Strategic Analysis Of The Industrial Environment Flashcards
What are porters five forces?
Threat of new entrants
Bargaining power of buyers
Threat is substitute products or services
Bargaining power of suppliers
Rivalry among existing competitors
Do you want porters forces to be high or low? Why?
Low; they are external forces affecting firms success and we want to lower their influence as much as possible
Why do we want barriers to new entrants?
New entrant put a cap on profit potential
What are seven major sources of barriers to new entrants?
- 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
Barrier: supply side economies of scale
New entrants deterred because they have to enter industry producing at a large scale
Barrier: demand side benefits of scale (network effects)
Buyers willingness to buy product increase with the number of other buyers willing to buy
Barrier: Customer switching costs
Fixed costs that buyers face when changing suppliers
Barrier: capital requirements
Need to invest large financial resources in order to compete
Barrier: incumbency advantages independent of size
Incumbents have advantages such as technology, preferential access to resources, regardless of their size
Barrier: restrictive government policies
Government can aid or hinder new entrants, as well as amplify other barriers
What are some factors that would make suppliers powerful in an industry?
- 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)
What makes buyers powerful?
The have negotiating leverage relative to industry participants
When do buyers have negotiating leverage?
- 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
When are buyers price sensitive?
- 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
What is the threat of substitutes?
Something performs the same or similar function to industry’s products by different means
When is the threat of substitution high?
- product/ service offers attractive price-performance trade off to the industry’s product
- low switching costs
When is rivalry between competitors considered intense?
- 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)
What are two reasons that exit barriers for an industry could be high? (I.e. despite low or negative profits)
- specialized assets (hard to sell because there are few buyers)
- management devotion to business (such as a family business)
What is price competition?
Products that relatively similar are judged solely on their price by the buyer
Why do we do five forces analysis?
- 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
What are disadvantages to porters five forces?
- 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
