5 forces
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112 Terms
Q: What is the main idea of Porter’s Five Forces?
A: Competition comes from more than direct competitors; five forces shape industry profitability.
Q: What are Porter’s Five Forces?
A:
Threat of new entrants
Supplier power
Buyer power
Threat of substitutes
Rivalry among existing competitors
Q: What happens when the Five Forces are strong?
A: Competitive pressure is high → industry profitability decreases.
Q: What happens when the Five Forces are weak?
A: Competitive pressure is lower → industry profitability can increase.
Q: What primarily determines long-term industry profitability?
A: Industry structure, represented by the Five Forces.
Q: Do all Five Forces matter equally in every industry?
A: No. The strongest force(s) usually have the biggest effect on profitability and strategy.
Q: What is the threat of new entrants?
A: The possibility that new competitors will enter an industry and increase competition.
Q: How do new entrants hurt profitability?
A: They can take market share, push prices down, and force companies to spend more.
Q: What determines the threat of entry?
A: Entry barriers + expected retaliation from existing competitors.
Q: What is a barrier to entry?
A: Something that makes it difficult or expensive for a new competitor to enter.
Q: What are Porter's 7 major barriers to entry?
A:
Supply-side economies of scale
Demand-side benefits of scale
Switching costs
Capital requirements
Incumbency advantages
Distribution access
Government policy
Q: What are supply-side economies of scale?
A: Large companies have lower costs per unit because they produce more.
Q: How do economies of scale discourage new entrants?
A: New companies must either enter at a large scale or accept higher costs.
Q: What are demand-side benefits of scale?
A: A product becomes more attractive because many other customers already use it.
Q: What is another name for demand-side benefits of scale?
A: Network effects.
Q: What's an example of a network effect?
A: eBay becomes more valuable because having more buyers attracts sellers and vice versa.
Q: What are switching costs?
A: Costs or difficulties customers experience when changing suppliers/brands.
Q: Do high switching costs increase or decrease the threat of entry?
A: Decrease it, because new competitors have trouble stealing customers.
Q: What are capital requirements?
A: The amount of money required to enter and compete in an industry.
Q: Do high capital requirements always prevent entry?
A: No. Investors may provide funding if the industry looks profitable.
Q: What are incumbency advantages?
A: Advantages existing companies have that newcomers can't easily copy.
Q: Examples of incumbency advantages?
A: Patents, technology, experience, brand reputation, locations, or access to materials.
Q: How can distribution access create an entry barrier?
A: Existing companies may already control important stores, distributors, or sales channels.
Q: How can government policy affect entry?
A: Licenses, patents, regulations, and restrictions can make entry harder or easier.
Q: What is expected retaliation?
A: How aggressively new entrants expect existing companies to fight back.
Q: What might incumbents do to fight a new entrant?
A: Cut prices, increase advertising, or use their resources and distribution relationships.
Q: When is expected retaliation especially strong?
A: When incumbents have aggressively fought entrants before or have substantial resources.
Q: Does a company actually have to enter for the threat of entry to hurt profitability?
A: No. The possibility of entry alone can force companies to lower prices or spend more.
Q: What is supplier bargaining power?
A: The ability of suppliers to charge higher prices or demand better terms.
Q: How do powerful suppliers hurt industry profitability?
A: They raise costs, reduce quality/services, or shift costs to companies.
Q: When are suppliers powerful?
A: When there are few suppliers, few substitutes, high switching costs, or differentiated products.
Q: Are suppliers more powerful if they depend heavily on one industry?
A: Usually no. They're stronger when they can sell to many industries and don't depend on one.
Q: How does supplier differentiation increase supplier power?
A: A unique product is harder for companies to replace.
Q: How do switching costs affect supplier power?
A: High switching costs → stronger supplier power.
Q: Why does having no substitute increase supplier power?
A: Companies have no good alternative to the supplier.
Q: What is forward integration?
A: A supplier moves forward and begins competing with its customers.
Q: How does the threat of forward integration affect supplier power?
A: It increases supplier power.
Q: What is buyer bargaining power?
A: The ability of customers to force prices down or demand more value.
Q: How can powerful buyers hurt profitability?
A: They demand lower prices, better quality, or more service.
Q: When are buyers powerful?
A: When there are few buyers, they purchase large amounts, products are similar, or switching costs are low.
Q: What happens to buyer power when switching costs are low?
A: Buyer power increases.
Q: Why do standardized products increase buyer power?
A: Customers can easily find an equivalent product elsewhere.
Q: When are buyers especially price sensitive?
A: When the purchase represents a large portion of their budget.
Q: Are struggling businesses usually more or less price sensitive?
A: More price sensitive.
Q: When are customers less price sensitive?
A: When quality is very important or the product can save/make them significant money.
Q: What is backward integration?
A: A buyer starts producing the product itself rather than buying it.
Q: How does the threat of backward integration affect buyer power?
A: It increases buyer power.
Q: What is a substitute?
A: A different product or service that performs the same or similar function.
Q: Is a substitute the same thing as a direct competitor?
