Lecture 2 - The 5 Forces

Question 1

What is the the abbreviation used to remember macro factors that can impact strategy? What do they stand for?

Answer 1

PESTEL (Political, Economic, Socio-cultural, Technological, Ecological, Legislation)

Question 2

What are 2 elements that comprise perfect competition?

Answer 2

Lots of firms, with very low/no barriers to entry. Opposite of a monopoly. Highly contested.

Question 3

What does PESTEL stand for?

Answer 3

Political, Economic, Socio-cultural, Technological, Ecological, Legislation

Question 4

What are 2 elements that comprise a monopolistic market?

Answer 4

One firm only. Extremely costly to enter/exit. Example of Thames Water.

Question 5

What are Porter’s 5 Forces?

Answer 5

Suppliers, Substitutes, Buyers, Potential Entrants and the Industry Competitors themselves.

Question 6

What are Porter’s 5 Forces plus 1?

Answer 6

Power of buyers
Power of suppliers
Threat of new entrants
Internal competition
Threat of substitutes
Complements

Question 7

How do you apply the 5 Forces framework?

Answer 7

Make a decision on the strength of the force now: high medium or low
Justify (use company names where possible)
Make a decision on the strength of the force going forward: high medium or low
Justify (use company names where possible)

Summarise your overall judgement on the position of the firm

Question 8

What is the impact of perfect competition on product designs?

Answer 8

There is little scope for differentiation, they all tend to be quite heterogenous

Question 9

What is the impact of industry growth on profitability?

Answer 9

Tends to be the higher the growth the higher the profits.

Question 10

What is the purpose of Porter’s 5 Forces?

Answer 10

Can be used to assess the effect a strategy has on power dynamics within an industry or how it effects the different players.

Question 11

How can one improve a firm’s size according to Porter (in very generalised terms, non-industry specific)?

Answer 11

Increase the firm’s position relative to the industry environment, or increase the size of the entire industry (and hopefully grow with it).

Question 12

What are the 6 factors that competition in an industry depends on?

Answer 12

Number and size of firms
Diversity of competitors
Product Differentiation
Excess Capacity and Exit Barriers
Industry Growth
Cost Conditions (ratio of fixed : variable costs, extent of scale economies)

Question 13

What are the two constituent parts of buyers’ bargaining power?

Answer 13

Buyers’ price sensitivity
Buyers’ relative bargaining power

Question 14

Explain what elements affect buyers’ price sensitivity and how this impacts their bargaining power.

Answer 14

If the ratio of the price to the buyers’ total costs is high, then they will be very price sensitive as they have little margin to fall back on.
If there is significant differentiation to the purchased item (e.g. well known brand) then it is also difficult for a buyer to have any say and they will have little bargaining power.

Question 15

Explain what elements effect buyers’ RELATIVE bargaining power?

Answer 15

The size and concentration of buyers relative to sellers of the product. If there are very few buyers, they have a lot of power if there are many sellers.
The ability for the buyer to backward integrate the seller’s production into their business - if they can do this easily, then the seller will have very little bargaining power as if they want to lift prices then the other person will just move the production inside their business.

Question 16

Define a substitute.

Answer 16

A product with the same utility to the customer as another BUT THAT IS NOT THE SAME. They can use Product B instead of Product A. Example of gaming and Netflix still being substitutes as they are both about entertainment at home but are not the same product. Disney+ and Netflix are in direct competition, not substitutes.

Question 17

What makes a substitute more or less dangerous?

Answer 17

How likely customers are likely to substitute your product for the others
The price-performance characteristics of substitutes

Question 18

What are the 7 factors that affect the barriers to entry in a market?

Answer 18

CAPEX required
Economies of scale
Absolute cost advantage
Product differentiation
Access to distribution channels
Legal and regulatory barriers (e.g. food standards, FDA approval)
Retaliation

Question 19

Define a strategic group. Give an example.

Answer 19

A group of firms or businesses in an industry that follow the same or similar strategies. For example, luxury brands.

Question 20

What is the difference between supply side and demand side substitutability?

Answer 20

Demand side is buyers being willing to substitute between types of products and across countries. (e.g. buy a train ticket or bus ticket)
Supply side is to switch production between products and across countries. (e.g. produce in India vs China)

Question 21

What two questions are central to defining key success factors?

Answer 21

What do customers want?
How does the firm survive competition?

Question 22

What are the steps to identify strategic groups?

Answer 22

Identify the principal strategic variables which distinguish firms
Position each firm in relation to these variables
Identify the clusters

Question 23

As a factor that influences competition in an industry, what are 2 examples of cost conditions?

Answer 23

Ratio of fixed : variable costs
Extent of scale economies