Slides 20 Flashcards
What does Porter’s Five Forces Model demonstrate?
How internal and external forces can influence an industry’s profitability
It helps businesses and investors understand industry competitiveness and profit potential.
What is a market?
A group of buyers and sellers that exchange payment for goods or services
Customers within a market have common needs/problems.
What are the four types of market competition?
- Perfect Competition
- Monopolistic Competition
- Monopoly
- Oligopoly
Each type has distinct characteristics regarding the number of sellers and product differentiation.
What are strategic groups in a market?
Companies that pursue the same strategy/positioning within a market
Examples include firms that position themselves as ‘low cost’, ‘high quality/luxurious’, or ‘niche’.
Why is internal rivalry considered one of the five forces?
Prices for goods are lower when there are more sellers in the market
Firms must spend on product differentiation to attract and retain customers.
Why do firms enter a market?
They expect to see long-term profit potential
Contestable markets have low barriers to entry and new firms can easily grab market share.
What are structural barriers to entry?
Natural cost advantages or government regulations that protect incumbent firms
These barriers make it difficult for new entrants to compete.
What is indirect competition?
Products or services that are fundamentally different but fulfill a similar need
Indirect competitors compete for a customer’s time, money, or attention.
Why is the threat of substitutes one of the five forces?
Substitute products can steal customers away and erode the size of a market
Changing consumer preferences can lead customers to substitute products.
What is technical specificity?
The uniqueness and technical complexity of a component part
A limited number of suppliers increases the bargaining power of suppliers.
What is the hold-up problem?
Occurs when either the buyer or seller uses power in a relationship to renegotiate contract terms in their favor
More likely when one firm has to build a relationship-specific asset.
Why do suppliers hold power in a market?
When there are more firms purchasing a component part than suppliers producing it
High switching costs between suppliers also increase supplier power.
What gives buyers significant power in a market?
If the buyer could credibly backwards integrate into an industry
Low switching costs also enhance buyer power.
What is a key takeaway about competition from Porter’s Five Forces?
Other forces like buyers and suppliers are also trying to maximize profits
Firms should be cautious of indirect competition and new entrants.
What happens when one of the five forces increases?
It will decrease the industry’s profit potential
Firms should try to eliminate strong forces and maximize opportunities created by weak forces.
What can firms do to reduce internal competition?
Take strategic action to decrease the level of internal industry competition
Specific examples can include enhancing product differentiation.
Fill in the blank: A market is defined by a group of buyers and sellers that exchange payment for goods or _______.
services
