Chapter 4 / Week 4 (Porter's five forces detailed)

Question 1

The five competitive forces that shape strategy

Answer 1

Read only 78-86

Question 2

Competition for profits goes beyond established industry rivals to include four other competitive forces as well

Answer 2

1) Customers
2) Suppliers
3) Potential entrants
4) Substitute products

Question 3

The the forces are intense, as in airline, textiles, and hotel industries

Answer 3

No company earns attractive returns on investment

Question 4

The configuration of the five forces differ by idustry

Answer 4

For the airline industry, there is fierce rivalry, but the threat of entry, threat of substitutes, and the power of suppliers are more benign

Question 5

Threat of entrants

Answer 5

New entrants bring new capacity and a desire to gain market share, putting pressure on prices, costs, and the rate of investment necessary to compete
-When entrants are diversifying from other markets they can leverage existing capabilities and cash flows to shale up competitors

Examples: Apple entering music, Microsoft entering internet browsers

Threat of entry depends on the height of entry barriers

Question 6

Barriers to entry

Answer 6

Entry barriers are advantages that incumbents have relative to new entrants, there are 7 major sources

Question 7

7 major Barriers to entry

Answer 7

1) Supply-side of economies of scale
2) Demand-side benefits of scale
3) Customer switching costs
4) Capital requirements
5) Incumbency advantages independent of size
6) Unequal access to distribution channels
7) Restrictive government policy

Question 8

Newcomers are likely expected to fear expected retaliation if:

Answer 8

1) incumbents have preciously responded to new entrants vigorously
2) incumbents possess substantial resources to fight back, including excess cash and unused borrowing power
3) Incumbents seem likely to cut prices because they are committed to retaining market share at all costs or because the industry has high fixed cost

Question 9

The power of suppliers

Answer 9

Powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants

Question 10

A supplier group is powerful if

Answer 10

1) It is more concentrated than the industry it sells to
2) The supplier group does not depend heavily on the industry for its revenue
3) Industry participants face switching costs in changing suppliers
4) Suppliers offer products that are differentiated
5) There is no substitute for what the supplier group provides

Norine List:

1. Few suppliers (more concentrated than the industry it sells to)
2. Product availability is restricted or limited
3. Product unique or at least differentiated or no good substitutes even exist
4. Built-up switching costs with buyer
5. Industry is not an important customer of the supplier group
6. Pose a credible threat of integrating forward into the industry’s business
7. Mutually dependent

Question 11

Return on investment capital (ROIC)

Answer 11

Appropriate measure of profitability for strategy formulation, not to mention for equity investors

Question 12

The power of buyers

Answer 12

Powerful customers - the flip side of powerful suppliers - can capture more value by forcing down prices, demanding better quality or more service (driving up costs) and generally playing industry participants off against one another, all at the expense of industry profitability

Question 13

Buyers are powerful if they:

Answer 13

Have negotiating leverage relative to industry participants, especially if they are price sensitive, using their clout primarily to pressure price reductions

Question 14

A customer group has negotiating leverage if:

Answer 14

1) There are few buyers, or each one purchases in volumes that are large relative to the size of a single vendor
2) The industry products are standardized or undifferentiated
3) buyers face few stitching costs in changing vendors

Question 15

A buyer group is price sensitive if:

Answer 15

1) The product purchases from the industry represents a significant fraction of its cost structure or procurement budget
2) The buyer group earns low profits, is strapped for cash, or is otherwise under pressure to trim its purchasing costs
3) The quality of buyer’s products or services is little affected by the industry’s product
4) The industry product has little effect on the buyer’s other costs

Question 16

Intermediate customers (those who purchase product but are no the end user, such as assemblers or distribution channels) has one important addition

Answer 16

Intermediate customers gain significant bargaining power when they can influence the purchasing decisions of customers downstream

Question 17

The threat of substitues

Answer 17

A substitute performs the same or similar faction as an industry’s product by a different means
(Plastic is a substitute for aluminum)

1.Substitutes perform a similar function for the end user

2.Place a ceiling on the prices charged
Limit profits in normal times and reduce the bonanza an industry can reap in boom times
Can also limit industry growth potential

3.Risk of displacement by substitute when:
Low switching costs
Viewed as being comparable or better on performance features
Technology improvements offer new performance capabilities
Produced by industries earning high profits

4.Ultimately, the level of threat depends on buyer’s propensity to change

Question 18

When the threat of substitutes is high, industry profitability suffers

Answer 18

Substitute products or services limit an industry’s profit potential by placing a ceiling on prices

Question 19

The threat of substitutes is high if:

Answer 19

1) It offers an attractive price-performance trade-off to the industry’s product
2) Buyer’s cost of switching to the substitute is low

Question 20

Rivalry among existing competitors

Answer 20

Takes place in many familiar forms, including price discounting, new product introductions, advertising campaigns, and service improvements

High rivalry limit profitability of industry

Question 21

The degree to which rivalry drives down an industry’s profit potentials depends on two factors

Answer 21

1) Intensity

2) Basis

Question 22

Intensity of rivalry is the greatest if:

Answer 22

1) Competitors are numerous or are roughly equal in size and power
2) Industry growth is slow
3) Exit barriers are high
4) Rivals are highly committed to the business and have aspirations for leadership, especially if they have goals that go beyond economic performance in the particular industry
5) Firms cannot read each there’s signals well because of competition but also the basis of competition

Question 23

Price competition is most liable to occur if:

Answer 23

1) products or services of rivals are nearly identical and there are dew stitching costs for buyers
2) Fixed costs are high and marginal costs are low
3) Capacity must be expanded in large increments to be efficient
4) Similar products
5) Slow growth
6) Government are de-regulating (end of patent)
7) Goods are perishable

Question 24

Non-price compeition

Answer 24

1) Rivals are relatively few
2) Products are differentiated
3) Rivals come from diverse backgrounds
Different sources of competitive advantage
Different aspirations of leadership
4.Technological change is important
5.Industry is regulated
6.High switching costs

Question 25

Substitute definition

Answer 25

Performs same/similar function for end user by a different means

Always present, but often overlooked
Consider all different ways of performing similar function not just physically similar products
Not buying something, buying used or making it yourself (DIY) are also substitutes

Question 26

Often the most significant of the 5 forces (Intensity of rivalry)

Answer 26

Nature or basis of competition
Degree/intensity of competition
Exit barriers

Question 27

Strength of rivalry depends on

Answer 27

How aggressively do company’s use competitive weapons to improve market positions and performance?
How quickly do others respond to actions of one company?

Question 28

What Causes Rivalry to Be Weaker ?

Answer 28

Infrequent or non-aggressive approach to gain sales from rivals
Rapid market growth
Products are strongly differentiated and customer loyalty is high
Buyer costs to switch brands are high
Number of rivals
so many that impact of any one firm is minimal (fragmented)

Question 29

Exit Barriers

Answer 29

Durable and highly specialized assets
Fixed costs 
Settlement of long term contractual obligations
Ongoing support for past customers
Labor settlements
Strategic 
Interrelatedness
Access to financial markets
Vertical integration
Managerial or emotional
Social and government
Mechanism for asset disposition

Question 30

Who might enter? and WHY?

Answer 30

WHOStartupsForeign firmsCompanies in related industries

WHYPerceive long term profit opportunityCan circumvent apparent barriersSufficient customer base to support new entrantsEasy access to infoSynergy with other areas of business