influence of these forces on their own business and competitors.
Moreover, the dynamic analysis of this model can reveal important information.
For example, Asian Paints Ltd can combine the Porter 5 force model with PESTEL
framework to determine the industry’s potential future attractiveness. In some
cases, companies do not have the required information to analyse five forces. In
such a scenario, the analysis can be conducted with the help of assumptions.
Mostly, consultants consider this model as a starting point, and other
frameworks are used in conjunction for a better understanding of the external
environment.

Threats of new entrants

Threat of new entrants reflects how new market players impose threats to the
existing market players. If the industry will be profitable and barriers to enter
the industry will be low, it will attract more players and hence, the threat of new
entrants. will be high. factors that reduce the threat of new entrants for Asian
Paints are:

 Entry in the industry requires substantial capital and resource

investment. This force also loses the strength if product differentiation is
high and customers place high importance to the unique experience.
 Asian Paints Ltd Division will face the low threat of new entrants if
existing regulatory framework imposes certain challenges to the new
firms interested to enter in the market. In this case, new players will be
 required to fulfil strict, time consuming regulatory requirements, which
may discourage some players from entering the market.
 The threat will be low if psychological switching cost for consumers is
high and existing brands have established a loyal customer base.
 New entrants will be discouraged if access to the distribution channels is
restricted.

Asian Paints Ltd Division will be facing high new entrants threat if

 Existing regulations support the entry of new players.

 Consumers can easily switch the brands due to weak/no brand loyalty.
 Initial capital investment is high.
 Building a distribution network is easy for new players.
 Retaliation from the existing market players is not a discouraging factor.

Asian Paints Ltd can tackle the Threat of New Entrants by can develop brand
loyalty by working on customer relationship management. It will raise
psychological switching costs. It can develop long-term contractual relationships
with distributors to widen access to the target market. Asian Paints Ltd can also
an investment in research and development activities, get valuable customer
data and introduce innovative products or services to set strong differentiation
basis.

Threat of Substitute Products or services

The availability of substitute products or services makes the competitive

environment challenging for Asian Paints and other existing players. High
substitute threat shows that customers can use alternative products or services
from other industries to meet their needs. Various factors determine the
intensity of this threat for Asian Paints Ltd are:

The Threat of Substitute Products or services increases when;

 A cheaper substitute product or service is available from another industry

  The psychological switching costs of moving from industry to substitute
products are low.
 Substitute product offers the same or even superior quality and
performance as offered by Asian Paints Ltd International Business
Division’s product.

However, this threat is substantially low for Asian Paints Ltd when;

 The switching cost of using the substitute product is high (due to high
psychological costs or higher economic costs)
 Customers cannot derive the same utility (in terms of quality and
performance) from substitute product as they derive from the Asian
Paints product.

Asian Paints can tackle the Threat of Substitute Products or services through
reducing Threat of Substitute Products or services by clearly emphasising how
its offered product and service is better than the available substitutes. It should
provide convincing reasons to the customers by offering a better experience and
high value for money. It can raise switching costs by working on loyalty. Lastly, it
can improve the quality, maximise value for money and set strong differentiation
basis to discourage customers from using the substitute product.

Rivalry among existing firms

The Rivalry among existing firms shows the number of competitors that give
tough competition to the Asian Paints and High rivalry shows Asian Paints Ltd
International Business Division can face strong pressure from the rival firms,
which can limit each other’s growth potential. Profitability in such industries is
low as firms adopt aggressive targeting and pricing strategies against each other.

The Rivalry among existing firms will be low for Asian Paints Ltd are:

 There are only a limited number of players in the market

 The industry is growing at a fast rate
 There is a clear market leader
  The products are highly differentiated, and each market player targets
different sub-segments
 The economic/psychological switching costs for consumers are high.
 The exit barriers are low, which means firms can easily leave the industry
without incurring huge losses.

