5. The industry and market environment Flashcards
What are the components of Porter’s Five Forces model?
According to Porter, five competitive forces influence the state of competition in an industry.
- Potential entrants: Threats of new entrants
- Customers: Bargaining power of customers
- Substitutes: Threat of substitute products or services
- Suppliers: Bargaining power of suppliers
- Industry competitors: Rivalry among existing firms
Porter claims that the intensity of the fifth force, that is the rivalry amongst industry competitors, is driven by the intensity of the other four forces.
What are some examples of barriers to entry?
- economies of scale and scope
- product differentiation
- capital requirements
- switching costs
- access to distribution channels
- cost advantages of existing producers, independent of economies of scale
- response of incumbents
Entry barriers might be lowered by:
- changes in the environment
- technological changes
- new distribution channels for products or services
How do substitutes affect profitability?
- putting a ceiling on prices eg, air fares will determine the maximum level of train fares over similar routes;
- affecting volumes of demand; and
- forcing expensive investments and service improvements
Threat from substitutes is determined by:
- relative price/performance
- switching costs from one to another
How is buyers’ power increased?
- The customer buying a large proportion of total • industry output.
- The product not being critical to the customer’s own business and a lack of proprietary product differences which would otherwise make them favour or be locked into one supplier.
- Low switching costs (ie, the cost of switching suppliers).
- The size of the purchase relative to the size of the supplier.
- High degrees of price transparency and supplier information available in the market.
How is bargaining power of suppliers determined?
- The number and size of suppliers
- The threat of new entrants or substitute products to the supplier’s industry.
- Whether the suppliers have other customers outside the industry, and do not rely on the industry for the majority of their sales.
- The importance of the supplier’s product to the customer’s business.
- The extent to which the supplier has a differentiated product.
- The level of switching costs for their customers.
Which factors influence the intensity of competition?
- Rate of market growth
- Level of fixed costs
- Ease and cost of switching for buyers
- Importance of capacity utilisation/economies of scale
- Degree of uncertainty regarding the actions of rival firms
- Strategic importance
- Exit barriers
What is the ideal market, in which profits are easiest to make?
- Low supplier power
- Low customer power
- Little prospect of substitutes emerging
- High barriers to entry
- Weak inter-firm competition
What are the limitations of the Five Forces model?
- Ignores the role of the state
- Not helpful for not-for-profit organisations
- Positioning view and not resource-based
- Assumes management are r`equired to maximise shareholders’ wealth
- Dynamic industries
- Ignores potential for collaboration to raise profitability
- Some industries may include additional forces, e.g. the sixth force known as ‘complementors’ such as apps for smartphones.
What are the key stages of the industry life cycle?
- Introduction
- Growth - rapid expansion
- Shakeout - market growth slows
- Maturity - stable
- Decline - fall off in activity level
What are the key characteristics of the introduction phase?
Customers - Experimenters, innovators
R&D - High
Company - Early mover, production focused
Competitors - A few
Profitability - Low, as an investment
What are the key characteristics of the growth phase?
Customers - Early adopters
R&D - Extend product before competition
Company - React to more competitors with increased marketing
Competitors - More entrants to the market
Profitability - Growing
What are the key characteristics of the shakeout phase?
Customers - Growing selectivity of purchase
R&D - Seek lower cost ways to supply to access new markets
Company - Potential consolidation through buying rivals
Competitors - Many competitors, price cutting but winnowing out weaker players
Profitability - Levelling off
What are the key characteristics of the maturity phase?
Customers - Mass market, brand switching is common
R&D - Low
Company - Battles over market share. Seek cost reduction
Competitors - Depending on industry, a few large competitors
Profitability - Stable, high or under pressure
What are the key characteristics of the decline phase?
Customers - Price competition. Commodity product
R&D - Close to nil
Company - Cost control or exit
Competitors - Price-based competition, fewer competitors
Profitability - Falling, unless cost control
What are the strategic implications of the introduction stage?
- Attract trend-setting buyer groups by promotion of technical novelty or fashion.
- Price high (skim) to cash in on novelty or price low (penetration) to gain adoption and high initial share.
- Support product despite poor current financial results.
- Review investment programme periodically in light of success of launch (eg, delay or bring forward capacity increases).
- Build channels of distribution.
- Monitor success of rival technologies and competitor products.
