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5 Forces Analysis

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5 Forces Analysis on the Paper Industry

Looking at the position of the paper industry relative to the five forces model I had to determine exactly what constituted the paper industry. I had to decide between the Paper Mills Industry and Pulp Mills Industry and ultimately decided to analyze the Paper Mills Industry specifically when it came to paper industry as a whole. The NAICS Code that corresponds to the Paper Mills Industry is NAICS: 322121 or SIC Code 2621. Porter’s Five Forces Model of Competition includes the firm’s, or in this case the paper mill industry’s, position relative to current competitors, suppliers, customers, potential new entrants and potential substitutes. Over the next few pages I will conduct a five forces analysis of the Paper Mills Industry. Current Competitors: The degree of rivalry in the paper industry is the center of the five forces and the other four forces branch off of this. The first aspect to look at is the number and position of companies within the paper industry. There were 445 companies in 2009 and as of 2013 there are now 119 companies in the industry. This industry still has many competitors within the industry and therefor, there shouldn’t be any impact of any particular company. This industry is large enough where these firms can prosper without having to steal market share from each other and this is a positive for the paper industry. The second key factor is the industry growth rate and if there is room to increase revenues or profits. Looking at appendices 1 and 2 it appears that the paper industry is a mature market in the focus stage and there is not a lot of room for growth at the moment. The revenues have decreased over the last couple of years but stayed roughly the same over the last two decades. Since it is a slow growth industry the companies may try and steal market share from competitors. The exit barriers are high due to the fact that if a company wishes to leave the industry they would have to dump plants, plant equipment and supplies such as, pulp, wood and various other resources. There seems to be excess industry capacity due to the fact that the internet and technology has decreased the need for magazines, books and other paper products. Many companies have “gone green” and no longer require paper to print materials and have opted to go digital.
Suppliers: Supplier power deals with how strong are the competitive pressures stemming from supplier bargaining power and seller-supplier collaboration. The keys to supplier power are raw material supply, structure of supplier industry, threat of vertical integration and switching costs. There are a large number of substitute inputs and this gives suppliers less bargaining leverage over producers in the paper industry. This greater competition among substitutes positively affects the paper industry. There is a moderate concentration of suppliers which means that the suppliers have moderate bargaining power and this moderately affects the paper industry. Volume is extremely high to suppliers and when suppliers are reliant on high volumes, they have much less bargaining power. This decreased bargaining power allows producers to threaten to cut volumes and hurt the supplier’s profits and this positively affects the paper industry the industry’s ability during collaboration. The only real negative affect on the paper industry is the lack of vertical integration. Not many companies if any at all own a majority of the inputs involved or needed in the paper industry. This lack of vertical integration does negatively affect the paper industry. There seems to be a somewhat diverse distribution channel involved in the paper industry. The more diverse distributions channels become in this industry then the less bargaining power a single distributor will have. The overall power of suppliers seems to moderately weak to moderate in the paper industry.
Customers: Buyer power deals with how strong the competitive pressures are from buyer bargaining power and seller-buyer collaboration. The main components of buyer power are number or size of buyers, type of product offered, switching costs and the threat of vertical integration. There are a large number of buyers in the paper industry, which bodes well because each buyer basically has no power. No one customer has bargaining leverage and this limited bargaining leverage helps the paper industry. The idea of buyers being able to purchase a company within the paper industry is very weak. Potential of vertical integration in the paper industry is very low positively affects the paper industry. Buyers require special customization in the paper industry. Since customers require special customization they less likely to switch producers and this buyer customization positively affect paper companies. Product is important to customer in the paper industry. Since the customers value the particular products they end up paying more for that one product and in turn this positively affects the paper companies in the industry. Overall, buyer power seems to be moderate in the paper industry. The concentration of buyers seems to be less concentrated than companies in the paper industry and this prevents buyers from being able to control or influence the demand or prices.
Potential New Entrants: The first aspect of potential new entrants into an industry has to do with barriers to entry. Entry barriers in the paper industry are very high due to economies of scale. This keeps many new entrants from wanting to enter the entry because they will not be able to grow quickly enough to compete. Capital investment is another barrier to entry that will deter potential new entrants. There is a high capital investment required to enter the paper industry. Newcomers will likely seek emerging markets with low capital investment and where the supply and demand is more balanced. In the paper industry it is neither emerging market nor balanced supply and demand market. The paper industry also has high switching costs which make it difficult for customers to switch due to costs involved. There are patents that cover vital technologies which make it difficult for new competitors. Due to the fact that it is a mature industry and seems to have overcapacity in the market it seems unlikely that new entrants would seek the paper industry.
Potential Substitutes: This force deals with the threat of substitutes referring to products outside the paper industry. Substitutes do not equal current or potential rivals. The three main things involved with potential substitutes are switching costs, buyer preferences and brand loyalty. The threat of substitutes in the paper industry seems moderate due to the fact that that metal, glass and plastic can substitute paper packaging. There are moderate to high switching costs involved with switching to glass or metal from paper though. Paper is relatively inexpensive, recyclable and more flexible when it comes to the three previously mentioned substitutes. There is also brand loyalty when it comes to household goods. Also electronic communication and digital media can substitute paper but, when it comes to household goods like toilet paper there isn’t really a substitute. Overall there are a limited number of substitutes and this has a significant positive impact for the paper industry.

Appendix 1

Appendix 2

Works Cited

1. http://bi.galegroup.com.libproxy.utdallas.edu/essentials/industry/322121?u=txshracd2602 2. http://bi.galegroup.com.libproxy.utdallas.edu/essentials/comparisonTool/industry?u=txshracd2602&entities=322121&metric=historicalCompanies 3. http://bi.galegroup.com.libproxy.utdallas.edu/essentials/comparisonTool/industry?u=txshracd2602&entities=322121&metric=revenue#tab=chart 4. http://bi.galegroup.com.libproxy.utdallas.edu/essentials/article/GALE%7CI2501600025/57b999d6ba45a026b319217f60351dee?u=txshracd2602 5. http://bi.galegroup.com.libproxy.utdallas.edu/essentials/article/GALE%7CRN2501400138/57b999d6ba45a026b319217f60351dee?u=txshracd2602

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