Lecture 2 - CH 3 - Porters Five Forces Flashcards
What is an Industry?
An industry is a group of firms producing products and services that are essentially the same.
What is a Market?
A market is a group of customers for specific products or services that are essentially the same (e.g. a particular geographical market).
What are “Porter’s Five Forces”?
- Rivalry of Competitors
- Threat of Entrants
- Threat of Substitutes
- Power of Buyers
- Power of Suppliers
What are the 2 additional factors to “Porter’s Five Forces”?
- Complementors
2. Network effects
What is the main message of Porter?
Porter’s main message is that where the five forces are high and strong, industries are not attractive.
What are the 5 factors that define “Rivalry of Competitors” and what do they mean?
- Competitor concentration and balance - Where competitors are numerous or of roughly equal size or power there is the danger of intensely rivalrous behaviour as competitors attempt to gain dominance over others, through aggressive price cuts, for example.
- Industry growth rate - In situations of strong growth, an organisation can grow with the market, but in situations of low growth or decline, any growth is likely to be at the expense of a rival, and meet with fierce resistance.
- High fixed costs - Industries with high fixed costs, perhaps because they require high investments in capital equipment or initial research, tend to be highly rivalrous.
- High exit barriers - The existence of high barriers to exit – in other words, closure or disinvestment – tends to increase rivalry, especially in declining industries.
- Low differentiation - In a commodity market, where products or services are poorly differentiated, the rivalry is increased because there is little to stop customers from switching between competitors and the only way to compete is on price.
What is the definition of “Threat of Entrants”?
1) An attractive industry has HIGH BARRIERS to entry that reduce the threat of new competitors.
2) Barriers to entry are the factors that need to be overcome by new entrants if they are to compete in an industry.
What are the 5 factors that define “Threat of Entrants” and what do they mean?
- SCALE and EXPERIENCE - Once incumbents have reached large-scale production, it will be very expensive for new entrants to match them and until they reach a similar volume they will have higher unit costs. This scale effect is increased where there are high capital investment requirements for entry. Importance of Economics of Scale.
- ACCESS to supply or distribution channels
- EXPECTED RETALIATION - If an organization considering entering an industry believes that the retaliation of an existing firm will be so great as to prevent entry, or mean that entry would be too costly, this is also a barrier.
- LEGISLATION or government action
- INCUMBENCY ADVANTAGES - Incumbents may have cost or quality advantages not available to entrants including access to proprietary technology, raw material sources, and geographical locations, or established brand identity.
What is the definition of “Threat of Substitutes”?
Substitutes are products or services that offer the same or a similar benefit to an industry’s products or services, but have a different nature.
What are the 2 factors that define “Threat of Substitutes” and what do they mean?
- The PRICE/PERFORMANCE ratio is critical to substitution threats. A substitute is still an effective threat even if more expensive, so long as it offers performance advantages that customers value.
- EXTRA-INDUSTRY EFFECTS are the core of the substitution concept. Substitutes come from outside the incumbents’ industry and should not be confused with competitors’ threats from within the industry. If the buyers’ switching costs for the substitute are low the threat increases and the higher the threat, the less attractive the industry is likely to be.
What is the definition of “Power of Buyers”?
1) Buyers are the organisation’s immediate customers, not necessarily the ultimate consumers.
2) If buyers are powerful, then they can demand low prices or costly product or service improvements.
When is the “Power of Buyers” likely to be high?
- CONCENTRATED BUYERS - Where a few large customers account for the majority of sales, buyer power is increased.
- LOW SWITCHING COSTS - Where buyers can easily switch between one supplier and another, they have a strong negotiating position and can squeeze suppliers who are desperate for their business. Switching costs are typically low for standardised and undifferentiated products like commodities such as steel. They are also likely to be low when the buyers are fully informed about prices and product performance.
- SUPPLY ITSEFL –> BACKWARD INTEGRATION
- LOW buyer PROFITS and IMPACT on QUALITY - For industrial or organizational buyers there are two additional factors that can make them price-sensitive and thus increase their threat: first, if the buyer group is unprofitable and pressured to reduce purchasing costs and, second, if the quality of the buyer’s product or services is little affected by the purchased product.
What is the definition of “Power of Suppliers”?
Suppliers are those who supply the organisation with what it needs to produce the product or service. As well as fuel, raw materials and equipment, this can include labour and sources of finance. The factors increasing supplier power are the converse to those for buyer power.
When is the “Power of Suppliers” likely to be high?
- Concentrated suppliers - Where just a few producers dominate supply, suppliers have more power over buyers.
- High switching costs - If it is expensive or disruptive to move from one supplier to another, then the buyer becomes relatively dependent and correspondingly weak.
- Supplier competition threat - Suppliers have increased power where they are able to enter the industry themselves or cut out buyers who are acting as intermediaries.
- Differentiated products - When the products or services are highly differentiated, suppliers will be more powerful.
What is meant if an organization is a Complementor instead of a Competitor?
An organization is your Complementor if it enhances your business attractiveness to customers or suppliers
