Porters 5 forces Flashcards
What is porters 5 forces model?
Porters five forces is an analtical tool that provides a framework for analysing the nature of competition within an industry
What are the 5 forces?
Rivalry among existing competitors.
Threat of new entrants.
Bargaining power of suppliers
Threat of substitute products/ services
Bargaining power of buyers.
Entry threat (barriers to entry)
What is it & where may this threat come from?
Not just existing firms in the industry- also new entrants to the industry.
Profitable markets attract new entrants, which erodes profitability. Unless incumbents have strong and durable barriers to entry, for example, patents, economies of scale, capital requirements or government policies, then profitability will decline to a competitive rate.
Entry threat (barriers to entry)
What are the possible barriers to entry?
Cost of entry
Government barriers
Patents- Give holder a competitive advantage- making it difficult for a new entrant to access a market.
Economies of scale- how quickly a new entrant would benefit from economies of scale.
Access to suppliers- whether or not have access to suppliers.
What is buyer power?
It relates to the impact that the customers have on the business.
An assessment of how easy it is for buyers to drive prices down.
This is driven by the: number of buyers in the market; importance of each individual buyer to the organisation; and cost to the buyer of switching from one supplier to another.
If a business has just a few powerful buyers, they are often able to dictate terms.
Buyer power
What types of customers are likely to be the most powerful?
Few buyers/ buy significant proportion of output.
What is competitive rivalry?
The main driver is the number and capability of competitors in the market. Many competitors, offering undifferentiated products and services, will reduce market attractiveness.
When is rivalry likely to be high?
Many firms of similary size
Low levels of differentiation
Slow market growth
High exit costs
Threat of substitute- what is this?
Where close substitute products exist in a market, it increases the likelihood of customers switching to alternatives in response to price increases. This reduces both the power of suppliers and the attractiveness of the market.
How did the 5 forces shape competitive strategy?
Porter as a result identified 3 generic strategies that could be implemented to create a competitive advantage.
- Cost leadhership ( Economies of scale, technology, preferential access to raw materials/ other factors)
- Differentiation strategy (seeks to be unique within the industry)
- Focus strategy ( entails a narrow competitive scope where a particular segment/segments are targeted.)
