*suggests 5 forces of the competitive environment that may determine likely profits of a business in that environment (affect profitability)
*analyses state of market and helps managers of existing businesses to figure out best strategy to gain competitiveadvantage - decision making tool
*shows potential market entrants how profitable market is likely to be and whether it's worth getting into + where to position themselves
barriers to entry (entry threat)
how easy is it for new businesses to enter the market?
easy to enter market
high threat (competitiveadvantage of existing businesses can be eroded - reduction in market share, profits and prices due to competition)
hard to enter market
low threat - barriers to entry exist
barriers to entry
factors that make it difficult and expensive to enter the market
examples of barriers to entry
patents & copyrights, economies of scale, customer & brand loyalty, exclusive rights to distribution channels (could use vertical integration either forward or backward), lobbyists,
buyer power
can buyers drive a hard bargain - do they have a lot of power in terms of what/where they purchase?
when will there be high buyer power?
*few buyers with many sellers
*standardised products are sold (ability to easilyswitch) - homogonous products
impact of high buyer power
powerful customers would be able to push down prices of products and reduce the profits
overcoming high buyer power
*differentiate product
*create buyer group
(decrease number of sellers) - limit options for buyers
can suppliers increase their prices - do they have a lot of power?
when is supplier power high?
few suppliers that provide raw materials and components - able to charge higher prices as they know businesses in the industry need them
overcoming high supplier power
lock in longer contracts, maximise economies of scale (use more JIC), offer to merge as a forward vertical integral partner
threat of substitutes
are the alternatives for consumers?
substitutes according to porter's model
products that perform the samefunction as the one in the industry
impact of many substitutes
demand is lower as there are more alternatives, making the environment more competitive and thus reducing profitability as prices would be reduced
what type of products does threat of substitutes affect most?
undifferentiated products
overcoming high threat of substitutes
build brand loyalty, meet customer needs better, costleadership (porter's generic strategy), build moat (eg Prime Video by Amazon) - reduce risk of consumers switching, market new product that exactly meets the needs of a specific group of customers (lack of substitutes)
rivalry
level of competition within the industry
where will rivalry be high/intense?
*in market with lots of equally-sized competitors
*market selling standardised goods
*young industries where competitors are following growth strategies
impact of intense rivalry
prices might have to be reduced to be able to be competitive (to raise demand)