porters five forces model Flashcards
STRATEGIC ANALYSIS - models
what is porters five forces model ?
micheal porter devised his five forces model to illustrate the main factors that determine the competitiveness and hance profitability of a firm/industry
what did porter argue was the aim of competitive strategy ?
to cope with and ideally change those forces in favour of the business
what did porter argue ?
that the strategic position of a firm and its strategies are determined not only by competition with its traditional direct competitors but also by four other forces
what are the four forces linked to competitive rivalry ?
- threat of new market entrants/barriers to entry
- threat of substitute products
- bargaining power of customers/buyers
- bargaining power of suppliers
threat of substitutes : what does it include ?
- rate of new technology ?
- availability of capital for investment ?
- switching costs for consumers ?
- how close is the substitute to the original ?
- price performance trade off ?
threat of substitutes : what does it depend on ?
- substitute performance
- cost of change
barriers to entry/threat of new entrants : what does it include ?
- economies of scale
- supplier relationships
- access to resources
- high capital investment
- strong brand identity
- established distribution routes
- access to technology
barriers to entry/threat of new entrants : what does it depend on ?
- time and cost of entry
- specialist knowledge
- economies of scale
- cost advantages
- technology protection
- barriers to entry
bargaining power of customers/buyers : what does it include ?
- does the customer buy large volumes from the business ?
- customer knowledge of alternative ?
- product usp and exclusivity
- brand identity ?
- brand loyalty ?
- price sensitivity of product ?
- forward vertical integration ?
bargaining power of customers/buyers : what does it depend on ?
- number of customers
- size of each order
- differences between competitors
- price sensitivity
- ability to substitute
- cost of changing
bargaining power of suppliers : what does it include ?
- number of alternatives
- switching costs
- importance of volume of orders to supplier
- threat of forward/backward integration
- degree of differentiation
- do inputs make up a large proportion of costs ?
bargaining power of suppliers : what does it depend on ?
- number of suppliers
- size of suppliers
- uniqueness of service
- your ability to substitute
- cost of changing
competitive rivalry : what does it include ?
- evidence of collusion ?
- maturity of the market
- industry concentration
- levels of product differentiation
- levels of brand loyalty
- existence of patents, copyright and licenses in the market
- evidence of horizontal integration in the market ?
competitive rivalry : what does it depend on ?
- number of competitors
- quality differences
- other differences
- switching costs
- customer loyalty
- costs of leaving market
benefits of porters five forces model :
- competitive analysis
- strategic planning
- decision making
- market insights
- risk management
negatives of porters five forces model :
- static analysis
- limited scope
- complexity oversimplified
- assumption of rational behaviour
- lack of quantitative metrics
- historical data dependence
what are barriers to entry ?
these are factors that prevent new firms from entering a market
what is bargaining power of customers ?
customer power relates to their ability to influence the price that they pay for goods and services within an industry
what are threats of substitutes ?
if there are lots of substitutes within a market then the customer can easily switch to an alternative if needed
the higher the number of substitutes the weaker the power of the individual business within the market
what is competitive rivalry ?
competition levels can vary between a pure monopoly to perfect competition
degree of rivalry will also determine prices and profits for any single firm
generally, the lower the level of competition within a market the higher the profits for the business
what is bargaining power of suppliers ?
when suppliers hold significant levels of influence within a market, they are able to push up prices for raw materials and components and therefore lower the profit margins for the businesses that they supply
how can a business reduce rivalry ?
not competing on price but competing by bringing out new products and through advertising
taking over their rivals
forming cartels or engaging in a broad range of anti competitive policies
what are strategies to reduce the bargaining power of customers are ?
forward vertical integration
make it more expensive for customers to switch to another supplier
how can a business reduce the number of potential substitutes through ?
marketing tactics
research and development and patenting the substitutes themselves
what can barriers to entry take the form of ?
pricing
applying for patents and copyright to protect its intellectual property
spending large amounts of money on advertising
attempting to develop strong brands which attract customer loyalty and make products less price sensitive
what are strategies to reduce the bargaining power of suppliers are ?
backward vertical integration
seek out new suppliers to create more competition between its suppliers
engage in technical research to find substitutes for a particular input
minimize the information provided to suppliers in order to prevent the supplier realising its power over customers
