Theme 3 - Porters 5 Forces Flashcards
What are porters five forces
The five reasons why there are variations within profitability between industries
The five forces are
1) Threat of entry
2) Supplier bargaining power
3) Threat of substitutes
4) Buyer bargaining power
5) Rivalry
Importance of the forces to managers
For an existing business ; The forces may help to define their strategy, which would help them know where to position themselves and what their value proposition is. If you define your strategy and communicate it to your employees, you’ll be aligned as a business and working towards the same goal
For a potential business: It would help decide if it’s worth entering into that market/industry
Threat of entry
How easy it is for new businesses to enter the market ?
If it’s easy to enter, then threat is high then existing firms are able to erode your competitive advantage very easily , reducing ur market share and profits. The more firms there are in the market means prices will naturally have to come down
You would want it to be difficult for new business to enter the market and you can do this by:
- using economies of scale to increase ur output and reduce costs so you can lower your prices and engage in a price war to make a firm wanting to enter the market struggle to compete with you
- Create customer/ brand loyalty
- Get exclusive rights to your distribution channels such as making a deal with ur suppliers to only supply to you
Buyer bargaining power
Can buyers drive a hard bargain?
If there are a few buyers and many sellers with similar products, you would need to lower your prices which would lead to less revenue and less profits
Or you would try to offer better quality which would lead to higher costs and lower profits
Strategies to overcome high buyer bargaining power:
- Differentiate products
- Find new customers in new segments to increase buyers for you
- Increase marketing/ price wars leading to less sellers
Supplier bargaining power
Can suppliers increase their prices?
