Models Of Strategic Choice Flashcards
What is porters 5 forces model?
A framework for analysing the nature of competition within an industry and helps to understand and assess industry profitability and attractiveness
What are porters five forces that determine the level of competitive intensity/
- Threat of new entrants to the market
- Bargaining power of suppliers
- Bargaining power of 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
What are high industry profits assosciaed with?
Weak suppliers, weak customers, high barriers to entry, few opportunities for substitutes,little rivalry
What does threat of new entrants focus on?
- if new entrants move into an industry they will gain market share and rivalry will inc - profits will probs fall
- the position of existing firms is stronger if there are barriers to entry
- if barriers to entry are low then threat of new entrants high
What are the barriers to entry?
- economies of scale
- brand loyalty
- set up costs
- expertise
- access to technology
- regulatory and legal restrictions (patents)
- aces to suppliers an distribution channels
What does bargaining power of suppliers focus on?
The stronger the power they exercise by selling at a higher price, the greater the profitability for them but lowers profits for businesses
What makes a supplier powerful?
- when there are only a few large suppliers
- resource they supply is scarce
- cost of switching to alternative supplier high
- product easily distinguished + high customer loyalty
- supplier can threaten to integrate vertically
- customer is small + unimportant
What does bargaining power of customer focus on?
The ability to exert pressure to drive down prices
When do customers have strong bargaining power?
- when only a few of them
- customer purchases significant proportion of an output in an industry
- they can choose from a wide range of supply firms
- easy + inexpensive to switch suppliers
What does threat of substitutes focus on?
Greater substitutes = greater competition = less profitability
What does the extent of threat of substitutes depend upon?
- willingness of customers to switch
- customer loyalty + switching costs
- extent to which price + performance of substitute match industry product
What does degree of competitive rivalry focus on?
Where greater rivalry = price wars, investment + innovation into new products, intensive promotion
- likely to inc costs and lower profits
What are the determinants of intensity’s of rivalry?
- number of comp = more rivalry
- market size + growth
- product differentiation + brand loyalty
- stronger buyer - more substitutes - greater rivalry
- more capacity - greater rivalry
- higher exit barriers - greater rivalry
What are the generic strategies on how a company can gain competitive edge in its industry that Porter suggested?
- cost leadership
- cost focus
- differentiation focus
