Porter's Five Forces

Question 1

Who created Porter’s Five Forces and what was his occupation?

Answer 1

Michael Porter was originally an economist

Question 2

Why would you look at the profitability of a market?

Answer 2

To figure how what you should venture into

Question 3

What are the five factors of Porter’s Five Forces?

Answer 3

Rivalry among existing firms, potential entrants, substitutes, suppliers, buyers

Question 4

How does rivalry among existing firms influence profitability

Answer 4

The more competitors there are the more options your customers have, and your customer market (and profitability) is reduced. Marketing expenses will also go up, further reducing profitability

Question 5

How do potential entrants influence profitability?

Answer 5

If its easy for new entrants to enter the industry, they are more likely to do so, increasing your competition and reducing your profit. New entrants might come in with a lower price and attract some (maybe only a few, maybe a lot) customers. You will have to work harder to get your original volume

Question 6

How do substitutes influence profitability?

Answer 6

The more substitutes there are, the less profitable you are. Substitutes are often cheaper, and some people will prefer to pay less and therefore it makes your market smaller and your marketing costs will go up. Because they are often cheaper, they may also force you to charge lower prices

Question 7

How do suppliers influence profitability

Answer 7

Suppliers are a big part of your cost because you need supplies. The more expensive the supplies are, the less profitability you have. Fewer suppliers or suppliers with a lot of influence can also increase your cost of goods sold

Question 8

How do buyers influence profitability

Answer 8

If there are lots of buyers there are lots of opportunities to sell, allowing you to raise your price. The number of buyers is also affected by how interested they are in your product: if they are not interested you must spend more on marketing

Question 9

What happens when any of Porter’s Five Forces cause a downward pressure on profitability?

Answer 9

Competition goes up because companies must work hard against each other to make profit

Question 10

What are some factors that influence competition?

Answer 10

1. Quantity and equality of competitors
2. Industry growth rate
3. Capacity of competitors
4. Customer switching costs
5. When products are commodities or perishables
6. Exit barriers

Question 11

What happens to competition when there are many competitors of equal size/capability?

Answer 11

As the number of competitors goes up, your profitability goes down

Question 12

What happens to competition when there is a low industry growth rate?

Answer 12

When the number of new customers coming to the industry every year is low you have to steal buyers away from competitors which is a lot of work (profitability goes down). However if there are a lot of new buyers it’s easier to attract the new buyers coming in

Question 13

What happens to competition when there is a low capacity of competitors?

Answer 13

If everyone is producing near 100% of their capacity you will not chase new buyers because you cannot satisfy their needs and rivalry intensity is not very high. But if you are not selling close to 100% you are very motivated to chase after new buyers and competition is very high so they can increase their output and profitability

Question 14

What happens to competition when there are low customer switching costs?

Answer 14

Low switching costs mean that there is more competition. If consumers can’t tell the difference between different brands (or don’t care), their switching costs will be very low. This forces you to lower your price or spend more on marketing, decreasing profitability

Question 15

What happens to competition when products are commodities or perishables?

Answer 15

Commodities are products that are undifferentiated. For those products, you compete only on price and it forces your prices down (decreases profitability). You must sell perishable products quickly before they go bad, which can force you to lower your price and decrease profitability

Question 16

What happens to competition when there are high exit barriers?

Answer 16

If you cannot exit an industry easily, you have to stay and fight for your place which increases competition

Question 17

What are some solutions businesses can use to fight competition?

Answer 17

1. Growth
2. Acquisition of competitors
3. Create/increase consumer switching costs
4. Differentiation

Question 18

What are some factors that influence substitution?

Answer 18

1. The quantity of good substitutes
2. Customer switching costs
3. Buyer propensity to substitute

Question 19

What happens to the substitute factor when there are many good substitutes?

Answer 19

It gives customers more choices and it’s harder to convince consumers that yours is worth the extra price. It forces you to keep prices lower and spend more on marketing, decreasing your profitability

Question 20

What happens to the substitute factor when there is a higher buyer propensity (eg. buying margarine in place of butter) to substitutes

Answer 20

You need to convince buyers that they don’t want the substitute and you need to spend a lot of money doing so, which decreases profitability

Question 21

What are some solutions that businesses can use to fight substitution?

Answer 21

1. Strong marketing/differentiation

2. Lock in customers

Question 22

What are some factors that affect potential entrants?

Answer 22

1. Quantity of capital intensity
2. Quantity of specialized assets
3. Amount of regulations/government policy
4. Customer switching costs

Question 23

What happens to the potential entrants factor when there is a lack of capital intensity?

Answer 23

When people don’t need a lot of assets to enter an industry (like making a factory, setting up a store, etc.), they are more likely to enter the industry, increasing your competition and forcing you to lower prices, decreasing profitability

Question 24

What happens to the potential entrants factor when there are specialized assets?

Answer 24

When your product requires very specific parts or it is a very specific product, you can lock up distributors or hold patents on those products so that new entrants to your industry will have a hard time making a similar product

Question 25

What are some solutions that businesses can use to fight potential entrants?

