Porter's 5 Forces of Business

Question 1

What is Porter’s 5 Forces?

Answer 1

• A framework for analysing the nature of competition within an industry
• Helps a business assess its profitability

Question 2

What are the reasons for competitive rivalry in business?

Answer 2

• Size
• Structure
• Distribution channels
• Profitability
• Growth

Question 3

What are Porter’s 5 Forces?

Answer 3

• Threat of New Entrants
• Bargaining Power of Suppliers
• Bargaining Power of Customers
• Threat of Substitutes
• Intensity of competitiveness

Question 4

What does the Threat of New Entrants suggest?

Answer 4

• If new entrants enter the market they will gain market share. Rivalry will intensify
• The position of existing firms is stronger if there are barriers to entering the market

Question 5

If barriers of entry are low what will the threat of new entrants be?

Answer 5

• High

Question 6

If barriers of entry are high what will the threat of new entrants be?

Answer 6

• Low

Question 7

What are Potential Barriers of entry into new markets?

Answer 7

• Cost - Capital equipment
• Size of competitors
• Legislation - Safety measures
• Tariffs - taxes
• Brand loyalty - Brand reputation
• Expertise

Question 8

What does Bargaining Power of Suppliers suggest

Answer 8

• If a firm has bargaining power they will:
  Sell products at a high price
  Squeeze industry profits

Question 9

If suppliers force up their prices paid for inputs, what will happen?

Answer 9

• Profits will be reduced

Question 10

When are suppliers powerful?

Answer 10

• There are only a few large suppliers
• The resource they supply is scarce
• The customer is small and unimportant
• There are few substitutes
• Cost of switching supplier is high

Question 11

What does Bargaining Power of Customers suggest?

Answer 11

• Powerful customers are able to exert pressure to drive down prices

Question 12

What is an example of Bargaining Power of Customers being strong?

Answer 12

• Supermarket industry is increasingly dominated by a small number of large retail chains able to exert power of suppliers

Question 13

What does Threat of Substitutes suggest?

Answer 13

• If there are substitutes to a firm’s product, they will limit the price that can be charged and will reduce profits

Question 14

How do you limit the Threat of Substitutes?

Answer 14

• Customer loyalty and availability will limit the extent of this threat

Question 15

What are the influences on intensity of rivalry?

Answer 15

• Number of competitors in the market
• Market size and Growth opportunity
• Product differentiation
• Capacity utilisation
• Exit barriers

Question 16

How does Porter’s model links with Industry Profitability?

Answer 16

• Low Industry Profits:
  Strong suppliers
  Strong customers
  Low entry barriers
  Many substitute opportunities
• High Industry Profits:
  Weak suppliers
  Weak customers
  High entry barriers
  Few substitute opportunities