Porter's Five Forces

Question 1

What is Porter’s Five Forces used for?

Answer 1

Used to assess the attractiveness of an industry in terms of long run profitability.

Question 2

What are the five forces?

Answer 2

• Threat of new entrants
• Bargaining power of suppliers
• Threat of substitutes
• Bargaining power of customers
• Competitive rivalry

Question 3

What makes a market attractive to new entrants?

Answer 3

• High industry growth
• High profit margins
• Few existing competitors
• Easy customer switching

Question 4

What are barriers to entry of a market for new entrants?

Answer 4

 Economies of scale
 Brand loyalty
 Capital requirements
 Access to distribution
 Patents
 Government subsidies

Question 5

What is competitive rivalry?

Answer 5

How intense the competition is between existing companies in the market

Question 6

What makes competitive rivalry higher?

Answer 6

 large numbers of existing competitors
 high levels of fixed costs
 low industry growth
 low switching costs
 high exit barriers
 high strategic importance

Question 7

What is the threat of substitutes?

Answer 7

Availability:
 From different industries (e.g. rail travel vs bus travel)
 From sub-industries (e.g. CDs vs MP3 downloads)

Increased likelihood:
 Price of substitute is low
 Relative performance of the substitute is comparable
 Customers can switch easily

Question 8

What is the power of the customer and what makes them more powerful?

Answer 8

Are the customers powerful enough to push down prices?
This will be higher if there are:
 small numbers of large customers
 large numbers of competitors
 low levels of product differentiation
 low switching costs
 the customers own profitability is low
 high degree of price transparency in the market

Question 9

What different suppliers should be considered when talking about the power of suppliers?

Answer 9

 Providers of raw materials
 Service providers and outsourced services
 Employees and hire workers

Question 10

What factors increase the power of suppliers?

Answer 10

 There are a few large suppliers
 The suppliers’ products are differentiated
 High switching costs for the customers (the industry being analysed)
 The supplier has other buyers that they can sell to instead