BSM 600 Quiz 1 What is Porter's Five Forces Framework? - answer This framework is used to classify and analyze the factors that determine the intensity of competition and levels of competition in different industries What are the five forces? - answer 1. Supplier Power (horizontal)
- Industry Rivalry (horizontal)
- Threat of Entry (horizontal)
- Threat of Substitutes (vertical)
- Buyer Power (vertical)
Threat of Substitutes - answer Are they products out there that do the same things but are not the same products?Customers will be more sensitive to price if there are a lot of substitutes and less sensitive if there are no substitutes Threat of Entry - answer What is the power of those seeking to come into my industry
Capital requirements - how much money does it take to enter an industry I.e., Netflix - how much will you need to compete against Netflix and other streaming platforms Economies of scale - the more profitable a business can be based on assets Allows a company to lower their price if they can sell a certain amount (in mass) Product differentiation - it's difficult for a company to take over another and compete if they are truly differentiated brand recognition and brand loyalty Absolute cost advantages - acquit ion os low-cost sources of raw materials, established firms have unit cost advantage over entrants Access to channels of distribution - main barrier to entry Governmental and legal barriers - regulations, IP, licenses Retaliation - aggressive action against new entrants Effective barriers to entry - Industries protected by high entry barriers tend to earn above average rates of profit Industry Rivalry - answer I.e., Netflix, Amazon Prime, Disney+
Competition intensifies from: 1 / 2
- concentration: Refers to the number and size distribution of firms competing within a
- diversity of competitors
- product differentiation: The more similar the offerings among rival firms, the more
market
willing customers are to switch between them
- excess capacity and exist barriers: The key is the balance between demand and
capacity— key issue is whether excess capacity will leave the industry
- cost conditions: Where fixed costs are high relative to variable costs, firms will take on
marginal business at any price that covers variable costs
Two types of markets - answer Input markets: firms purchase raw materials,
components, and financial and labour services
Output markets: firms sell their goods and services to customers (who may be
distributors, consumers, or other manufacturers)
Bargaining Power of Buyers - answer Strength of bargaining power:
- Price sensitivity - depends on four factors
- Bargaining power
---> greater importance ---> less differentiated ---> more intense competition among buyers ---> criticality of industry's product to the quality of buyer experience
I.e., if there is 4-5 buyers they have the power, but if you have millions of customers you have the power You don't want to rely on four or five buyers because if they pull out that is significant - controlling the churn rate Power of Suppliers - answer If there are a few suppliers that can do what the company wants, they have a lot of power If the power of a supplier is strong that is not attractive but if the supplier power is weak it is attractive
Predicting future profitability - answer three stages:
- Examine how the industry's current and recent levels of competition and profitability
- Identify the trends that are changing the industry's structure. Is the industry
- Identify how these structural changes will affect the five forces of competition and
- / 2
are a consequence of its present structure.
consolidating? Are new players seeking to enter? Are the industry's products becoming more differentiated or more commoditized? Will additions to industry capacity outstrip growth of demand?
resulting profitability of the industry. Will the changes in industry structure cause competition to intensify or to weaken?Strategies to Alter Industry Structure - answer 1. Identify the key structural features of an industry that are responsible for depressing profitability