Porters Six Forces Model

Question 1

Level of rivalry: high/moderate/low

Answer 1

• a business must know what their competitors are up to
• review the following factors when comparing to competitors: size and financial resources of business, market share, quality/prices of products and services, location/distribution.
• strategies to deal with above factors!
  1. Customer loyalty programs
  2. Reduction of prices
  3. Improve quality of products/services

Question 2

Threats of new entrants: high/moderate/low

Answer 2

• an existing business will see any new entrant as a threat to its market share and profits
• business will therefore try to build barriers/ strategies to prevent these new businesses from entering the market successfully

EXAMPLES:

1. Big retailers in shopping malls may negotiate with mall management to prevent too many competitors from acquiring space in the same mall
2. Business may register a patent to deter new business from selling similar product

Question 3

Availability of substitute products: high/moderate/low

Answer 3

• does NOT refer to another brand
• a substitute product is different product that satisfies the same need (sugar vs artificial sweeteners)
• increasing availability of substitute products generates more indirect competition

Question 4

Power of suppliers

Answer 4

• means the ability of suppliers to dictate prices
• it is critical for the business to develop and maintain relations with suppliers
• no raw materials = no sales = no profit
• no stock = customer frustration = bad publicity = decrease in sales = decrease in profits

Question 5

Power of buyers

Answer 5

• means the ability to dictate prices
  FACTORS THAT MUST BE TAKEN INTO CONSIDERATION:
  1. What type of product/ service is being offered? Speciality goods, convenience etc.
  2. Is customer brand loyal or are they prepared to swap brands for better deal
  3. How price sensitive are customers
  4. Snob value - image associated with products/ servocd

Question 6

Power of complementary products

Answer 6

Complementary product is where the use of one product is interrelated with the use of another. Examples: bread and butter, coffee and milk