Porter's 5 Forces

harming organisms in the sea (Winnes, 2019; Aagren, 2019). These impacts discussed above may threaten the demand for NewCo’s main products.

coming years (Markets and Markets, n.d.). Moreover, the industry allows for additional margins as the players further refine and differentiate its products from the production and adapt these to different niche markets.

Threat of substitution

A substitute can be defined as a replacement of a product or service that covers the same needs of a customer (Porter, 1980). Although there is potentially a threat of substitutes for Yara, the company is a global player providing a variety of products and services, which suppresses the threat.

RemainCo:

Substitutes for mineral fertilizers could be other nutrients and products with a positive impact on plant growth, such as ammonium sulfate, planting legumes or using animal manures (Smith, 2013).

However, during the growing season, these fertilizers require repeated applications, which is more time consuming (Cochran, n.d.). Another alternative could be organic fertilizers, such as animal wastes. However, the nutritional content is low compared to mineral fertilizers, and

plant growth is therefore produced slower and less efficiently (Yara, 2018d). Although the threat of these alternatives is considered relatively low, mineral fertilizers with less environmental consequences produced more efficiently can be a major threat in the future.

NewCo:

Upgrading products for industrial applications require highly advanced technology, which

suppresses the threat of substitutes. The majority of NewCo’s revenue is derived from a product called AdBlue, a urea-based reagent used to reduce NOx from heavy-duty diesel vehicles (Yara, 2015). As the world's population and economy are growing, road transport increases and the demand for products like AdBlue are expected to similarly increase. Additionally, the

growing focus on sustainable solutions will contribute to boost the demand for these types of products, which in turn probably raise the number of suppliers. This greatly increases the threat of alternative products, such as climate-friendly solutions for scrubbers, especially if the substitutes are more sustainable or can be used more effectively.

Very high High Moderate

Low Very Low

Very high High Moderate

Low Very Low

Bargaining power of customers

There are several factors affecting the bargaining power of customers such as substitutes, price sensitivity, customers’ switching costs, product differentiation, and the number of buyers (Porter, 1980). Yara serves a large number of customers with a wide geographical spread. In fact, no single customer contributes with more than 10% of the total revenue (Yara, 2018), leading to relatively low bargaining power among customers. Still, as the market is characterized as

fragmented with low switching cost leading to low price sensitivity, some buyer power does exist (Yara, 2018; Mordor Intelligence, n.d.).

RemainCo:

The customer base of the industry consists of a wide range of different customers, mostly farmers, with a large geographical spread. This makes each customer less important, reducing their

bargaining power. However, as the agriculture industry is shifting and the farmers are becoming more strategic with greater impact, it contributes to a change in the customer base (Yara, 2018).

As mentioned, the industry is characterized as fragmented with homogenous products, low price sensitivity and limited supply, which reduces the switching cost and hence increases the

bargaining power. On the other hand, the recent consolidations in the market decreases the bargaining power (Mordor Intelligence, n.d.). Yara’s long history and strong brand, constantly focus on differentiating its products with close cooperation to customers, makes the threshold for choosing another supplier larger and the bargaining power of customers is somehow reduced.

NewCo:

Since NewCo consists of mainly large industrial companies, the firm is more dependent on each customer which increases their bargaining power. However, NewCo hedges against this risk by constantly differentiating its products as well as entering into medium to long-term contracts specifying minimum purchase delivery, to increase the customer’s switching cost (Yara, 2018; Yara, n.d.b). Further, as NewCo offers products and solutions to a wide range of industries, it broadens its customer base and makes the company less dependent on possible volatility and changes in one specific industry.

Bargaining power of Suppliers

The strength of the bargaining power of suppliers depends on several factors, such as product

Very high High Moderate

Low Very Low

Very high High Moderate

Low Very Low

major global buyer of a large amount of raw materials, it makes the company an important customer for the different suppliers, where the bargaining power depends on the raw material purchased (Yara, 2018).

RemainCo:

Natural gas is the most important input factor for RemainCo’s production, providing bargaining power for suppliers of natural gas. However, these suppliers' power is somewhat limited as natural gas is an undifferentiated product in a fragmented market (Market Watch, 2020). To get the best price available, RemainCo hedges itself against unpredictability by entering into long-term agreements with a wide network of suppliers in less competitive gas markets, while using spot gas contracts in more competitive markets. Further, P&K are supplied by a small number of large industry players only available in certain regions, which provides these suppliers with relatively large bargaining power (Yara, 2018). Since Yara is being one of the world’s largest buyers of P&K, the company is evaluating several options for strengthening the degree of self-sufficiency through vertical integration, decreasing the power of these suppliers.

NewCo:

Unlike RemainCo, which mostly buys natural gas and P&K, NewCo purchases more processed nitrogen products from its suppliers, which they in turn convert into upgraded products- and solutions. As mentioned, AdBlue stands for the main share of revenue within the segment, and is produced from the purest urea (Yara, 2018; Yara, 2015), providing the suppliers of urea bargaining power. Since it is uncertain whether Yara’s Production segment will continue to supply NewCo after the carve-out, in order to decrease the supplier’s bargaining power, NewCo should focus on entering into solid, long-term agreements with a wide network of suppliers to hedge itself against volatile prices. However, since NewCo buys more processed products, these products can be considered more differentiated and require more advanced technology, providing the available suppliers with more power (Yara, 2018).

Competitive rivalry

The competitive rivalry within an industry depends on the intensity, and is considered high if it is characterized by many competitors with approximately the same power and size or if there are potential to fight for market shares and excess capacity (Porter, 1980).

Very high High Moderate

Low Very Low

Very high High Moderate

Low Very Low

RemainCo:

Based on the discussion of the above forces, the nitrogen fertilizer market is considered attractive, but characterized as fragmented with homogenous products, making the rivalry high. Although Yara has a strong position in the market (Yara, 2018c), no player is considered to have large enough market shares to control the entire market (Mordor Intelligence, n.d.). This contributes to healthy competition and/or cooperation between the competing companies, which has led to an increasing consolidation lately. Further, the market for P&K is characterized by a small

number of large industry players, making the degree of competitive rivalry smaller in these markets. On the other hand, the exit barriers are assumed to be high since this is a capital-intensive industry with large up-front investments. Based on this analysis, the competitive rivalry is considered moderate.

NewCo:

Similar to RemainCo, the industry of NewCo includes many of the same suppliers, products and customers making some of the arguments similar. The competitive rivalry is high due to the fragmented nature of the market. Additionally, with a high demand for industrial nitrogen due to expected growth in its markets, the industry is considered attractive. Further, the entry barriers of NewCo are argued to be lower than RemainCo’s, due to a less capital-intensive industry. However, NewCo is assumed to become a significant player, as the company is expected to take

an industry-leading position by creating the “first integrated industrial nitrogen company”

(Yara, 2019c). This is supported by its leading position in the scrubber market, as well as one of the largest players of TAN (technical ammonia nitrate) in the civil explosive

market (Market Watch, 2019; Yara, 2018a). Yet, based on the above, the competitive rivalry for NewCo is argued to be moderate to high.