Strategic Analysis Of The Industrial Environment

Question 1

What are porters five forces?

Answer 1

Threat of new entrants

Bargaining power of buyers

Threat is substitute products or services

Bargaining power of suppliers

Rivalry among existing competitors

Question 2

Do you want porters forces to be high or low? Why?

Answer 2

Low; they are external forces affecting firms success and we want to lower their influence as much as possible

Question 3

Why do we want barriers to new entrants?

Answer 3

New entrant put a cap on profit potential

Question 4

What are seven major sources of barriers to new entrants?

Answer 4

• supply-side economies of scale
• demand-side benefits of scale (network benefits)
• customer switching costs
• capital requirements
• incumbency advantages independent of size
• unequal access to distribution channels
• restrictive government policies

Question 5

Barrier: supply side economies of scale

Answer 5

New entrants deterred because they have to enter industry producing at a large scale

Question 6

Barrier: demand side benefits of scale (network effects)

Answer 6

Buyers willingness to buy product increase with the number of other buyers willing to buy

Question 7

Barrier: Customer switching costs

Answer 7

Fixed costs that buyers face when changing suppliers

Question 8

Barrier: capital requirements

Answer 8

Need to invest large financial resources in order to compete

Question 9

Barrier: incumbency advantages independent of size

Answer 9

Incumbents have advantages such as technology, preferential access to resources, regardless of their size

Question 10

Barrier: restrictive government policies

Answer 10

Government can aid or hinder new entrants, as well as amplify other barriers

Question 11

What are some factors that would make suppliers powerful in an industry?

Answer 11

• They have multiple streams on revenue
• there are no substitutes for their products
• few suppliers (they are concentrated compared to the industry they sell to)

Question 12

What makes buyers powerful?

Answer 12

The have negotiating leverage relative to industry participants

Question 13

When do buyers have negotiating leverage?

Answer 13

• there are few buyers/ each buyer buys at large volumes relative to the number of buyers
• buyers believe they can find an equivalent product
• few switching costs
• buyers can legitimately threaten to create product themselves

Question 14

When are buyers price sensitive?

Answer 14

• product presents large cost to buyers
• buyer has low profits/ needs to lower purchasing costs
• quality of products/ services has little affect on buyers product/ service

Question 15

What is the threat of substitutes?

Answer 15

Something performs the same or similar function to industry’s products by different means

Question 16

When is the threat of substitution high?

Answer 16

• product/ service offers attractive price-performance trade off to the industry’s product
• low switching costs

Question 17

When is rivalry between competitors considered intense?

Answer 17

• numerous roughly equal sized competitors
• slow industry growth
• exit barriers from industry are high
• rivals have aspirations for leadership in the industry (including beyond economic performance)

Question 18

What are two reasons that exit barriers for an industry could be high? (I.e. despite low or negative profits)

Answer 18

• specialized assets (hard to sell because there are few buyers)
• management devotion to business (such as a family business)

Question 19

What is price competition?

Answer 19

Products that relatively similar are judged solely on their price by the buyer

Question 20

Why do we do five forces analysis?

Answer 20

• position company to better cope with current forces
• aniticipate and exploit shifts in forces
• shape balance of forces to create an industry structre that is more profitable

Question 21

What are disadvantages to porters five forces?

Answer 21

• five forces only tell us about the external environment
• do not tell us the whole story about a set of competitors: ex. restaurants; large breath to the kinds of restaurants