7.8 - The Competitive Environment (Porter's Five Competitive Forces) Flashcards
Advantages of competition:
- Brings down prices
- Makes businesses efficient
- Higher quality products
Disadvantages of competition:
- Quality may be sacrificed if competition is based on price
- Closure of weaker businesses
Porter’s five competitive forces definition
A model showing factors that could effect competition and profitability in an industry and how businesses can react to these changes
What are the five competitive forces?
- Threat of new entrants
- Threat of substitute products
- Bargaining power of suppliers
- Bargaining power of customers
- Competitive rivalry
What unfair competition can result in government intervention?
- High prices through lack of competition
- Restricting supply
- Trade agreements
Examples of barriers to entry:
- High start up costs
- Patents
- Customer loyalty
What is the strategy for dealing with new entrants?
- Compete on price, quality and USP
- Protect position through branding, trade marks and supplier agreements
What does the power of customers depend on?
Whether they are one of a large number of customers, or one of a small number of customers
How have customers become more powerful?
- Price comparison websites
- The recession
How can a business influence their buying power?
- Buy the supplier out (backwards vertical integration)
- Similar businesses can come together to form a buying group (buying in bigger volumes so better deal)
How can suppliers influence the power they have over the price they charge?
- Tie buyers into long-term contracts
- Forward integration
- Develop new products and protect with patent (they will be the only one able to supply)
What does a business need to do in a highly competitive market?
- Lots of marketing
- Keep up with innovations
- Use patents and trademarks
Rivalry definition
The intensity of competition of firms in an industry
