The Five Competitive Forces That Shape Strategy

Question 1

The Five Forces

Answer 1

1. New entrants
2. Power of suppliers
3. Power of buyers
4. Substitute products or services
5. Rivalry among existing competitors

Question 2

Why is New Entry a threat?

Answer 2

Puts pressure on prices, costs, and the rate of investment necessary to compete

Question 3

Barriers to new entry

Answer 3

1. Dislodging entrenched competitors
2. Competitors unwilling to buy from new guy
3. Expensive for customer to switch
4. Large sunk cost
5. Existing OE not available to newcomer
6. Limited access to distribution
7. Government policies (ex. require licenses for global operations)

Question 4

Newcomers likely to experience retaliation if

Answer 4

1. Competitors have in the past towards newcomers

2. Competitors have large resources

Question 5

Why is Power of Suppliers a threat?

Answer 5

They can charge higher prices and limit quantity

Question 6

A supplier group is powerful when

Answer 6

1. Monopoly
2. Does not depend on industry for revenue
3. Switching suppliers cost
4. Offer variety of products
5. No substitute
6. Threaten to move into industry

Question 7

Why is Power of Buyers a threat?

Answer 7

They can force down prices and demand better quality

Question 8

Buyers have power when

Answer 8

1. Few buyers
2. Undifferentiated products
3. Switching costs
4. Integrate backwards (produce goods themselves)
5. Shopping for bargains
6. Profit potential
7. Quality not important
8. Effect on other buyers’ costs

Question 9

Why is Rivalry a threat?

Answer 9

Limits profit potential

Question 10

Rivalry occurs when

Answer 10

1. Competitors are numerous or equal in size
2. Industry growth is slow
3. Exit barriers high
4. Firms unaware of competitors’ moves

Question 11

Price competition occurs when

Answer 11

1. Identical products
2. Fixed costs and marginal costs low
3. Perishable product

Question 12

Zero Sum Competition

Answer 12

One firm’s gain is another’s loss

Question 13

Factors not Forces

Answer 13

1. Industry growth rate
2. Technology and innovation
3. Government policies

Question 14

Complementary products

Answer 14

Two goods combined result in greater value. Can affect substitutes (gas and station vs alternative fuel) or lower entry barrier (Microsoft OS for software)

Question 15

Implications for strategy

Answer 15

1. Position the company where forces are weakest
2. Exploit and anticipate industry change
3. Shape industry structure by reducing share of profits going to competitors

Question 16

Industry boundaries

Answer 16

1. Scope of products or services

2. Geographic scope

Question 17

Analysis common mistakes

Answer 17

1. Defining industry too broadly
2. Lists instead of rigorous analysis
3. Equal attention to all of the forces
4. Ignoring industry trends