Five forces framework Flashcards
What is value added?
Sales revenue - input costs
List the three main determinants of profits
Value of product to customers
Intensity of competition
Bargaining power of producers rel to their suppliers
What does Porter say?
The stronger the forces, the greater the competitive pressures on the industry and thus the lower the profitability of the industry
Which five forces are considered?
Suppliers
Substitutes
Buyers
Potential entrants
Internal rivalry
List the two main types of competition
Price
Non-price
What are the 5 determinants of the intensity of the competition between firms?
A - Concentration of competitors
B - Diversity of competitors
C - Product differentiation
D - Excess capacity and exit barriers
E - Cost conditions
Outline ‘concentration of competitors’
Concentration - number and size distribution of firms
More firms & the less dominance of each firm, less concentrated the market
Dominated by one firm – considerable price discretion
Dominated by two firms – focus on non-price competition
Many firms & low dominance – price competition much stronger.
Outline ‘Diversity of competitors’
If firms have similar origins, objectives, costs and strategies they are more likely to be able to avoid price competition
A history of cooperative pricing may limit future price competition
Outline ‘product differentiation’
If products are similar and switching costs are low, price competition will be much more intense
Outline ‘Excess capacity and exit barriers’
Excess capacity – offer price cuts to increase market share and to spread costs over a greater sales volume
With substantial exit barriers firms will compete to survive rather than exiting
Outline ‘Cost conditions’
Cost structure determines how low prices can go.
Low cost firms may lower prices in the hope that high cost firms exit.
Economies of scale may encourage fierce price competition
When is price competition greatest?
1 - Concentration is low 2 - Undifferentiated product 3 - High excess capacity 4 - Different cost structures 5 - Buyers are price sensitive 6 - Lumpy orders
What are barriers to entry?
Advantages that incumbent firms have relative to new entrants (can be exogenous or endogenous)
List some types of barriers to entry
1 - Economies of scale 2 - Customer loyalty 3 - Customer switching cots 4 - Capital requirements 5 - Gov and legal barriers 6 - Unequal access to distribution
What does price sensitivity depend on?
Importance of the item as a proportion of total costs
Product differentiation
Competition between buyers
