Question 1- Industry Analysis Flashcards
What are Porters five forces?
1) Rivalry between existing firms
2) Threat of new entrants
3) Threat of substitute products
4) Bargaining power of buyers
5) Bargaining power of suppliers
What are the two means by which firms can compete?
By brand name or on price
What are the factors that determine the level rivalry between existing firms and explain the correlation
1) Industry growth rate - slow industry growth means higher competition as companies can only grow by gaining the market share from either other
2) Degree of concentration - the higher the concentration (the degree to which a few large firms make up the majority of the market) the lower the competition
3) Differentiation and switching costs: the less the differentiated and the lower the switching costs are, the more competitive the market will be
4) Scale and learning economies:
5) Excess capacity and exit barriers: High exit barriers and excess capacity will increase the level of competition within an industry
What determines the treat of new entrants?
Two key factors
1) The potential to earn abnormal earnings
2) How easy it is to enter the market
What will determine the ease at which the market can be entered?
1) Economies of scale: force the entrant to come in at a large scale (for a cost advantage) or a small scale (with a cost disadvantage)
2) First mover advantage- less existing competition therefore greater potential to have abnormal earnings
3) Access to channels or distribution and relations- greater access= greater ease of entrance
4) Legal barriers- greater legal barriers = more difficult to enter
What determines the treat of substitute products?
Depends on the relative price and performance of the competition, and the customers willingness to substitute
What impact will the bargaining power of suppliers/ customers have on the potential to earn abnormal profits?
Potential to earn abnormal profits is driven by the degree of competition
Actual profits are determined by the industries bargaining power with customers/ suppliers
What is the bargaining power of customers determined by?
Number of buyers: more buyers= less bargauning power
Volume per buyer: more volume per buy= more bargaining power
Switching costs: Less switching costs = more bargaining power
Levels of differntaition: low levels of differentiation= more bargaining power
What determines the bargaining power of suppliers?
Suppliers are only powerful when there are a few of them and there are few substitutes available
