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Porter's Five Forces
Terms in this set (16)
Porters Five Forces use [State]
The five forces framework describes the nature and degree of competition in an industry.
What theory is Porters Five Forces based on?
Based on an economic theory called the SCP model. It states that the (Structure) of an industry determines an organisation's competitive behavior (Conduct), which in turn determines its profitability (Performance).
How does Porters Five Forces differ from SWOT?
The framework focuses on the industry and differs from the SWOT analysis that focuses on the organisation.
What are the Porters Five Foces?
1) Threat of new entrants
2) The bargaining power of buyers
3) Threat of substitute products and services
4) The bargaining power of suppliers
5) Competitive rivalry
Threat of new entrants [Explain]
The extent to which new competitors may decide to enter the industry and reduce the level of profits being earned by incumbent firms.
The bargaining power of buyers [Explain]
The extent to which buyers can affect the industry e.g. to force down prices, bargain for higher-quality or play competitors against each other.
Threat of substitute products and services [Explain]
The threat from products and services which can meet similar needs.
The bargaining power of suppliers [Explain]
Extent to which suppliers can exert power over participants in the industry by raising prices or reducing quality of goods and services.
Competitive rivalry [Explain]
Extent of competition and the overall profitability of the organisations within the industry.
When is the threat of new entrants high?
- There is few economies of scale in the industry
- Capital requirements are low
- No specialized knowledge is needed
- There is no product differentiation
- There is access to distribution channels
- Switching costs for firms are low
- There are no government imposed barriers
When is the bargaining power of buyers high?
- There are few buyers compared to goods
- Volume of purchase of a buyer is high
- Product is not differentiated and substitutes are available to buyers
- Switching costs is low
- Buyers are price sensitive
- Buyers can move into the suppliers industry (backward integration)
When is the threat of substitute products and services high?
- There are many substitutes
- Substitute products are of better quality
- Similar products or services cost the same or are at a lower price
- Price of substitute products are low and profits of competitors are higher due to improved efficiency
When is the power of suppliers high?
- Few suppliers dominate the supplier's industry
- Few substitutes are available
- The industry is not an important customer of supplier
- Supplier products are differentiated
- Supplier is important to buyer's business
- Suppliers can move into the buyer's industry (forward integration)
When is the competitive rivalry high?
- There are many competitors and no clear market leader
- Products are undifferentiated and customer switching cost is low
- Industry growth is slow
- Fixed costs are high and firms compete for market share
- Exit barrier is high and firms stay longer in the industry
Merits of the Five Forces Framework
- It helps organisations ascertain the attractiveness or profit potential of their industry.
- It helps organisations understand the drivers of the industry structure.
- It helps an organisation in formulating a strategy which, defends its position and will influence the five forces in its favor.
Criticism of the Five Forces Framework
- The framework assumes that competitors can only succeed at the expense of other players.
- It does not consider collaborative relationships within an industry that could benefit both parties.
- It assumes that the market is relatively stable and does not show how firms within the industry interact.
- It assumes that there are only five forces.
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