Similarly, there are some factors that increase the Rivalry among existing firms.
For example, the company will face intense Rivalry among existing firms if
market players are strategically diverse and target the same market. The rivalry
will also be intense if customers are not loyal with existing brands and it is easier
to attract others’ customers due to low switching costs. Competitors with equal
size and offering undifferentiated products with slow industry growth tend to
adopt aggressive strategies against each other. These all factors make the Rivalry
among existing firms a major strategic concern. Asian Paints Ltd International
Business Division can tackle the Rivalry among existing firms by focus on the
implicit needs and expectations of its customers to strengthen the differentiation
basis. It should raise switching costs by developing long-term customer
relationships. The organisation should also invest in research and development
activities to identify new customer segments. In some cases, collaborating with
competitors can be mutually beneficial. The organisation can look for this option
as well.

Bargaining Power of Suppliers

Bargaining power of suppliers in the Porter 5 force model reflects the pressure
exerted by suppliers on business organisations by adopting different tactics like
reducing the product availability, reducing the quality or increasing the prices.
When suppliers have strong bargaining power, it costs the buyers- (business
organisations). Moreover, high supplier bargaining power can increase the
competition in the industry and lower the profit and growth potential for Asian
Paints Similarly, weak supplier power can make the industry more attractive due
to high profitability and growth potential.

Bargaining power of suppliers will be high for Asian Paints Ltd Division if:
  Suppliers have concentrated into a specific region, and their
concentration is higher than their buyers.
 This force is particularly strong when the cost to switch from one supplier
to other is high for buyers (for example, due to contractual relationships).
 When suppliers are few and demand for their offered product is high, it
strengthens the suppliers’ position against Asian Paints Ltd.
 Suppliers’ forward integration weakens the Asian Paints position as they
also become the competitors in that area.
 If the Division is not well educated, does not have adequate market
knowledge and lacks the price sensitivity, it automatically strengthens the
suppliers' position against the organisation.
 Other factors that increase the suppliers’ bargaining power include-high
product differentiation offered by suppliers, Asian Paints making only a
small proportion of suppliers’ overall sales and unavailability of the
substitute products.

Contrarily, the bargaining power of suppliers will be low for Asian Paints Ltd
International Business Division if:

 Suppliers are not concentrated

 Switching costs are low
 Product lacks differentiation
 Substitute products are available
 Highly price sensitive and has adequate market knowledge
 There is no threat of forward integration by suppliers.

Asian Paints can strengthen its position against suppliers by decreasing the
dependency on one or a few suppliers. It will increase its price sensitivity.
Developing the long-term contractual relationships with suppliers from different
regions not only lowers their bargaining power but also allows them to improve
its supply chain efficiency. Finally, Asian Paints can find the alternate ways of
producing the product if product demand is high enough and the firm has
required competencies and expertise. However, it requires detailed cost-benefit
analysis to determine its feasibility. Product redesign and diversification of the
product lines can also help the organisation reduce the suppliers’ power in the
market.

Bargaining Power of Buyers

Bargaining power of buyers indicates the pressure that customers exert on the
business organisations to get high quality products at affordable prices with
excellent customer service. This force directly influences their ability to
accomplish the business objectives. Strong bargaining power lowers profitability
and makes the industry more competitive. Whereas, when buyer power is weak,
it makes the industry less competitive and increase the profitability and growth
opportunities for Asian Paints.

There are some factors that increase the bargaining power of buyers:

 A more concentrated customer base increases their bargaining power

against Asian Paints.
 Buyer power will also be high if there are few in number whereas a
number of sellers (business organisations) are too many.
 Low switching costs (economic and psychological) also increase the
buyers’ bargaining power.
 In case of corporate customers, their ability to do backward integration
strengthen their position in the market. Backward integration shows the
buyers' ability to produce the products themselves instead of purchasing
them from Asian Paints Ltd Division.
 Consumers’ price sensitivity, high market knowledge and purchasing
standardised products in large volumes also increase the buyers'
bargaining power.

