business objectives and strategy - Models of strategic choice Flashcards
(21 cards)
what is porters 5 forces model?
a framework for analysing nature of competition within an industry
what is the purpose of Porter’s 5 Forces Model?
helps to understand and assess industry profitability and attractiveness
what are the categories of P5FM?
- threat of new entrants
- bargaining power of suppliers
- bargaining power of buyers/customers/consumers
- threat of substitutes
- degree of rivalry
what are low industry profits associated with?
- strong suppliers
- strong customers
- low entry barriers
- many opportunities for substitutes
- intense rivalry
(opposite for high industry profits)
what happens when new entrants move into a market?
gain market share which leads to more rivalry
when is the position of existing firms stronger?
when there are high barriers to entry
what happens when the barriers to entry are low?
threat of new entrants is high as it is easier to enter a market
what happens if a firm’s supplier has bargaining power?
- exercise their power
- sell their products at a higher price
- squeeze industry profits
what happens when suppliers force up their prices?
profit will be affected
when are suppliers powerful?
- only a few large suppliers
- limited supply of product
- cost of switching suppliers is high
- customer is small and unimportant
- none/few substitutes available
what happens when customers have lots of bargaining power?
they are able to exert pressure to drive down the price
what is a substitute product?
a replacement for another product that still meets customer needs
what happens if there is a threat of substitute products?
- they will limit the price that can be charged and will reduce profits
- customer loyalty/availability will limit the extent of threat
what determines the intensity of rivalry?
- number of competitors
- market growth
- product differentiation
- brand loyalty
- capacity utilisation
- cost structure of industry
- barriers to exit
What is the purpose of Porter’s generic strategies?
show how a company can achieve a competitive advantage in its industry
what are the 3 generic strategies?
- cost leadership
- differentiation
- focus on niche
what is cost leadership?
aim of being the lowest cost producer in the field
- reduce production costs and pass savings onto consumer
what is differentiation?
producing a range of goods that is different from competition
- can charge a premium
- needs a patent (or else copied)
what is focusing on a niche strategy?
producing for a particular sector of the market
- prepared to buy premium products
what is ‘stuck in the middle’?
a business that tries to adopt all 3 strategies is unlikely to achieve success
it’s impossible to please all consumers and trying to achieve everything suggests there is no strategy at all
evaluate Porter’s generic strategies
some firms may not be able to achieve any of them if they are too small to achieve economies of scale, or may not be able to differentiate or create a niche product
