Michael PorterFive Forces

Question 1

What are Porter’s 5 Forces

Answer 1

Porter’s Five Forces is a model that identifies and analyzes five competitive forces that shape every industry and helps determine an industry’s weaknesses and strengths.
Porter’s 5 forces are:
-Competition in the industry
-Threat of new coemption entering the market
-Power of suppliers
-Power of customers
-Threat of substitute products

Question 2

Why do business use porter’s 5 forces

Answer 2

-Porter’s model can be applied to many types of business.
-It can determine the behaviour of a businesses
- The interaction and influence of these 5 forces will determine the behaviour of businesses’ and the likely levels of profitability for a business within a particular industry.

Question 3

Threat of new competitors entering the market (porter’s 5 forces)

Answer 3

-Threat of new competitors entering the market
helps businesses create strategies to prevent new competitors entering the market (to avoid falling prices and profits)
- Refers to the threat that new competitors pose to current players within an industry

Question 4

Power of Buyers (porter’s 5 forces)

Answer 4

-Buyers have the power to influence price and the quantity of products sold
- If there are only a few customers who buy in large volumes – they will have huge market power to drive down prices!
-The higher the buyer power, the lower the potential for the business to set the price themselves.
- If buyer power is low, then the business is able to set the price high and therefore achieve more profit.

Question 5

Power of suppliers (porter’s 5 forces)

Answer 5

-Suppliers want to charge as much as they can for the raw materials they offer the industry.
-If they have power this will hurt industry profits
-On the other hand, with lower levels of supplier power, the situation is reversed.
-The buyer may be able to force prices paid for components and raw materials down, which results in higher profit margins for the business.

Question 6

Threat of substitutes (porter’s 5 forces)

Answer 6

-Customers can buy alternatives
- the availability of other products that a customer could purchase from outside an industry
-This can force prices down and reduce profitability
-The more substitute products available the weaker the position of the business, and vice versa.

Question 7

Competition with the industry (porter’s 5 forces)

Answer 7

• The number of competitors and their ability to undercut a company.
  -The more competitors, and the more products and services they offer, the less the power of a company.
  -When competitive rivalry is low, a company has greater power to charge higher prices and set the terms of deals to achieve higher sales and profits.