Some factors that decrease the bargaining power of buyers include lower
customer concentration (means the customer base is geographically dispersed),
customers’ inability to integrate backwards, low price sensitivity, lower market
knowledge, high switching costs and purchasing customised products in small
volumes. This Division can manage the bargaining power of buyers by increasing
and diversifying their customer base. It can be done by introducing new
products, targeting new market segments and adopting the product
diversification strategies. Marketing and promotional strategies can also be
helpful in this regard. Building loyalty by embedding innovation and offering
excellent customer experience can raise the switching costs, which will
ultimately reduce their bargaining power. Asian Paints Ltd can adopt these
strategies to strengthen its competitive positioning in the market.

3.2 PEST ANALYSIS

Asian Paints Ltd PESTEL analysis includes macro environment factors that
impact the overall business environment – Political, Economic, Social,
Technological, Environmental, and Legal factors. Managers at Asian Paints need
to examine three inter-related environments in order to come up with an
effective strategy. The three inter-related environments are – industry
environment in which the company operates in, the geographic market or
country in which company operates, and wider socio economic / macro
environment. PESTEL analysis is mainly the assessment of macro environment
factors.

Political Factors

 Regulatory Practices -The regulatory practices are streamlined with global

norms which have helped the country to improve its “ease of doing business”
ranking.

Segregation of Political Responsibilities between Different Government Agencies

– There are numerous government agencies which reduces the risk of
overwhelming pressure by one agency. But on the flip side it does increases both
time and cost of doing business and getting certifications and clearances.

Size of Government Budgets – Both Local Governments and National

Government – The government at both national level and local levels are running
deficit budgets which is boosting growth in the short term but may lead to
increase in inflation over medium term. The bond rating of national government
is investment grade.

Role Local Governments Play – Local governments are highly influential in the
policy making process and implementation as most of the policies and
regulations are implemented by the local government as enforcement agencies
mostly report to local government in their own states regarding various laws

Government Regulations and Deregulations – The government is adhering to all

the rules and regulations under World Trade Organization norms. There is
consistency in both policy making and implementations of those policies.

Economic Factors
Price Fluctuations in both Local and International Markets – Compare to the level
of quantitative easing in last decade the prices of Paints Asian products and
prices of overall products have remained sticky in the US market. Paints Asian
should consider the fact that at deficit levels of United States in an emerging
economy can lead to rampant inflation and serious risks of currency
depreciation.

Work Force Productivity – Work force productivity in US has grown by 25-30 %

in last two decades even though the salaries are not reflecting those gains. It can
enable Paints Asian to hire skilled workforce at competitive salaries.

Demand Shifts from Goods Economy to Service Economy – The share of services
in the economy is constantly increasing compare to the share of manufacturing,
goods, and agriculture sector.

Employment Rate – If the employment rate is high then it will impact Paints
Asian strategies in two ways – it will provide enough customers for Paints Asian
products, and secondly it will make it expensive for Paints Asian to hire talented
and skilful employees.

Government Spending – As mentioned in the political factors, government of the

country is running deficit budgets. The implication for Paints Asian is that it can
boost sales of its product in short run but also expose Paints Asian to medium
term forex and currency depreciation risks.

Social Factors 

Attitude towards Authority – Various cultures in different part of the world have
different attitude towards authority. In Asia authority is respected while in west
it is something to rebel against. Paints Asian should carefully analyse the attitude
towards authority before launching a marketing campaign for its products and
services.

Demographic Trend – The demographic trend is one of the key factors in demand
forecasting of an economy. For example, as the population of USA and EU is
growing old the demand for products mostly catering to this segment will grow.
Paints Asian should consider demographic trends before new product
developments and integrate features that cater to this segment. As population is
ageing it will require less tech intensive products.

Societal Norms and Hierarchy – What sort of hierarchy and norms are acceptable
in society also influence the types and level of consumption in a society. In highly
hierarchical societies the power of decision making often reside at the top.

Education Level in Society – Education level of the society impacts both the
quality of jobs and level of income. High level of education often results in better
jobs, higher income and higher spending on complex and aspirational products.

