Porter's 5 Forces

Question 1

Why are Porter’s 5 forces important?

Answer 1

1. Shape industry profitability by enabling value capture by different groups
2. Firms can shape conditions in their favor, or exploit changing circumstances
3. Firms can find segments in industries wherein conditions are more favorable
4. Firms can identify attractive / unattractive industries
5. Investors can make smart investment decisions
6. Governments can use them to understand the implications of policies, regulations, etc.
7. Each of these forces is important and deserves consideration, but some may be more problematic for a given industry at a given time.

Question 2

What are Porter’s 5 Forces (BESSI)

Answer 2

1. The power of BUYERS
2. The threat of potential ENTRANTS into the industry
3. The power of SUPPLIERS
4. The threat of product SUBSTITUTES
5. The INTENSITY of competitive rivalry

Question 3

Name potential new entrants

Answer 3

1. New ventures
2. Existing firms who can leverage their resources

Question 4

Name the 7 major sources of advantages of entry barriers incumbents have over new entrants.

Answer 4

1. Supply-side economies of scale
2. Demand-side benefits of scale
3. Switching Costs
4. Capital Requirements
5. Incumbent cost advantages beyond scale
6. Unequal access to distribution channels
7. Restrictive Government Policy
   Also:
   Expected Retaliation

Question 5

How do suppliers increase bargaining power?

Answer 5

Demand for their offering

Question 6

How is supplier bargaining power reduced?

Answer 6

Availability of alternatives

Question 7

Name reasons why supplier bargaining power is increased

Answer 7

1. Supplier industry is more concentrated than buyer industry
2. Supplier industry is not reliant on particular buyers
3. Suppliers’ products create switching costs
4. Suppliers’ products are differentiated
5. Suitable substitute products are not available
6. Suppliers pose a threat to integrate forward into buyers’ industry

Question 8

What is buyer bargaining power?

Answer 8

Buyer ability to capture value, the quality of the items exchanged, the terms of the exchange

Question 9

Bargaining power of buyers is based on their dependence on particular suppliers (True or False)

Answer 9

True

Question 10

Name ways buyer bargaining power is increased

Answer 10

1. Buyers are large and few in number
2. Products are standardized
3. Buyers may integrate backward into the sellers’ industry
4. Buyers face few switching costs
5. Intermediate customers can influence the buying decisions of downstream customers

Question 11

Name ways price sensitivity increases

Answer 11

1. The industry’s products are a large share of buyers’ costs
2. Buyers lack funds
3. The perceived quality of buyers’ products are unaffected by industry’s products

Question 12

What are substitutes?

Answer 12

Substitutes exist when another product or service performs the same function in a different manner.

Question 13

Substitutes can only exist in the same industry (True / False)

Answer 13

False

Question 14

Substitutes don’t exist within the same product category, i.e. different brands of coffee are not substitutes (True / False)

Answer 14

True

Question 15

Energy drinks vs. coffee are substitutes (True / False)

Answer 15

True

Question 16

When does the threat of substitutes increase?

Answer 16

1. Price-performance characteristics of the substitute are superior (e.g. transportation)
2. Buyers face few switching costs

Question 17

Define Rivalry in the context of Porter’s 5 forces

Answer 17

Rivalry manifests in pricing, products, advertising, services, etc., often limiting industry profitability by transferring value to others.

Question 18

Name reasons why intensity of competition increases

Answer 18

1. Numerous or equally balanced competitors
2. Slow or declining industry growth
3. Exit barriers
4. Non-economic commitments
5. Signaling difficulties (unfamiliarity, diversity, attention)

Question 19

List elements of Price Competition

Answer 19

1. Nearly identical products/services
2. Fixed or storage costs are high and marginal cost is low
3. Capacity must be expanded in large chunks
4. Product may perish (rot, obsolete, etc.)

Question 20

Why is non-price competition beneficial?

Answer 20

It incentivizes differentiation and innovation

Question 21

What is a result of narrow focus on growth?

Answer 21

Poor decisions

Question 22

What is a complementor?

Answer 22

A product or service with functionality that is greater together than separate

Question 23

Investments should be judged relative to cost of capital, which affects both actual financial outlays and opportunity costs (True / False)

Answer 23

True

Question 24

What is punctuated equilibrium?

Answer 24

Describes how many industries change (long periods of stability or gradual change, interrupted by seismic shifts and transformation; energy)

Question 25

Firms should only compete on a price basis (True / False)

Answer 25

False

Question 26

Why is it risk to eliminating rivals?

Answer 26

They could be replaced by stronger competitors

Question 27

Defining the industry is important (True / False)

Answer 27

True

Question 28

It is important to consider the percentage of industry sales that must be captured to fill a new facility to capacity (True / False)

Answer 28

True

Question 29

What is a negative consequence of Standardization?

Answer 29

It can increase rivalry