5 Forces Model

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5 Forces Model

-Examines competitive forces that influence the profitability potential in an industry

-Each force can reduce the probability that a firm can earn profits while competing in an industry

Potential Entrant

- can take market share away

- force to learn new ways to compete

- Barrier

- Economies of scale – cost disadvantage

- Capital – lack the resources (physical & human) to compete, competitive disadvantage

- Switching costs – college, machine

- Differentiation – brand loyalty

- Access to distribution channels – creating of switching cost, price breaks, and cooperative advertising allowances

- Government policy – license or permit, radio & TV station, airlines

Substitute Products

- Products that perform functions similar to an existing product

- Cassette, CD, MP3

- Strong threat – more effective & lower price, especially lack switching costs

- Differentiate the existing product, after sales service

Bargaining Power of Suppliers

- Increase price, decrease quality

- Few large suppliers

- Substitute products are not available

- Not significant customer for suppliers

- Essential to marketplace success

Bargaining Power of Buyers

- Increase quality, lower price

- purchase large portion

- Lower switching costs

-Threat to integrate backward

Rivalry among Existing Firms

- Compete for advantageous market position

- Price, quality, innovation, responsiveness

- Degree of differentiation – established brand loyalty

- Switching costs – lower, easier to be attracted

- Equally balanced competitors – similar size and capabilities

- Slow industry growth

- High strategic stakes – to perform well in chosen market

- High fixed costs – large volume, increase inventory cost, price cutting

- High exit barriers – continue competing to survive, specialized assets, fixed cost of exit, emotional, government and social restrictions

Porter’s Five Forces Model

- To identify O & T to analyze competitive forces in the industry.

- The stronger the forces are, the more limited is the ability of the companies to raise prices and earn greater profits.

1. Risk of Entry by Potential Competitors

- more difficult to protect their share of the market and generate profits if more new entries.

- established company can increase prices

- High entry barriers may keep potential competitors out of an industry

- advantages of economies of scale - costs advantage

- brand loyalty

- absolute cost advantages – superior production operations due to accumulated experience, patents and secrets

- customer switching costs – Example: Microsoft Windows Operating system

- government regulation – permit – Example: Cable TV VS internet TV

2. Rivalry among Established Company

- Intense rivalry among established companies constitutes a strong threat to profitability (lower price, more spending on non-price-competitive weapons)

- Industry competitive structure – number and size determine industry prices: fragmented industry (consists of a large number of small and medium sized companies) and consolidated industry [dominated by a small number of large companies (oligopoly) or one company (monopoly)]

- Industry demand – market growing rate

- Cost conditions – large volume may reduce fixed cost, but to lower inventory costs by price cutting

-Exit barriers – investment on assets, high fixed cost of exit, emotional attachment, economic dependence, bankruptcy regulations

3. The Bargaining Power of Buyers

- the ability of buyers to bargain down prices or to raise the costs by demanding better product quality

-the level of power is high when,

- composed of many small companies and the buyers are large and few in number

- buyer purchase in large quantities

- switching costs are low...
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