Porter's five forces

• The changing competitive environment

  > Some markets more subject to change than others

  > Those w/ low barriers to entry will be more subject to changing competition levels because it's easier for firms to enter the market, obtain profits + leave if wish

  > Tech markets are constantly in flux e.g been big changes in market share over last 20 years in mobile producers

  > Traditional markets like staple foods, ie. canned food are less prone to changing environment, partly down to barriers to entry due to brand power + EoS.
• The changing competitive environment

  > Consumer tastes changing faster than ever e.g diets.

  > Globalisation has radically altered the UK marketplace as more + more overseas sell products within UK

  > External pressures from shareholders + private equity groups also have changed from competitive environment as they're demanding higher profits from firms, meaning they have to look for growth + seek expansions of current markets + possibly enter new markets
• What is Porter's five forces model?


  Analyses the competitive forces within the environment in which a company operates to assess the potential for profitability in an industry.

  
• What is the threat of new entrants?


  > If threat of new entrants is high, this must mean the barrier to entry + exit are low

  > As result, this will mean that incumbent firms (those in market) could be put under pressure to;

  - Reduce prices leading to potentially lower revenues + lower profit margins

  - Changes the quality (add value) or increase promo (adapt 4P's)

  - Increase costs + therefore reduced profit margins

  > Example: Supermarkets, difficulties achieving EoS to meet lower average unit costs of existing firms, need to invest heavily in promotion due to existing firms brand loyalty.
• What is supplier power?


  > Powerful suppliers may be able to push up prices which raise costs for buyers, thereby reducing profit margins unless they can increase their prices onto consumers.

  > Suppliers have more power when there are fewer suppliers to choose from, if what they offer is unique, or if the cost of switching supplier is very high.
• What is buyer power? (consumers)


  > Powerful customers can put pressure on a business to reduce price + improve quality. Both will reduce profit margins; e.g big supermarkets are customers of vegetable farmers.

  > Online availability has also increased customer buying power in some instances due to a greater availability of choice of businesses, allowing us more negotiation when striking deals. Also means their businesses are able to sell direct to customers, taking out middle man

  > E.g: holidays + travel agents which reduces prices for consumers whilst increasing profits + airlines
• What is substitute threat?


  > Goods/services that are partly or wholly satisfy same needs+wants as another good/service so that same utility is received.

  > If more subs become available, may reduce number of goods sold, depending upon perceived superiority (USP) or price, e.g Netflix + Spotify radically changed way we consume films + music due to tech improvements

  > Depend upon switching costs, ie. costs associated w/ the move from one good/service to another

  > Low costs of switching to above services has meant traditional methods of buying DVD's has changed e.g Blockbuster disappearing from high street + into bankruptcy.

  > E.g HMV closed lot of stores, revamped others + Apple have had to adapt own services by offering its own streaming service.
• What is the degree of rivalry?


  Strong rivalry w/ large number of competitors in the market:

  1). Lower prices

  2). Faster introduction of new/improved goods

  3). Increase investment into promotion (make self known)
• Rivalry can be more intense when there are...

  > Many competitors of similar size + power

  > When growth of market is slow

  > Little difference between products (homogenous)/little differentiation

  > Switching costs are low.