Porters Five Forces Flashcards
Porters 5 forces model
A framework for analysing nature of competition within a industry of competition within a industry and helps to understand and assess industry profitability and attractiveness
Threat of new entrants
Degree of rivalry
Threat of new entrants
Bargaining threat of new buyers
Threat of new buyers
Bargaining power of suppliers
Threat of new entrants
Threat of suppliers
Bargaining power of suppliers
If a firms suppliers have bargaining power they will
.exercise that power
.sell their products at a higher price
.squeeze industry profits
.if the supplier forces up the price paid for inputs profits will be reduced
The power of customers
Powerful customers are able to exert pressure to drive down prices
Eg-supermarket business is increasingly dominated by a small number of large retail chains able to exert great power over suppliers
Threat of substitute products
A substitute product is something that meets the same customer need
If there are substitutes to a firms product they will limit the price that can be charged and will reduced profits
Customer loyalty and availability will limit the extent of this threat
Note the role of technological change is rapidly creating new substitutes
What determines the intensity of rivalry
Number of competitors-rivalry high in an industry with lots of competitors
Market size and growth- competition tends to be the most intense in slow growth or declining markets
Product differentiation and brand loyalty-the greater the customer loyalty the less intense the competition and the lower the degree of product differentiation the greater the intensity of price competition
The power of buyers and availability of substitutes if buyers are strong and or if close substitutes are available there will be more intense competitive rivalry
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 dependant on volume
Exit barriers
If it is difficult or expensive to exit an industry firms will remain thus adding to the intensity of competiton
