7.8 The Competitive Environment: Porter's Five Competitive Forces

Question 1

What is an important external influence on a business that isn’t part of PESTLE?

Answer 1

Actions of competitors

Question 2

Opportunities of competition:

Answer 2

• Brings down prices
• Makes businesses efficient
• Higher quality products

Question 3

Threats of competition:

Answer 3

• Quality may be sacrificed if competition is based on price

- Closure of weaker businesses

Question 4

What are Porter’s five competitive forces?

Answer 4

• Threat of new entrants
• Bargaining power of customers
• Bargaining power of suppliers
• Threat of substitute products
• Competitive rivalry within an industry

Question 5

What does Porters five competitive forces model show?

Answer 5

The factors that could effect competition and profitability in an industry and how businesses can react to these changes.

Question 6

What are supernatural profits an indicator of?

Answer 6

Unfair competition where there is high demand, little competition

Question 7

A business needs to make sure that it does not do the following as it may result in government intervention:

Answer 7

• High prices through lack of competition (monopoly)
• Restricting supply (cartels)
• Trade agreements (selling only one businesses products in expense of others)

Question 8

Examples of barriers to entry:

Answer 8

• High start-up costs
• Patents
• Customer loyalty

Question 9

A businesses strategy for new entrants:

Answer 9

• Compete on price, quality and USP

- Protect position through branding and trade marks

Question 10

What does power of customers depend on?

Answer 10

Whether they are one of a large number of customers, or one of a small number of customers

Question 11

Customers of a business whose customers have little power will be forced to accept the terms and conditions forced upon them, what does this mean for the business?

Answer 11

They have the power to set a price and provide the products it wishes to sell

Question 12

How did customers become more powerful?

Answer 12

• Price comparison websites

- The recession and deflation

Question 13

What could powerful customers demand?

Answer 13

• A reduction in price

- A longer credit period

Question 14

The power of suppliers depends on what?

Answer 14

How much influence they have over the price they receive for their goods

Question 15

What could a business such as Microsoft do with a large supplier with lots of power?

Answer 15

Arrange exclusivity agreements

Question 16

What can less powerful businesses do to become more powerful?

Answer 16

Join together and act as a cartel to try and influence the prices

Question 17

Strategy for a business in a market with few substitutes:

Answer 17

• Be aware of threat of potential substitutes

- Protect their USP and barrier to entry

Question 18

Strategy for a business in a market with lots of substitutes:

Answer 18

• Lots of marketing
• Keep up with innovations
• Use of patents and trademarks

Question 19

Rivalry definition

Answer 19

The intensity of competition of firms in an industry

Question 20

What do concentration ratios do?

Answer 20

Identify the market share of the five largest firms in the industry

Question 21

Ways to deal with competitive rivalry:

Answer 21

• Differentiate product
• Build brand loyalty
• Make it difficult for customers to switch your product for another

Question 22

Strategies to influence buyer power:

Answer 22

• Buy supplier out - backwards vertical integration

- Similar businesses can come together to form a buying group - buying in bigger volumes so demand better deal