Reading 32 - 5 Competitive Forces that shape strategy

Question 1

What are Porter’s 5 forces?

Answer 1

1. Threat of new entrants in the industry
2. Threat of substitutes
3. Bargaining power of buyers
4. Bargaining power of suppliers
5. Rivalry among existing competitors

Question 2

What are the 7 major sources of barrier to entry?

Answer 2

1. Economies of scale that will make it difficult for new entrants to achieve critical mass
2. Product differences and brand identity that will deter customers from switching to new brans without costly inducements
3. Switching costs that the product user will incur if they decide to use the new entrant
4. Capital requirements to construct the facilities and other infrastructure required to enter the industry
5. Access to distribution channels, meaning that existing distributors may be at or near capital and/or may not be willing to take on the new entrant’s products
6. Government policy may require licensing or other approvals to enter the industry
7. Cost and/or quality adantages may be enjoyed by the encumbent firm

Question 3

Newcomers to an industry are likely to face retaliation if…..

Answer 3

1. Incumbents have previously responded vigorously to new entrants
2. Incumbents possess substantional resources to fight back
3. Incumbents seem likely to cut prices because they are commited to retaining market share at all costs or because the industry has high fixed costs
4. Industry growth is slow so newcomers can gain volume only by taking from the incumbents

Question 4

Explain one of Porter’s Forces - “The Bargaining Power of Suppliers”….

Answer 4

The stronger the bargaining position of the suppliers, the greater their ability to increase their share of the value-added in the form of higher prices for the inputs they sell to the industry.

Question 5

Explain one of Porter’s Forces - “The Threats of New Entrants into the Industry”….

Answer 5

The strength of this force depends upon a variety of factors, most or all of which relative to the size of the barriers to entry present. All else being equal, the higher the barriers, the weaker the threat, and , the greater the pricing power of existing participants

Question 6

Explain one of Porter’s Forces - “The Threat of Substitute Products”….

Answer 6

This force concerns not only existing subsitutes, but also those that become available in the future.

Question 7

What are the 3 major factors that effect the strength of “The Threat of Substitute Products”?

Answer 7

1. The relative price performance of subsitutes (**meaning can they get the same quality product for a lesser price elsewhere)
2. Buyer propensity to substitute, or how likely are the current buyers to switch, given a viable alternative
3. Switching Costs

Question 8

What is the key issue of Porter’s Forces - “The Bargaining Power of Buyers”….

Answer 8

How strong is the negotiating power of the buyers of the firm’s or industry’s output, and what is the impact on the distribution of value-added by the industry?

Question 9

What are the 2 main sources of Bargaining Power of Buyers?

Answer 9

1. Bargaining Leverage relates closely to factors affecting the other forces… ie low switching costs and readily available substitutes give the buyers leverage
2. The buyers Price Sensitivity depends upon qualitative factors such as brandy identity, product differences, quality and performance

Question 10

What is the key issue of Porter’s Forces - “The Bargaining Power of Suppliers”….

Answer 10

How strong is the negotiating postition of the suppliers of production inputs to the industry,and what is the impact on the distribution of the value-added?

Question 11

What are some of the key factors that help to determine the power of suppliers?

Answer 11

1. Differentiation of Inputs - the greater the potential options, the lower the power of suppliers
2. Presence of substitute inputs - the more actual or prospective substitutes that exist, the lower the supplier power
3. Supplier Concentration - a small number of suppliers increases their relative power, all things being equal.
4. Importance of volume to the supplier - the more the seller seeks high volume, the harder they will work to maintain this volume and lower their bargaining power

Question 12

What is the key issue of Porter’s Forces - “The Degree of Rivalry Among Existing Competitors”….

Answer 12

Will existing firms compete away the value-added component through lower prices and higher costs to compete

Question 13

What are some of the key factors that help to determine The Degree of Rivalry Among Existing Competitors?

Answer 13

1. The number of competitors
2. High degree of operating or financial leverage
3. Product Differences
4. Product Shelf Life
5. The existence of exit barriers
6. Amount of informational complexity

Question 14

Describe why a high industry growth rate on a temporary basis does not determine industry profitability and structure in the long run….

Answer 14

A high growth rate diminishes but does not assure proftitabilty if other forces are detrimental to profits.

Question 15

What are the 6 steps when using Porter’s Five Forces in analyzing an industry?

Answer 15

1. Define the industry
2. Identify the participants
3. Determine strength or weakness of each force, what drives it, and why?
4. Determine industry structure using an analytical framework
5. Asses current and potential shifts in each force
6. Decide which forces can be altered in ways that will affect the value of the industry or firm