Answer 25

1. Grow to achieve scale
2. Control distribution network
3. Lobby government
4. Differentiate; create brand loyalty and identity
5. Lock customers in

Question 26

What happens to the potential entrants factor when there are no regulations or government policy?

Answer 26

If there are no regulations or government policies that new entrants need to meet, it will be easier for them to enter the industry. For example, banks have very high regulations and it is very hard to enter that industry

Question 27

What happens to the potential entrants factor when there are low switching costs/no brand loyalty or identity?

Answer 27

If there are low switching costs customers will be more inclined to switch from your product to the cheaper version offered by the new entrant

Question 28

What happens to the potential entrants factor when there are low barriers to entry?

Answer 28

The easier it is for new entrants to come in, and often with cheaper prices which attract some customers, which decrease your profitability

Question 29

What are some solutions that businesses can use to fight potential entrants?

Answer 29

1. Grow to achieve scale
2. Control distribution network
3. Lobby government
4. Differentiate; create brand loyalty and identity
5. Lock customers in

Question 30

What are some factors that affect suppliers?

Answer 30

1. Number of suppliers
2. Number of good substitute suppliers/inputs
3. Producer switching costs
4. Forward integration

Question 31

What happens to the supplier factor when there are few suppliers?

Answer 31

It’s a bad thing for companies because they have very few choices in terms of where to go. Suppliers have the bargaining power, and they will force you to pay higher prices for the inputs you need (decreases profitability)

Question 32

What happens to the supplier factor when there are few good substitute suppliers/inputs?

Answer 32

Companies have very few choices in terms of what inputs/supplies they can use. Suppliers will have greater bargaining power, which forces you to pay more, decreasing your profitability

Question 33

What happens to the supplier factor when there are high switching costs?

Answer 33

The supplier has the upper hand because they know that it’s difficult for you to switch suppliers (decreased profitability). Eg. if you need a very specific, very unique input for your product it will be difficult to convince other suppliers to be willing to build the input

Question 34

What happens to the supplier factor if your supplier integrates forward?

Answer 34

If your supplier integrates forward, they are now producing the same product you do and they are now a competitor). They have a cheaper and more secure source than you do: they can enter your market and sell the same/similar product at a lower price which will force you to lower your own price (decreases profitability)

Question 35

What are some solutions that businesses can use to fight supplier power?

Answer 35

1. Form strategic alliance: formal partnership results in mutual benefit. You succeed when your supplier succeeds and vice versa. They might give you a better price/quality/service, which helps lower costs, and they don’t feel the need to enter the industry themselves, which lowers competition
2. Internal supply: if you produce for yourself you don’t need to worry about bargaining or switching over to someone else
3. Redesign product or needed input: long run strategy

Question 36

What do you do if you are trying to decide between forming a strategic alliance and internalizing your supply?

Answer 36

Use the Diamond-E strategy to see if you have the resources/capabilities to produce your own supplies, then look at your managerial preferences to see if you even want to do it. Do you want to be able to walk away from it if it doesn’t work out, or do you want to have control over every aspect of your company?

Question 37

What are some factors that affect buyers?

Answer 37

1. The number and concentration of buyers
2. Discretionary purchase
3. Standardization products
4. Customer switching costs

Question 38

What happens to the buyer factor if you have few/concentrated buyers?

Answer 38

Buyers have a lot of power so they will negotiate a better price for themselves and your prices will have to go down (decreased profitability)

Question 39

What happens to the buyer factor if they make discretionary purchases?

Answer 39

Your customers won’t buy your product if you don’t sell it for their price because they don’t need it. It forces you to lower your prices because they can walk away

Question 40

What happens to the buyer factor if there is a standardization of products?

Answer 40

If buyers don’t see that there is a distinction between the two products, they will treat it like a commodity and look only at price.This will force your price down because they are only looking for the cheapest option (decreased profitability)

Question 41

What happens to the buyer factor if there are low switching costs?

Answer 41

The buyer has the bargaining power because they can easily switch to other products or companies. this will force your price down (decreased profitability)

Question 42

What are some solutions that businesses can use to fight buyer power?

Answer 42

1. Form alliance with other sellers (can be illegal)
2. Strong marketing/differentiation: set your product apart in a valuable way
3. Create switching costs; lock in customers: create components that go along with each other (eg. video games, consoles, and game systems)

Question 43

Why do you use the Porter’s Five Forces model?

Answer 43

1. Predicts industry profitability
2. Helps determine whether a firm should enter a particular industry (whether there are profits to be had)
3. Helps determine whether and/or how firm can carve out an attractive position in that industry (is there something you can do for your suppliers/buyers? Can you raise the barriers to entry once you are in the market?)

Question 44

What are some generic strategies in terms of Porter’s Five Forces?

Answer 44

1. Are you going to be cheaper or more unique? (eg. Walmart vs. apple) Low cost or unique?
2. Are you going to make it available to a lot of people or few people? (eg. freedom mobile vs. Ferrari) Narrow customer market focus or wide customer market focus?