Industry Structure and Firm Strategy: The Five Forces Model
36 important questions on Industry Structure and Firm Strategy: The Five Forces Model
What is a Strategic position?
It relates to its ability to create value for customers (V) while containing the cost to do so (C).
What is the 'Five Forces Model'?
What are Porter's 2 Key Insights?
2) The profit potential of an industry is a function of the five forces that shape competition.
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What are the 5 key competitive factors managers need to consider when analysing the industry environment and formulating competitive strategy?
2) Power of Suppliers
3) Power of Buyers
4) Threat of Substitutes
5)Rivalry among existing Competitors
In what 2 ways does potential new entry depresses industry profit potential?
2) Incumbent firms might be forced to spend more in order to satisfy their existing customers more.
! the more profitable an industry, the more attractive it is for new competitors to enter !
What are Barriers to Entry?
What are 7 important Entry Barriers of which incumbent firms benefit?
- Network effects
- Customer switching costs
- Capital Requirements
- Advantages independent of size
- Government Policy
- Credible threat of retaliation (wraak)
Barriers to Entry: Economies of Scale
ATC decrease when Q increases as costs are more spread over TFC (drives the fixed cost per unit down)
Barriers to Entry: Network Effects
When the value of the product or service increases with the number of users.
(= Network externalities)
Example: Facebook, Instagram,...
Barriers to Entry: Switching Costs
switching costs are sunk costs
Barriers to Entry: Capital Requirements
The threat of entry is high when capital requirements are low in comparison to expected returns.
Barriers to Entry: Advantages independent of size + Examples
Examples: Brand loyalty, Location, Distribution channels, Patents, Own technology,...
Barriers to Entry: Government Policy
Examples:
Barriers to Entry: Credible threat of retaliation
A credible threat of retaliation (revenge) often deters (schrikt af) entry.
Example: price war, litigation, sales promotions, innovation,...
FIVE FORCES MODEL: The Power of Suppliers
Powerful suppliers might...
1) Raise the cost of production
2) Reduce industry's profit by capturing part of the economic value created
FIVE FORCES MODEL: The Power of Buyers
What is Backward Integration?
In what scenario's is the Power of Suppliers HIGH?
- Differentiated products
- Incumbent firms face switching costs
- Suppliers industry is more concentrated
- Almost) independent on the industry for their revenues
- Threaten to forward-integrate into the industry
In what scenario's is the Power of Buyers HIGH?
- Low/No switching costs
- Threaten to backwardly integrate into industry
- Industry products are standardised/ undifferentiated commodities
FIVE FORCES MODEL: The Threat of Substitutes
When is the threat of substitutes high?
- Buyer's switching costs are low
What is 'Rivalry among existing competitors'?
What determines the intensity of rivalry among existing competitors?
- Industry Growth
- Strategic Commitments
- Exit Barriers
What captures the structure of an industry? (Common to all industries)
- Firms degree of pricing power
- Type of product/service
- Height of entry barriers
What are the 4 main Competitive Industry Structures?
2) Monopolistic Competition
3) Oligopoly
4) Monopoly
Competitive Industry Structures: Perfect Competition
- No barriers to entry
- Commodity product (grondstoffen)
- Price taker (No pricing power)
Example: wheat, corn,...
Competitive Industry Structures: Monopolistic Competition
- Some barriers to entry
- Differentiated product
- Price maker (for unique product)
What is Non-price Competition?
Competitive Industry Structures: Monopoly
- High barriers to entry
- Price maker (Pricing power)
!!! The one firm IS the industry !!!
What is a Natural Monopoly?
Natural Monopolies exists due to the high fixed or start-up costs of conducting a business in a specific industry. They can arise in industries that require unique raw materials, technology or similar factors to operate.
! The government will provide regulation in order to ensure consumers get a fair deal !
Public utilities supplying gas, water and electricity to businesses and homes are often monopolies.
What are Near Monopolies?
Example: by owning valuable patents, their own technology,...
What is Industry Growth?
What are Strategic Commitments?
What are Exit Barriers?
What is a Complement?
What is a Complementor?
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