FIVE FORCES OFNEKGNSKCK

Five competitive forces within an industry, based on Porter's Five Forces model:

1. Buyers (Buyer Power)

2. Potential New Entrants (Threat of New Entrants)

3. Rivalry among existing firms

4. Substitute Products (Threat of Substitutes)

5. Suppliers (Supplier Power)

Buyers (Buyer Power):

These can influence pricing and demand better quality or service. Their power increases when there are many alternatives or when they buy in large quantities.

Potential New Entrants (Threat of New Entrants):

New companies can enter the market and increase competition. The easier it is to enter (low barriers to entry), the greater the threat they pose to existing firms.

Rivalry Among Existing Firms:

This refers to the intensity of competition among current players. High rivalry can lead to price cuts, marketing battles, and reduced profits, especially when many similar-sized firms compete.

Substitute Products (Threat of Substitutes):

These are products or services that fulfill the same need in a different way. The threat is high if substitutes offer better value, performance, or price.

Suppliers (Supplier Power):

These can influence the cost and availability of inputs. Their power grows when there are few alternatives or when their products are unique or essential.

Buyers

Buyers are the customers who exchange money for goods or services. Their bargaining power affects how much control they have over prices, terms, and product quality. When buyers have strong bargaining power, they can demand lower prices, better service, or higher quality.

The threat of buyer power is reduced when the following conditions are present:

1. There are several suppliers available in the market

2. The buyer has the potential for backward integration

3. The cost of switching the supplier is minimal

4. The product represents a high percentage of the buyer’s cost

5. The buyer purchases large portions of the seller’s product or services

There are several suppliers available in the market:

Explanation: When buyers have many suppliers to choose from, they can switch easily if one doesn't meet their needs.

Impact: Buyer power is strong because competition among suppliers increases, pushing prices down and improving terms for buyers.

The buyer has the potential for backward integration:

Explanation: If a buyer can start producing the product themselves (backward integration), they gain leverage over suppliers.

Impact: Buyer power is strong because suppliers risk losing business if buyers decide to produce the item internally.

The cost of switching the supplier is minimal:

Explanation: If it's easy and cheap for buyers to change suppliers, they are more likely to demand better terms.

Impact: Buyer power is strong because they can switch with little consequence if unsatisfied.

The product represents a high percentage of the buyer’s cost:

Explanation: If the product makes up a large portion of the buyer’s total expenses, they’ll negotiate harder to lower costs.

Impact: Buyer power is strong because they are more price-sensitive and motivated to drive prices down.

The buyer purchases large portions of the seller’s product

Explanation: Buyers who buy in bulk have more influence over the seller.

Impact: Buyer power is strong because losing a large customer would significantly impact the supplier’s revenue.

Threat of Potential New Entrants.

This force refers to the risk that new companies may enter an industry and increase competition, which can reduce profitability for existing businesses.

When barriers to entry are high, the threat of new entrants is ____

low—and that's good for existing businesses.

Barriers to entry:

1. Substantial Capital Requirement

2. Difficulty in Accessing Distribution Channels

3. Strict Government Policy

4. Economies of Scale

5. High Cost of Product Differentiation

6. High Switching Cost

Substantial Capital Requirement

Explanation: If starting a business requires a lot of money (e.g., for equipment, facilities, or research), fewer new companies can afford to enter.

Impact: This reduces the threat of new entrants, protecting current businesses

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Strict Government Policy

Explanation: Regulations, licenses, and legal requirements can make it hard for new firms to enter certain industries (e.g., healthcare, banking, energy).

Impact: Government restrictions act as a barrier, lowering the threat of entry

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Difficulty in Accessing Distribution Channels

Explanation: If existing companies already control key distribution networks (like retail shelves or delivery platforms), it’s tough for new entrants to reach customers.

Impact: This limits new competition, making entry more difficult

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Economies of Scale

Explanation: Larger companies can produce goods at lower costs because they operate on a big scale. New entrants can't match their prices or efficiency immediately.

Impact: Discourages new entrants, since they’ll face a cost disadvantage

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High Cost of Product Differentiation

Explanation: In industries where branding and uniqueness matter (like cosmetics or tech), new firms need to spend heavily on marketing to compete.

Impact: This raises entry costs, making it harder for newcomers to succeed.

High Switching Cost

Explanation: If customers must spend time, money, or effort to switch from one brand to another, they’re less likely to try a new company’s product.

Impact: Protects existing firms, as customers stick with familiar brands.

Rivalry Among Existing Firms

which refers to the level of competition between companies already operating in an industry.

When rivalry is intense, companies often engage in _____, _______, and ______ ______, which can reduce profit margins for everyone.

