porter's 5 forces

Question 1

What is it?

Answer 1

an ANALYSIS SCHEME for mainly business managers

- can be applied for any industry

Question 2

What is the purpose of it? (three levels)

Answer 2

1) To measure the level of competition within an industry.
2) The ultimate goal is to help managers set profitability expectations because PROFITABILITY DECREASES AS COMPETITION INCREASES.
3) Furthermore, it attempts to explain why different industries are able to sustain different levels of competition

Question 3

Are the forces vertical or horizontal? What does vertical / horizontal mean?

Answer 3

three of the five are horizontal; two vertical.
horizontal = competition BETWEEN similar companies at the same level
vertical = competition OF resources; suppliers and customers

Question 4

What does an unattractive industry look like according to this scheme?

Answer 4

One where effects of these forces reduce overall profitability. A PURE MARKET full of competetitors is the most unattractive.

Question 5

1st force

Answer 5

COMPETITION AND RIVALS (horizontal)

• the number and strength of the competitors
• how do they compare in quality and prices?

Question 6

2nd force

Answer 6

POWER OF SUPPLIERS (vertical)

• how easy is it for the suppliers to raise their prices
• the more choice you have on suppliers, the better deals you can usually get
• if little choice, suppliers have the power

Question 7

3rd force

Answer 7

POWER OF CUSTOMERS (vertical)

• if you have many customers, you have power
• but if you have only a few big customers, they have power
• can customers drive down your prices?

Question 8

4th force

Answer 8

THREAT OF NEW SUBSTITUTES (horizontal)

• there might be some similar, slightly different products being offered that might replace your product
• it’s safer to produce something that cannot easily be replicated

Question 9

5th force

Answer 9

THREAT OF NEW ENTRANTS (horizontal)

• how easy is it for new companies to enter the market? if easy, competition will likely be big
• new entrants weaken your position in the market

Question 10

criticism of the scheme?

Answer 10

Since technology has revolutionized the ways we do business, this model can slightly outdated, and quite inflexible and thus not always that accurate.