Porter’s Five Forces

Question 1

What is Porter’s Five Forces Model?

Answer 1

A framework for analysing the nature of competition within an industry
• Helps understand & assess industry profitability & attractiveness

Question 2

Reasons Why Competitive Rivalry (and Profits) Vary Between Industries

Answer 2

Size (revenues, quantity)
• Structure
• Distribution channels
• Customer needs and wants
• Profitability
• Growth
• Product life cycle
• Alternatives for the consumer

Question 3

Is cafe sector low or high profit

Answer 3

Low

Question 4

Soft drinks low or high profit

Answer 4

High

Question 5

Pharmaceuticals high or low profit

Answer 5

High

Question 6

Airlines low or high profit

Answer 6

Low

Question 7

Why Profits are High in Soft Drinks

Answer 7

Customers and suppliers have little power
• High brand awareness & loyalty = less desire for substitutes
• High barriers to entry (economies of scale)

Question 8

Low industry profits associated with:

Answer 8

Strong suppliers,
Strong customers (buyers),
Low entry barriers,
Many opportunities for substitutes,
Intense rivalry

Question 9

High industry profits associated with:

Answer 9

Weak suppliers
Weak customers (buyers)
High entry barriers
Few opportunities for substitutes
Little rivalry

Question 10

Barriers to entry

Answer 10

Economies of scale, Vertical integration, Brand loyalty, Access to the best technologies, Expertise & reputation

Question 11

Suppliers are powerful when

Answer 11

There are only a few large suppliers
• The resource they supply is scarce
• The cost of switching to an alternative supplier is high
• The customer is small and unimportant
• There are no or few substitute resources available

Question 12

Bargaining Power of Customers

Answer 12

Powerful customers are able to exert pressure to drive down prices
• E.g. supermarket business is increasingly dominated by a small number of large retail chains able exert great power over suppliers

Question 13

the role of technological change on forces

Answer 13

rapidly creating new substitutes

Question 14

Determinants of Intensity of Rivalry (1)

Answer 14

Number of competitors in the market,
• Market size and growth prospects
– Competition tends to be most intense in slow-growth or declining markets
• Product differentiation and brand loyalty

Question 15

Determinants of intensity of rivalry (2)

Answer 15

The power of buyers and the availability of substitutes,
• Capacity utilisation
– The existence of spare capacity will increase the intensity of
competition
• Cost structure of the industry
– Where fixed costs are a high percentage of costs then profits
will be very dependent on volume
– As a result there will be intense competition over market share
• Exit barriers
– If it is difficult or expensive to exit an industry, firms will remain thus adding to the intensity of competition

Question 16

What are the 5 forces

Answer 16

1. Bargaining power of suppliers,
2. Bargaining power of customers,
3. Threat of new entrants,
4. Threat of substitutes,
5. Rivalry among existing businesses

Question 17

How to reduce bargaining power of suppliers

Answer 17

Limit power of suppliers by looking for new suppliers,

• Backward vertical integration and merge or takeover the supplier

Question 18

How to reduce bargaining power of customers

Answer 18

Make it too expensive for a customer to switch,

• Forward vertically integrate

Question 19

How to tackle threat of new entrants

Answer 19

Create barriers to entry to prevent new entrants,

• Heavily advertise to build strong brands

Question 20

How to tackle threat of substitutes

Answer 20

• Continuously invest in R&D and develop
patents
• Buy up patents of rivals and shelve to prevent product production

Question 21

How to reduce rivalry

Answer 21

• Larger businesses trying to buy up rivals through horizontal integration
• Businesses continuously introducing new products to the market
• Businesses in the market having to heavily advertise to maintain market share