1. Price wars

2. Aggressive marketing

3. Innovative battles

Factors that increase the intensity of rivalry:

1. Diversity of Rivals

2. Number of Competing Firms

3. Characteristics of the Products or Services

4. Increased Capacity

5. Amount of Fixed Costs

6. Rate of Industry Growth

Diversity of Rivals

Explanation: When companies differ in strategies, cultures, goals, or origins (e.g., local vs. global firms), competition becomes less predictable.

Impact: Increases rivalry because firms may use unique tactics (like aggressive pricing or innovation) to gain advantage

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Number of Competing Firms

Explanation: The more companies that compete in the same market, the harder it is for any one firm to dominate.

Impact: More competitors mean higher rivalry, especially when market share is divided among many players.

Characteristics of the Products or Services

Explanation: When products are similar or not clearly differentiated, customers can easily switch between brands.

Impact: Intensifies rivalry, as companies must compete on price, promotions, or other factors to retain customers

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Increased Capacity

Explanation: If a company produces more than the market demands, it may lower prices to sell its extra inventory. This can lead others to do the same.

Impact: Triggers price wars and heightens competition.

Amount of Fixed Costs

Explanation: Industries with high fixed costs (like factories or equipment) need to sell large volumes to be profitable. Firms may cut prices to keep production running.

Impact: Leads to intense competition, especially when demand is low

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Rate of Industry Growth

Explanation: In fast-growing industries, firms can gain more customers without taking market share from others. But in slow-growing or declining industries, growth comes mainly by stealing customers.

Impact: Slower growth = higher rivalry, as firms fight for a limited customer base.

The intensity of rivalry

shaped by how crowded, competitive, and dynamic the market is. When these six factors are present, companies are forced to fight harder for market share—often at the expense of profitability.

Threat of Substitute Products

Substitutes are different products or services that satisfy the same customer need. When customers see substitutes as good alternatives, it creates competitive pressure on existing businesses.

Factors that increases the threat of substitutes:

1. Switching Cost is Low

2. Preferences and Tastes of the Customers Easily Change

3. Product Differentiation is Highly Noticeable

4. The Quality of Substitute Products Dramatically Improves

5. The Price of Substitute Product is Substantially Lower

Switching Cost is Low

Explanation: If it's easy and cheap for consumers to switch from one product to another, they are more likely to do so.

Impact: High threat of substitution, since customers can change brands or products without much effort

Preferences and Tastes of the Customers Easily Change

Explanation: When consumers quickly change their preferences, they may abandon your product in favor of substitutes.

Impact: Increases threat, as businesses must constantly adapt to shifting trends

Product Differentiation is Highly Noticeable

Explanation: If a substitute offers unique features or a different experience, it becomes more attractive.

Impact: Raises the threat of substitution, especially if it meets the same need in a better or more appealing way

The Quality of Substitute Products Dramatically Improves

Explanation: As substitutes become better in performance or design, consumers may prefer them over the original product.

Impact: Boosts substitution threat, especially if the quality matches or exceeds that of the current product.

The Price of Substitute Product is Substantially Lower

Explanation: When substitutes are much cheaper and still meet the need, customers are likely to switch to save money.

Impact: Greatly increases threat, especially in price-sensitive markets

Bargaining Power of Suppliers

These are the companies or individuals that provide raw materials, products, or services needed by businesses.

When suppliers have strong _____ _____, they can ____, _____, ____, and _____, which can reduce a company’s profit margins.

1. bargaining power

2. influence

3. prices

4. quality

5. delivery terms

Factors that increase the power of suppliers

1. The Supplier Has the Ability for Forward Integration

2. Suppliers in the Industry Are Few, but the Sales Volume Is High

3. Substitute Products Are Not Readily Available in the Market

4. The Switching Cost Is Very High

5. The Product or Service Is Unique

The Supplier Has the Ability for Forward Integration

Explanation: If a supplier can begin selling directly to customers (cutting out the middleman), they have more power over the businesses that currently buy from them.

Impact: Increases supplier power, as businesses risk losing their supplier to direct competition.

Suppliers in the Industry Are Few, but the Sales Volume Is High

Explanation: When there are only a few suppliers but many businesses depend on them, suppliers can dictate terms.

Impact: Strengthens supplier power, since buyers have limited options

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Substitute Products Are Not Readily Available in the Market

Explanation: If there are no alternative products or materials to replace what the supplier offers, businesses are forced to depend on them.

Impact: Boosts supplier power, due to lack of substitutes

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The Switching Cost Is Very High

Explanation: If it’s expensive or difficult to switch to a different supplier (due to contracts, re-training, or compatibility issues), buyers are less likely to change.

Impact: Increases supplier control, since customers are “locked in.”

The Product or Service Is Unique

Explanation: When suppliers offer specialized or high-quality items that can't be easily replaced, their importance rises.

Impact: Gives more power to the supplier, as businesses rely on their unique offerings

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