Week 8 - How to identify competitors and Porter's 5 Forces

Question 1

How to identify competitors?

Answer 1

• Direct competitors.
• Indirect competitors.
• Substitutes or new entrants.

Question 2

What are the 5 competitive forces in an industry using Porter’s 5 Forces Model (1980) ?

Answer 2

1. Threat of new entrants.
2. Substitutes.
3. Buyers B2B (Using their bargaining power).
4. Suppliers (Using their bargaining power).
5. Industry competitors (Rivalry among exisitng firms).

Question 3

Considerations that firms need to account for in Porter’s 5 Forces Model (1980).

Answer 3

• Doesn’t show how much of a threat each of the entrants will pose - this is specific to the firm’s market, position within market, etc…
• Needs continuous review to identify and exploit changes, make adaptations.

Question 4

Benefits of Porter’s 5 Forces Model.

Answer 4

Identifies internal and external considerations (SWOT) -
- Identifies the strengths and weaknesses of the business.
- Identifies threats to avoid or counterattack and opportunities.

Helpful in assisting strategy and visions.

Question 5

1. How will New Entrants impact an organisation. (Porter’s 5 Forces Model, 1980).

Answer 5

New entrants will force a firm to:
- Reduce prices to stay price competitive but loss of profit margin.
- Increase spending on marketing to keep consumers aware of the firm, despite new firm.
- Differentiate products.

Question 6

1. How can existing firms increase barriers to entry to reduce the threat of new entrants? (Porter’s 5 Forces Model, 1980).

Answer 6

• Take adv of Economies of Scale (Lower costs from increased production) and use your experience of the market.
• Monopolise or spread across supply and distribution channels to make it difficult for new entrants to access consumers.
• Exploit gaps in the market to grow.
• Differentiate products from competitors.
• Cover up weaknesses.

Question 7

2. The Threat of Substitutes depends on?

Answer 7

• Price/performance ratio. Higher = more attractive = more threat
• Cost of switching for the buyer. Low = more easily switch = more threat.
• Quality Depreciation = Less likely to switch if quality is less.
• Perceived level of product differentiation = more differentiated = more competitors = less attractive.

Question 8

3. Power of B2B Buyers.

Answer 8

• Powerful buyers relative to the selling firm can force prices down or demand more at the same price.
• Undifferentiated products can force prices down because buyer can easily substitute.
• Low switching costs = more buyer power.

Question 9

4. Power of suppliers

Answer 9

• If only a few suppliers then suppliers have more power to raise prices because there are few substitutes.
• High switching costs = more supplier power. If firms gets tied into contract then can be expensive and difficult to switch.
• More differentiated products = more supplier power because fewer close substitutes to choose from.
• Supplier competition threat - low competition between suppliers = more power.

Question 10

5. Competitive Rivalry

Answer 10

• Competitor balance - more competitors = less power of the firm to charge high prices.
• Industry growth rate - slow = more competitive
• Fixed costs - High = more competitive to try and cover them.
• Exit barriers - High exit barrier = more competitive to stay in the market and not forced out of it.
• Differentiation - Low differentiation = More competitive because have to compete on price therefore competitive to reduce costs, reduce prices and win sales.