Weekly Chapter Assignment 6
Introduction of Porter’s Five Forces
Wikipedia defines Porter’s Five Forces Analysis as a framework to analyze the level of competition within an industry and business strategy development. The five forces are used to measure the attractiveness (or profitability) of an industry. These forces are a micro environment of a company in an industry, which affect its ability to serve customers and make a profit (Wikipedia). Porter’s five forces include three horizontal and two vertical forces: 1. Threat of substitute products (horizontal)
2. Threat of established rivals (horizontal)
3. Threat of new entrants (horizontal)
4. Bargaining power of suppliers (vertical)
5. Bargaining power of customers (vertical)
Definition and Factors of Porter’s Five Forces
The threat of new entrants is high when profitable markets yield high returns. Wikipedia lists some factors that could have an effect on how much of a threat new entrants may pose: the existence of barriers to entry, economies of scale, product differentiation, brand equity, switching costs, access to distribution, customer loyalty to established brands, and industry profitability.
The threat of substitute products or services is the likelihood of the existence of new innovations outside of the common product which increases the probability that customers will switch over to the substitute. Wikipedia lists some potential factors: buyer propensity to substitute, buyer switching costs, perceived level of product differentiation, ease of substitution, substandard product, and quality depreciation.
The bargaining power of buyers is defined as the level of bargaining power the buyers have to put a firm under pressure and influence competition. The buyer power is high when buyers have several alternatives, but it’s low if a buyer acts alone. Wikipedia lists some potential factors: buyer concentration to firm concentration ratio, degree of dependency upon exsisting channels of...
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