Porter’s Five Forces Model

Question 1

Importance of Porter’s Five Forces Model

Answer 1

1. It identifies five forces that affect the industry or market and the performance of businesses competing in the industry.
2. Collectively, the five forces determine the competitive intensity and attractiveness of a market and help to establish where power lies. This is useful in understanding the strength of an organization’s current competitive position and the strength of a position an organization may look to move into.
3. The model helps to understand whether products or services are likely to be profitable.
4. Applying the model can improve the understanding of a market and why different organizations succeed or fail in a market

Question 2

Threat of new entrants

Answer 2

Profitable and potentially profitable markets attract new entrants. If new entrants gain entry into the market, increased competition is likely to reduce profitability. If current competitors have strong and durable barriers to entry(for e.g patents, economies of scale, capital requirements, government policies) then profitability is highly unlikely to decline.

Question 3

Bargaining power of suppliers

Answer 3

The power held by suppliers is assessed by considering how easy it is for suppliers to increase their prices whilst retaining market share.

Question 4

Bargaining power of suppliers is dependent on the following;

Answer 4

1. The number of suppliers of each essential input
2. The uniqueness of product or service
3. The relative size and strength of the supplier
4. The cost to purchasing organization of switching from one supplier to another

Question 5

Bargaining power of customers

Answer 5

The power held by customers is assessed by considering how easy it is for customers to switch to a competitor and/or drive prices down.

Question 6

The bargaining power of customers is dependent on the ff;

Answer 6

1. The number of customers in the market
2. The importance of each individual customer to the organization
3. The cost(including time) to the consumer of switching from one supplier to another.

Question 7

The threat of substitute products or services

Answer 7

If close substitute products or services exist in a market, the likelihood of customers switching to an alternative product or service in response to price rise increases. This reduces both the power of suppliers and attractiveness of the market.

Question 8

Competitive rivalry among current competitors

Answer 8

The main driver of competitive rivalry is the number of capable competitors in the market. Businesses operating in a market with many competitors offering undifferentiated products and services are highly competitive and likely to have low margins. Such a market is unlikely to attract new entrants.