Week 2: Five Forces analysis

Question 1

Core aim for Five Forces model

Answer 1

Developed by Michael Porter
Tool for the analysis of the attractiveness of an industry, as seen from the perspective of the focal firm.

Strong roots in industrial organisation economics, which also underpins most of contemporary U.S. and EU anti-trust law

The core idea of this research program is that external forces, especially industry structure, are the core drivers of a firm’s strategic advantage and profitability.

Question 2

Industry concentration related to Five Forces model

Answer 2

The closer an industry is to monopoly- high levels of industry concentration-
and the more power the firms in that industry hold over everybody else, the more profitable those firms will be.

Question 3

Name all 5 components of “Five Forces” model

Answer 3

1. Threat of new entrants
2. Threat of substitute
3. Bargaining power of suppliers
4. Bargaining power of buyers
5. Rivalry against existing competitors (central)

Question 4

Threat of substitute

Answer 4

Competing firm trying to serve the same customer needs as focal firm, but using different core technology.

Substitution can also be called- “disruptive innovation” (disrupting existing business models)

Greatly influenced by platform economy- potential to “invert firms”: shifting the production processes from within to beyond the internal capacity of firm.

Question 5

Threat of new entrants

Answer 5

Competitor aiming to serve the same customer needs using the similar core technology.
*High entry barrier industry: need government concession to start the business, protective patterns
*Low entry barriers industry: post-material societies. The more differentiated products –>lower entry barrier–>higher threat of new entrants.

Question 6

Rivalry against existing competitors

Answer 6

(core)
Industry incumbent- company which already operates as focal firm, usually similar core competencies, technologies.
*High nr of incumbents–>lack of differentiation —>high competitiveness–>high exit barriers

Question 7

Bargaining power of buyers

Answer 7

When there are many buyers in the industry and firm can switch between them, the bargaining power of buyers becomes lower.
Reduces even further if the products and services are critical/unique to buyers.
2 ways buyers can respond to low bargaining power:
1) buyer cooperatives
2) vertical integration, seek control of supply chain

Question 8

Bargaining power of suppliers

Answer 8

Many suppliers in industry–> possibility to switch–>low bargaining power–> reduce even further if products are commodities or unimportant for firm’s welfare.
Solution: seek control over supply chain (vertical integration)