Five Forces Model Flashcards
What are the roots of the five forces model?
Industrial organisation economics, which underpins most of contemporary anti-trust law
What is the core idea of FFM?
External factors, especially industry structure, are the core drivers of a firm’s strategic advantage and profitability. The higher the levels of industry concentration (monopoly), the more profitable those firms will be
What are the five forces?
- Threat of new entrants
- Bargaining power of suppliers
- Bargaining power of buyers
- Threat of substitutes
- Competitive rivals
What is a substitute?
Product produced by rivaling firm that services the same customer needs as those aimed for by your firm but with a different technology
Why is substitution usually coined disruptive innovation?
Because it has the potential of rendering the installed asset base of industry incumbents less valuable or even obsolete
What has greatly increased the power of substitutes?
The rise of the platform economy, with its potential of ‘inverting the firm’, capitalising on unused capacity in the economy, and harnessing multi-sided network effects,
What is a new entrant?
A firm producing a product or delivering a service that aims at serving the same customer needs as those aimed for by the focal firm, with a similar core technology.
What happens if there are high entry barriers such as a high minimum efficient scale, government concessions, or protective patent?
The threat of entrants will be lower
Why are entry barriers lower for differentiated products?
They are products that appeal to the tastes of heterogenous consumer audiences, which often skim off the most lucrative market segments
How do high exit barriers affect industry competitiveness?
In the presence of sunk costs or high historical investments in non-redeployable assets, firms will fight to the death
What is an industry incumbent?
Firm that already operates in the same industry as the focal firm, and frequently possesses similar technologies and core competences
Why might the competitiveness of an industry increase?
It increases with the number of incumbents and a lack of differentiation opportunities among those incumbents
What is a buyer?
A firm, government agency, or set of private consumers interested in acquiring the firm’s core products or services.
When does the bargaining power of buyers dimish?
When there are many of them, such that the firm can switch between them. When a firm’s products or services are unique and critical to the buyer’s welfare, the bargaining power of buyers is reduced even further.
How can buyers respond to low bargaining power?
By organising themselves (buyer cooperatives) or through vertical integration (seeking control over the supply chain).
