Poters Five Forces Flashcards
The five forces
Competitive rivalry in the industry
Threat of substitution of good
Threat of new entrants
Bargaining power of customers
Bargaining power of suppliers
Examples of factors that determine supplier power
the number of alternative suppliers; competition amongst suppliers
importance of volume of orders to supplier
if inputs make up a large proportion of costs
if inputs (raw materials or components) help create differentiation of products made
the costs of switching to a new supplier
availability of alternative (substitute) inputs
if backward vertical integration exists.
Factors that determine buyer power
-The amount of bargaining leverage the buyer has - for example, does the customer buy a large proportion of the business’ 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 of the product bought. If the product is branded, the buyer has less control over price paid, they may even be told the price that they can sell the product at.
-Price sensitivity of the product - how changes in price affect demand levels (PED)?
Examples of barriers to entry
-cost advantages of existing businesses (gained through economics of scale or effective relationships with suppliers)
-access to factors of production, e.g. raw materials, skilled staff, and components
-high capital/investment requirements
-strong brand identity of existing business’ products and high levels of advertising
-access to distribution networks
-predictable behaviour of existing businesses, e.g. retaliation through short term pricing strategies
-access to technologies used in the industry.
Examples of 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 – how likely potential producers of substitutes are to be able to raise the capital required for research and development, and production.
-Switching costs for customers – cost of changing to substitute.
-Level of substitution effect – how close the substitute is, how easily it replaces the original product or service.
-Price-performance trade-off of substitutes – how effective the substitutes are in cost and performance, .
-The existence of patents and licenses - to operate in the market.
Examples of factors that determine the number of competitors in a market include:
-The level of collusion in the market, i.e. do the businesses act together to control price and share out the market between them?
-Maturity of the market
-Industry concentration, i.e. is the market a monopoly or an oligopoly
-Product differentiation in the market, i.e. is the market full of virtually identical products (cereals), or are the products identifiably different (car market)?
-Strength of brands in the market
-The existence of patents and licenses to operate in the market. Patents can give companies monopolies of production for specific products, and licences offered by governments or regulators will limit the numbers of competitors.
An attractive industry is one that has high profitability due to:
new entrants finding difficulty setting up
few strong competitors – little rivalry
weak suppliers
loyal, but passive customers
lack of competition from substitute products.
An unattractive industry is one where there is low profitability due to:
many substitutes
lack of barriers to entry
strong, well-established competitors
powerful suppliers
well-organised and choosy customers.