A good understanding of a company’s competitive strengths and weaknesses is important for an investor to grasp, keeping in mind that a business that has lots of strengths may just turn out to be a good investing opportunity. To assess a company’s competitive strengths and weaknesses, we can turn to Porter’s Five Forces, a framework created by Harvard professor Michael E. Porter that is also widely used by management to assess the risks their businesses are facing. Porter’s Five Forces looks at five different aspects of a business: Level of competition in the industry Threat of new entrants into the…
A good understanding of a company’s competitive strengths and weaknesses is important for an investor to grasp, keeping in mind that a business that has lots of strengths may just turn out to be a good investing opportunity.
To assess a company’s competitive strengths and weaknesses, we can turn to Porter’s Five Forces, a framework created by Harvard professor Michael E. Porter that is also widely used by management to assess the risks their businesses are facing.
Porter’s Five Forces looks at five different aspects of a business:
- Level of competition in the industry
- Threat of new entrants into the industry
- Power of suppliers
- Power of customers
- Threat of substitute products
So with these in mind, let’s run through the framework with Golden Agri-Resources Ltd (SGX: E5H).
As a quick introduction, Golden Agri-Resources is a major vertically-integrated player in the palm oil industry. It is also one of the largest oil palm plantation owners in the world, with more than 472,000 hectares of planted area.
Competition in the industry
The palm oil industry is a classic commodity industry whereby companies within are troubled by intense competition and the lack of pricing power. Despite Golden Agri-Resources being one of the largest companies in its industry, it’s still subjected to the economic dynamics within.
Threat of new entrants into the industry
In the upstream portion of the palm oil industry, which involves the planting of oil palm trees, the threat of new entrants is constant and very real. That’s because anyone armed with some land and the funds to plant the trees can be a part of it easily.
However, as we move downstream into the refineries and the business of distributing refined and packaged palm oil, the threat of new entrants is lower due to the huge capital outlay needed to expand into this market. New entrants would need to have a strong sourcing and distribution network in order to be successful.
Power of suppliers
Golden Agri-Resources’ suppliers can be considered as the oil palm plantations which sell their fresh fruit brunches (FFB) to the company’s mills.
As FFBs need to be processed quickly after they are harvested, Golden Agri-Resources might have some pricing power over the plantations that have limited access to mills as they would need to sell their FFBs fast lest they go stale.
But, that is only the case in situations where Golden Agri-Resources has managed to establish its mills in locations where it has a monopoly.
Power of customers
The balance of power between Golden Agri-Resources and its customers is quite even. Both parties essentially have to follow the market price of the commodity and they can’t stray far.
That’s because Golden Agri-Resources can sell its palm oil products to other buyers if the price offered is too low while other customers can easily buy from someone else if the price is deemed too high.
Threat of substitute products
This is a very real threat. We can use cooking oil as an example.
Palm oil is used to produce cooking oil. But so is sunflower oil, soybean oil, canola oil, olive oil, and coconut oil. Simply said, there’re a huge range of substitutes (at least in one important segment of the market for palm oil-derived consumer products).
Rounding it all up, Golden Agri-Resources seems to be in a tough business – it has weaknesses in most elements of the Porter’s Five Forces framework.
As such, the main business strategy the company can engage in is to ensure that it is the lowest cost producer (or one of the lowest) so that it has the staying power within the industry to tide over the times when its market would turn sour.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned above.