3.7.7 - Porter's five forces

Question 1

What are Porter’s five forces definition

Answer 1

Model to analyse the competitive environment in which a business operates

Question 2

What are the 5 forces

Answer 2

1) Intensity of Rivalry
2) Threat of substitutes
3) Bargaining power of buyers
4) Threat of new entrants
5) Bargaining power of suppliers

Question 3

How is a threat of new entrants measured

Answer 3

• how easy entry to market
• if a new business ( competitor ) enters a market - what are the impacts on existing firms?
• some industries have high barriers to entry, some have low

Question 4

What are the barriers of entry to think about for threat of new entrants

Answer 4

• economies of scale
• vertical integration
• brand loyalty from customers
• access to the best technology
• expertise required

Question 5

What industry example has a high barrier of entry

Answer 5

aviation industry

Question 6

What industry has a low barrier of entry

Answer 6

fruit + veg market

Question 7

How to measure bargaining power of suppliers (supplier power)

Answer 7

• If suppliers have power then they will generally exercise it by selling products at a higher price = reduced profits
• Suppliers are powerful when:
  1) few of them
  2) resource is scarce
  3) cost is high to switch to alternative
  4) limited alternative
  5) customer is small / unimportant

Question 8

How to measure bargaining power of customers

Answer 8

• Powerful if they have ability to exert pressure to lower prices
  e.g supermarkets

Question 9

How to measure substitute products

Answer 9

• generally if there is an alternative (and lots of them) = lower prices -> customer switch (potentially)
• technology has had impact e.g newspaper industry, nights out e.g cineworld

Question 10

Forces act to determine the nature of rivalry

Answer 10

• no. competitors
• market size and growth
• product differentiation and brand loyalty
• power of buyers
• capacity utilisation
• exit barriers

Question 11

The implications of ‘Entry Threat’ for strategic and functional decision making and profits

Answer 11

1) Monopolistic competition means new competitors enter all the time
- To make profit, businesses need to take decisions that ensure appropriate quality, priced and promoted and have their own USPs
- High barriers to entry means unchallenged business and allows them higher profits than in a competitive environment
2) The expectations of potential new entrants about the reaction of existing competitors will influence their decision about entering a market
- less likely to enter if businesses have cash, borrowing power and productive capacity - might decide to cut prices = maintain market shares
- industry growth slow, a new entrant would cause the financial performance of all firms involved to decline, retaliatory action from existing firms is likely to be stronger - motives to maintain market share and profit levels to reduce threat
3) Businesses need to constantly review their position in order to maintain their profit levels
- new and often unexpected, or, non-traditional competitors can emerge and completely change the nature of the market

Question 12

Examples of monopoly or oligopoly markets

Answer 12

Car manufacturers, supermarkets and banks

Question 13

Example of non-traditional competitors changing the nature of the market

Answer 13

Supermarkets sell perfume, books, electrical equipment and mobile phones - massively undercutting traditional sources of each products

Question 14

The implications of ‘Buyer Power’ for strategic and functional decision making and profits

Answer 14

1) Ability to influence the price that they pay or the quality of products they buy
- single customer in large supermarket = little power - little / no influence in decision making
2) Economic climate can influence e.g recession and deflationary periods, such as 2008-09, give customers stronger buying power and puts them in control. - People who wanted to buy cars = strong bargaining position
3) Improvements in information and communication technology have an influence
- the internet & general access to information = customers much more: aware, better informed and prepared e.g to switch energy suppliers, phone networks or mortgage firms more regularly if it means better deal
- need to constantly review strategic decisions to ensure they aren’t vulnerable to buyer power, which can reduce their profits

Question 15

Example of buyer power (small farm making sausages and selling to major supermarkets)

Answer 15

• supermarkets could insist on price reduction or longer period
• little option to meet demands, or lose future potential profit
  Needs to extend customer base so no longer dependent on a single buyer - involves strategic and tactical decisions about future marketing and placement of product and about costs & methods of production linked to quality

Question 16

How did the 2008-09 recession affect dealers

Answer 16

A low level of demand - dealers were prepared to reduce prices, massively because needed to get rid of excess stock

Question 17

The implications of ‘Supplier power’ for strategic and functional decision making and profits

Answer 17

• ability to influence the prices they will receive for their suppliers or quality of products they supply
• concentrated and controlled source of supply = power on an individual supplier is likely to wield in the market
• suppliers can group together to wield more power
• join together as cartel, such as OPEC (the Oil Producing and Exporting Countries) to try to influence prices to their own advantage
• supermarkets point of view = decisions about ensuring supply base for most products is broad and not dependent on any one supplier

Question 18

The implications of ‘Rivalry’ for strategic and functional decision making and profits

Answer 18

1) often assumed it takes place in industries where there are more competitors fighting for share of the market for particular product - not case: an element of monopolistic competition takes place
- allows firms to capture a small section of the market
- decision making : product differentiation, building brand loyalty and developing switching costs for their products - to prevent or deter consumers purchasing from competitors
2) if business has sufficient financial resources, try to grow in size quickly by merging with or taking over another firm
- enables to become a large and dominant force in its industry - reduces the threat of rivalry
- has significant impact on the competitive forces for other businesses that are now faced with a more powerful rival

Question 19

The implications of ‘Substitute Threat’ for strategic and functional decision making and profits

Answer 19

1) Likely to be intense when a market is characterised by a large number of firms with very similar products, all competing for a share of the market

Question 20

Changes in the competitive structure can have a significant impact on the success of a business. It is vital that any business understands fully the competitive environment in which it operates and the opportunities and threats it presents. This means - it should have good information about…

Answer 20

• the market in which it operates
• the number and size of competitors
• the nature of the product and the quality
• availability and nature of substitute products
• how easy it is to set up the industry
• whether it has control over the price it charges
• how important price and non-price competition are
• how many and how powerful its suppliers are
• how many and how powerful its customers area

Question 21

What strategy would the business take if a new competitor emerges into the market?

Answer 21

A business might try to diversify into other markets or consider merging or taking over another business in order to establish itself as a dominant business in the market

Question 22

What strategy would a business take if a supplier has too much power over them?

Answer 22

One possibility is for the business to find alternative sources of supply

Question 23

What should a business consider when trying to devise a competitive strategy to influence its future success and profitability?

Answer 23

• Current position
• Where it might be in the future
  E.g analysing the industry it is in and each of the forces it faces now and in the future

Question 24

What are the options that a firm boarding has when developing a competitive strategy

Answer 24

1) Attempting to position itself so that its capabilities, e.g USP, provide the best defence against the five competitive forces. In pursuing this option it is likely to reduce the impact of rivalry, reduce the substitute threat and buyer power and raise barriers to entry
2) Influencing the balance of the five forces so that it improves position e.g by ensuring that the power of its suppliers and buyers is reduced substantially or that it introduces innovations in marketing that raise brand loyalty, thus reducing substitute threat and raising barriers to entry.