Class 04.

Question 1

what does the 5 forces analyze?

Answer 1

the industry

Question 2

what is industry?

Answer 2

businesses meeting the same needs + same suppliers/buyers

Question 3

what groups are considered?

Answer 3

1. suppliers
2. buyers
3. rivals
4. substitutes
5. entrants

Question 4

who are rivals?

Answer 4

firms from the same industry

Question 5

what are substitutes?

Answer 5

meeting the same needs but different buyers (fuzzy with rivals)

Question 6

who are entrants?

Answer 6

emerging firms entering the industry

Question 7

what do we do a 5 force analysis?

Answer 7

to assess the avg. industry profitability of incumbent firms

Question 8

what is an industry?

Answer 8

firms with similar products, buyers, and suppliers

Question 9

what is the 5 forces vertical axis?

Answer 9

highlights rials: new entrants + incumbents + substitutes

Question 10

what is the 5 forces horizontal axis?

Answer 10

industry environment

Question 11

what if suppliers + buyers have high bargaining power & price sensitive (cannot influence price)?

Answer 11

they can squeeze industry profits

Question 12

what can strong suppliers do?

Answer 12

raise industry avg. costs

Question 13

what can weak suppliers do?

Answer 13

accept lower costs

Question 14

what can strong buyers do?

Answer 14

lower industry avg. costs

Question 15

what can weak buyers do?

Answer 15

accept higher costs

Question 16

what’s a substitute v. rival?

Answer 16

subs are outside the industry while rivals are within

Question 17

what can close substitutes do?

Answer 17

drive prices down, while weak subs allow high prices

Question 18

what is high rivalry?

Answer 18

competition that dec. prices + inc. costs

Question 19

what does threat of entry consider?

Answer 19

1. how easy can firms enter + become rivals?
2. how expensive is it to keep firms from entering?

Question 20

what does low entry imply?

Answer 20

1. firms can eat profits
2. the industry must deter potential entrants (lowering price or increasing quality)

Question 21

what are economies of scale?

Answer 21

when avg. costs decline as output increases

Question 22

when does economies of scale matter?

Answer 22

when size matters + high fixed costs present

Question 23

how do you approach the 5 forces analysis?

Answer 23

1. first analyze the building blocks separately
2. then conclude if an industry’s long run profit is better than, worse, or equal to the economic average
3. on this basis we then use the analysis to strategize for a firm

Question 24

what are the steps to the 5 force analysis?

Answer 24

1. define the industry
2. identify orgs + products involved in each force
3. identify supplier, buyer, subs, rivals and potential entrants
4. asses strength of forces within the industry
5. assess overall effect of the forces

Question 25

what’s a favorable industry?

Answer 25

profits above economic avg.

Question 26

what’s an unfavorable industry?

Answer 26

profits below economic avg.