3.7.7

Question 1

what is the competitive environment

Answer 1

refers to the factors within a market that determine how businesses operate and compete in that market. A business must respond and make functional and strategic decisions based on these factors.

Question 2

porters 5 forces

Answer 2

• competitive rivalry
• bargaining power of suppliers
• bargaining power of buyers
• threat of substitutes
• threat of new entrants.

Question 3

Porter’s five forces model can be used alongside other popular models such as

Answer 3

SWOT and PEST-C in order to analyse the key issues facing a business and how that business might respond to these competitive forces.

Question 4

what is rivalry within the market

Answer 4

This is the level of competition and aggressive rivalry between businesses within the market. As markets grow and become more attractive, new businesses may enter the market, increasing the competitive rivalry.

Question 5

competition is fierce if

Answer 5

• easy entry to market
• easy for customers to switch
• little differentiation of products
• little growth or decline in the market

Question 6

key problem

Answer 6

profit margins are squeezed

Question 7

options for businesses to consider

Answer 7

• lower costs of production and prices to compete
• develop a basis for differentiation
• takeover, merger or strategic alliance

Question 8

what is bargaining power of suppliers

Answer 8

This is the power suppliers have to negotiate terms and prices. The bargaining power of a supplier may change if the supply of a commodity, such as wheat or copper, fluctuates.

Question 9

supplier power is high if

Answer 9

• few suppliers
• supplier’s product is essential for production
• the supplier is able to integrate vertically forward and sell direct to the business’s customers
• low availability of viable substitutes.

Question 10

key problem

Answer 10

• high production costs and unfavourable terms of supply

Question 11

options for businesses to consider

Answer 11

• build strong relationships with suppliers
• agree long-term contract of supply with favourable conditions
• backward vertical integration

Question 12

what is buyer power

Answer 12

This is the power buyers have to negotiate terms and prices. This might change as consumers gain greater access to information and greater choice between rival businesses.

Question 13

buyer power is high if

Answer 13

• there is little difference between products offered by competitors
• products are price sensitive
• customers buy in large quantities on a regular basis
  *it is easy for buyers to switch between competitors.

Question 14

key problem

Answer 14

prices forced low and credit terms demanded there is pressure on cash flow

Question 15

options for businesses to consider

Answer 15

• develop a USP
• build switching costs into agreements
• lower prices to attract customers
• forward vertical integration (if buyer is another business)

Question 16

what is threat of substitutes

Answer 16

A substitute is an alternative product that may deliver the same benefits to the customer. The threat of substitutes may change with social trends.

Question 17

threat of substitutes is high if

Answer 17

• alternative products exist
• alternative prices fall
• customers can easily switch to a substitute.

Question 18

key problem

Answer 18

buyers have high bargaining power
competition exists outside of the market

Question 19

options for businesses to consider

Answer 19

• develop a USP
• build switching costs into agreements
• lower prices to attract / keep customers
• promote benefits in comparison to substitute products

Question 20

what are barriers to entry

Answer 20

A barrier to entry is a physical, technological and intellectual factor that makes it difficult for a rival business to enter the market.

Question 21

The existence of large companies can create

Answer 21

barriers to entry as they dominate resources and networks. However, disruptive technology and innovation can give small businesses leverage to enter a market.

Question 22

barriers to entry exist when

Answer 22

• capital investment to enter the market is very high
• customers are brand loyal to existing businesses
• levels of specialist knowledge and expertise in the industry are very high.

Question 23

key problem

Answer 23

If few barriers exist it is easy for new competitors to enter the market and increase competitive rivalry.

Question 24

options for businesses to consider

Answer 24

innovation - continuous development of new products can keep the business ahead of any new competition
* build strong relationships with buyers, making it difficult for new entrants
* growth - economies of scale can keep prices low and make it difficult for small businesses to enter the market