Attitude towards Health & Safety – The attitude towards health and safety is
often reflected in the quality of the products and cost structures of
manufacturing processes. Paints Asian has stringent norms for health and safety
norms so in emerging economies it may have to compete with players who don’t
have high-cost structures that of Paints Asian.

Technological Factors
Mobile Phone & Internet Penetration – Paints Asian should assess the level of
internet and mobile phone penetration in the country as it will it in building a
requisite business model based on local needs and realities.

Technology transfer and licensing issues for Paints Asian – laws and culture of
licensing of IPR and other digital assets should be analysed carefully so that
Paints Asian can avoid shakedowns and IPR thefts.

Empowerment of Supply Chain Partners – Paints Asian should analyse areas

where technology can empower supply chain partners. This can help Paints
Asian to bring in more transparency and make supply chain more flexible.

Level of Acceptance of Technology in the Society – Paints Asian has to figure out
the level of technology acceptance in the society before launching new products.
Often companies enter the arena without requisite infrastructure to support the
technology-oriented model.

Transparency & Digital Drive – Paints Asian can use digitalization of various
processes to overcome corruption in the local economy.

Environmental Factors

Recycle Policies – What are the recycle policies in prospective market and how
Paints Asian can adhere to those policies.

Influence and Effectiveness of Environmental Agencies – The role of

environment standards enforcement agencies is critical in safeguarding norms.
But often in emerging countries these agencies delay the process as a tactic to
extract bribes. Paints Asian should be aware of presence of such practices in a
country.

Focus & Spending on Renewable Technologies – How much of the budget is

spend on renewable energy sources and how Paints Asian can make this
investment as part of its competitive strategy.
 Influence of Climate Change – How climate change will impact Paints Asian
business model and supply chain. For example, if the supply chain is not flexible
it can lead to bottlenecks if shipments from one part of the world are delayed
because of sudden climate shift.

Environmental Standards and Regulations both at National & Local Levels –

Often the environment policy at national and local level can be different. This can
help Paints Asian in numerous decisions such as plant location, product
development, and pricing strategy.

Legal Factors

Health & Safety Laws – What are the health and safety laws in the country and
what Paints Asian needs to do to comply with them. Different countries have
different attitude towards health and safety so it is better for Paints Asian to
conduct a thorough research before entering the market.

Intellectual Property Rights Protection – Paints Asian should assess the level of
protection that intellectual property rights get under the legal system of the
country.

Laws regarding Monopoly and Restrictive Trade Practices – As a new player

Paints Asian shouldn’t be worried about the monopoly and restrictive trade
practices law.

Time Taken for Court Proceedings – Even if the country has best of the laws, it
doesn’t mean much if they can’t be enforced in a timely manner. Paints Asian
should do a primary research regarding how much time it often takes to
conclude a court case in the country given the sort of legal challenges Paints
Asian can face.

Summarised Pestel Analysis Table

POLITICAL FACTORS ECONOMIC FACTORS

 Regulatory Practices  Price Fluctuations

  Size of Government Budgets  Work Force Productivity
 Segregation of Political  Demand Shifts
Responsibilities  Employment rate
 Role Local Governments Play  Government spending
 Government Regulations and
Deregulations

SOCIAL FACTORS TECHNOLOGICAL FACTORS

 Attitude towards Authority  Mobile Phone & Internet

 Demographic trend Penetration
 Societal Norms and Hierarchy  Technology transfer and
 Education level in society licensing issues

 Attitude towards Health & Safety  Empowerment of Supply

Chain Partners
 Transparency & Digital
Drive

ENVIRONMENTAL FACTORS LEGAL FACTORS

 Recycle Policies  Health & Safety Laws

 Influence and Effectiveness of  Intellectual property right
Environmental Agencies protection
 Focus & Spending on Renewable  Laws regarding Monopoly
Technologies and Restrictive Trade
 Influence of climate change Practices
 Environmental Standards and  Time taken for court
Regulations proceedings