Porters Five Forces

Question 1

What are porters five forces?

Answer 1

• threat of new entrants to a market
• bargaining power of suppliers
• bargaining power of customers (buyers)
• threat of substitutes
• degree of competitive rivalry

Question 2

What is the threat of new entrants?

Answer 2

• if new entrants move into an industry they will gain market share and rivalry will intensify
• the position of existing firms is stronger if there are barriers to entering the market
• if barriers to entry are low then the threat of new entrants will be high and vice versa

Question 3

What are high industry profits associated with?

Answer 3

• weak suppliers
• weak customers (buyers)
• high entry barriers
• few opportunities for substitutes
• little rivalry

Question 4

What are low industry profits associated with?

Answer 4

• strong suppliers
• strong customers (buyers)
• low entry barriers
• many opportunities for substitutes
• intense rivalry

Question 5

What are some successful barriers to entry?

Answer 5

• investment cost (high cost deters entry, only large businesses can compete)
• economies of scale available to existing firms (lower unit costs make it difficult for smaller newcomers to break into the market and compete effectively)
• product differentiation (products with strong USPs/ brand customer loyalty,
• regulatory restrictions (e.g. patents can hold protection in the short run)
• retaliation by established products ( the threat of price war will act to discourage new entrants)
• access to distribution channels ( a lack of access to distribution channels will make it difficult for newcomers to enter the market)

Question 6

What are Barriers to entry?

Answer 6

• These are factors that prevent new competition entering the market.
• If barriers to entry are high, then monopoly profits can occur.
  examples include;
• cost advantages of existing businesses (gained through economics of scale or effective relationships with suppliers)
• access to factors of production e.g raw materials etc.
• high capital. investment requirements
• strong brand identity of existing businesses products and high levels of advertising
• access to distribution networks
• predictable behaviour of existing businesses e.g. retaliation through pricing strategies.
• technologies.

Question 7

What is supplier power?

Answer 7

• if suppliers have high levels of power they are able to push up prices for raw materials and components.
• with lower levels of supplier power, the situation is reversed.
• the number of alternative suppliers- competition amongst suppliers
• importance of volume of orders to supplier
• if inputs make up a large proportion of costs.
• the costs of switching to a new supplier
• availability of alternative (substitute) inputs.

Question 8

What is buyer power?

Answer 8

• Buyer power concerns the abilities of customers within an industry to affect/determine the price they pay.
• if buyer power is low, then the business is able to set the price high, vice versa.
• The amount of bargaining leverage the buyer has. for example, does the customer buy a large proportion of the businesses products/services
• whether the customer buys in bulk. the larger the order the greater the level of negotiated discount
• whether the buyer has information on costs/ availability of alternative suppliers
• product USP and exclusivity
• brand identity and loyalty
• price sensitivity

Question 9

What is degree of competition in the market?

Answer 9

• strength of brands in the market (levels of brand loyalty)
• the level of collusion in the market, do the businesses act together to control price and share out the market between them?
• maturity of the market, is the market stable with established brands and market leaders, or is the market immature, with new entrants being able to join?
• product differentiation in the market i.e it is the market full of virtually identical products or are the products identifiably different (car market?)

Question 10

Threat or risk of substitute products or services?

Answer 10

Factors that determine the likelihood of availability of substitute products include;

• rate of change of technology; the faster the rate of change of technology, the more quickly substitutes are likely to occur
• availability of capital for investment; are potential producers of substitutes likely to be able to raise the capital required for research and development and production
• switching costs for customers; cost of changing to substitute
• the existence of patents and licenses to operate in the market.