7b Analysing the external environment: The competitive environment (includes Porters 5 forces) Flashcards
The competitive environment is made up of what factors?
Power of rivals & potntial rivals
Customers-influence
Suppliers-influence
What had globalisation caused?
Increased the degree of competition to which new businesses are exposed.
What did Michael Porter create?
Created, 5 forces of competitive position model- which provides a simple framework for assessing & analysing the competitive strength & position of a corporation or business.
What can Porters 5 forces model be good alongside?
Porters 5 forces model can be used to good analyitical effect alongside other models such as SWOT & PEST-C analysis tools.
What are the 5 forces in Porters model?
The power of suppliers.
The power of buyers.
The threat of substitutes.
The threat of new entrants.
Competitive rivalry.
Porters 5 forces model
What are high profit industries likely to show?
Mild competition between businesses.
Suppliers with little power.
Customers having little power.
Little threat of substitute products being developed.
No real prospect of a new entrant to the industry.
Porters 5 forces model
What are low profit industries expected to have?
Intense rivalry between businesses.
Very powerful suppliers.
Customers with considerable power.
Imminent threat of the development of substitute goods or services.
A high likelihood of new entrants to the market.
The power of suppliers.
Suppliers can be very powerful and this power arises from what variety of sources?
- Number of suppliers that are operating- fewer suppliers = more powerful suppliers.
- Cost involved in changing suppliers, if difficult or expensive, suppliers have greater power.
- Availability of substitutes- if no other substitute for their product or if the items they supply are scarce, supplier has greater power.
- Customers size relative to size of supplier- if supplier is much smaller, they have less power over bigger customer.
- Whether or not other uses exist for the products sold by the supplier.
- To what extent supplier poses a creditable threat to integrate forwards & enter its customers market as a rival, or to takeover the business itself.
The power of buyers
When can buyers or customers exert influence & control over an industry?
- Products sold by businesses are very similar & therefore easy for buyers to find substitutes.
- Products have high price elasticity of demand, that is the demand from customers is sensitive to price.
- Switching to another suppliers product is cheap & straightforward & there are many other businesses offering supplies.
- Customers buy a large quantity of products & place these orders regularly.
What is a factor which may limit the power of buyers?
- If the producer represents a significant threat to take over the buyers business, or that of a rival & operate in competition.
- In such circumstances- a buyer may not use the power it has for fear of invoking the action, such as a takeover, that is possible.
The power of suppliers
What can buyers increased bargaining power result in?
- The buyer will have increased bargaining power & may be able to negotiate substantial reductions in the price- at which the products are supplied.
- May use threat of transferring to another supplier to achieve its ambitions. Being forced to sell at lower prices could reduce or, in extreme cases, eliminate the suppliers profit margins.
The power of suppliers
What may buyers do which could put suppliers under pressure & what are the likely outcomes?
- Request changes in specifications of products to be supplied or may impose tough conditions in terms of delivery dates/ or the quality or appearance of the products.
- Likely to increase the costs of production. Ultimate effect could be to reduce profits.
The power of buyers
What may a dominant buyer ask for from a supplier & what can this cause?
- Ask for generous trade credit terms- e.g. a 60 day trade credit period.
- Can cause liquidity problems for suppliers, not least because the size of the order will mean that the sums involved are substantial.
- In such circumstances, the supplier may have to negotiate expensive overdrafts with its bank.
The threat of substitutes
When is the threat of substitues high?
- The price of that substitute product falls, making it more attractive to customers.
- It is easy for customers to switch from one substitute product to another.
- Customers are willing & able to substitute the suppliers products for those of another supplier.
What are barriers to entry?
Those factors such as high advertising costs, that make it difficult for a business to sell products in a market for the first time.
