3.1 Porter's 5 forces

Question 1

What are the five forces?

Answer 1

• threat of new entrants to a market
• bargaining power of suppliers
• bargaining power of customers
• threat of substitute products
• degree of competitive rivalry

Question 2

Threat of new entrants

Answer 2

• if new entrants move into an industry they will gain market share and rivalry will intensify
• the position of existing firms is stronger if there are barriers to entering the market
• if barriers to entry are low then the threat of new entrants will be high

Question 3

what are the barriers to entry for new entrants in market?

Answer 3

-investment cost
high cost will deter
high capital requirements might mean that only large businesses can compete
-economies of scale available to existing firms
lower unit costs make it difficult for smaller newcomers to break into the market and compete effectively
-regulatory and legal restrictions
-product differentiation with strong USP’s increase customer loyalty making it harder for new comers to gain market share
-access to suppliers and distribution channels
-retaliation by established products

Question 4

Factors that affect the threat of new entrants

Answer 4

• cost advantages
• government policy
• economies of scale
• brand recognition and loyalty
• capital requirements

Question 5

Bargaining power of suppliers

Answer 5

if a firms suppliers have bargaining power they will:

• exercise that power
• sell their products at a higher price
• squeeze industry products
• if supplier forces up price paid for inputs - profits reduced
• the more powerful the customer the lower the price

Question 6

What are the determinants of supplier power?

Answer 6

-uniqueness of the input supplied
Essential and no close substitutes
-number and size of firms supplying the resources
suppliers with high market share can exert more power
-competition for the input from other industries
there is great competition, the supplier will be in a stronger position
-cost of switching to alternative sources

Question 7

Power of customers

Answer 7

-powerful customers are able to enter pressure to drive down prices

Question 8

Determinants of customer power

Answer 8

-number of customers
the smaller the number of customer, the greater their power
-volumes of their order sizes
-number of firms supplying the product
the smaller the number of suppliers, the less opportunity customers have for shopping around
-the threat of integrating backwards - if customers pose a threat of integrating backwards they will enjoy increased power
-the cost of switching

Question 9

Threat of substitute products

Answer 9

• a substitute product can be regarded as something that meets the same need
• substitute products are produced in a different industry but satisfy the same customer need
• if there are substitutes to a firm’s product, they will limit the price that can be charged and will reduce profits

Question 10

Determinants of threat of substitutes

Answer 10

• the extent to which the price and performance of the substitute can match the industry’s product
• the willingness of customers to switch
• customer loyalty and switching costs

Question 11

Degree of competitive rivalry

Answer 11

• if there is high level of competition it will encourage a business to engage in
• price wars
• investment in innovation and new products
• promotion

Question 12

Determinants of intensity of rivalry

Answer 12

• number of competitors in the market
• market size and growth prospects - stagnating markets
• product differentiation and brand loyalty
• the power of buyers and the availability of substitutes
• capacity utilisation
• the cost structure of the industry
• exit barriers