A: No. It can be completely different but solve the same problem.
Q: What's an example of a substitute?
A: Videoconferencing is a substitute for business travel.
Q: Another example of a substitute?
A: Streaming is a substitute for going to a movie theater.
Q: Can doing something yourself be a substitute?
A: Yes.
Q: Can buying used instead of new be considered a substitute?
A: Yes.
Q: When is the threat of substitutes high?
A: When substitutes offer a good price-performance trade-off and switching is easy.
Q: How do substitutes hurt profitability?
A: They put a ceiling on the prices companies can charge.
Q: What happens when switching to a substitute is cheap/easy?
A: The threat of substitution increases.
Q: Why should companies watch technological changes outside their industry?
A: Technology can create new substitutes that didn't previously exist.
Q: What is competitive rivalry?
A: Competition between companies already operating in the industry.
Q: What are examples of rivalry?
A: Price cuts, advertising, new products, better service, and promotions.
Q: What happens when rivalry is intense?
A: Industry profitability generally decreases.
Q: When is rivalry especially intense?
A: When:
many similar competitors exist
growth is slow
exit barriers are high
competitors are highly committed
Q: Why does slow industry growth increase rivalry?
A: Companies must steal customers from competitors to grow.
Q: What are exit barriers?
A: Things that make it difficult for companies to leave an industry.
Q: Why do high exit barriers hurt profitability?
A: Weak companies stay and continue competing even when they're losing money.
Q: Why does Porter consider price competition especially dangerous?
A: Competitors can easily match price cuts, causing price wars and lower profits.
Q: What does Porter mean when he says price competition transfers profits to customers?
A: Customers pay less while companies lose profit margins.
Q: When is price competition especially likely?
A: When products are similar, switching costs are low, fixed costs are high, or products are perishable.
Q: Why do high fixed costs encourage price competition?
A: Companies want to sell more units to help cover their large fixed costs.
Q: What does "perishable" mean in Porter's framework?
A: Something loses its value if it isn't sold at the right time.
Q: Why is an empty hotel room considered perishable?
A: Once the night passes, the hotel can never sell that night's room again.
Q: What is nonprice competition?
A: Competing through quality, features, service, delivery, branding, etc.
Q: Why can nonprice competition be healthier than price competition?
A: It can increase customer value while allowing companies to maintain higher prices
Q: What is zero-sum competition?
A: Companies compete for the same customers in the same way, so one company's gain is another's loss.
Q: When does zero-sum competition often happen?
A: When competitors focus on the same needs and same competitive dimensions.
Q: What is positive-sum competition?
A: Competitors target different customers or needs, allowing multiple companies to succeed.
Q: Why can positive-sum competition increase industry profitability?
A: Companies differentiate instead of constantly fighting over the same customers.
Q: How does positive-sum competition connect to Porter's "What Is Strategy?"
A: Companies should choose different positions instead of copying competitors.
Q: What does "industry structure" mean?
A: The underlying competitive conditions represented by the Five Forces.
Q: What does industry structure determine?
A: Long-term competition and profitability.
Q: Does being a high-tech industry automatically mean high profitability?
A: No.
Q: Does fast industry growth automatically mean high profitability?
A: No.
Q: Why can a fast-growing industry still be unprofitable?
A: Growth can attract entrants, while buyers, suppliers, substitutes, or rivalry can still be powerful.
Q: Is government a sixth competitive force?
A: No. Government policies influence the existing Five Forces.
Q: Example of government affecting a force?
A: Patents increase barriers to entry → reducing the threat of new entrants.
Q: Is technology a sixth force?
A: No. Technology can change the Five Forces.
Q: Is industry growth a sixth force?
A: No.
Q: Can the Five Forces change over time?
A: Yes.
Q: What can cause industry structure to change?
A: Technology, customer needs, regulation, new substitutes, mergers, and competitors.
Q: Why should strategists study how the Five Forces might change?
A: Changes can create new threats or strategic opportunities.
Q: What time period should industry analysis generally consider?
A: Usually around 3–5 years, or a full industry business cycle.
Q: Why shouldn't strategists focus on one year's profitability?
A: Temporary events may not represent the industry's long-term structure.
Q: What is the goal of Five Forces analysis?
A: Understand why an industry has its level of profitability and how a company should respond strategically.
Q: Should Five Forces simply be used to label an industry attractive or unattractive?
A: No. It should help companies make strategic choices.
Q: What are three major ways companies can use Five Forces strategically?
A:
Position where forces are weaker
Exploit changes in the forces
Shape the forces in their favor
Q: What does "positioning where the forces are weakest" mean?
A: Choosing customers or a market position where the company faces less competitive pressure.
Q: What company does Porter use as an example of strategic positioning?
A: Paccar, a heavy-truck manufacturer.
Q: Who did Paccar focus on?
A: Owner-operators who owned and drove their own trucks.
Q: Why were owner-operators attractive customers for Paccar?
A: They had less buyer power and cared about quality, comfort, customization, and status—not just price.
Q: What did Paccar's positioning allow it to do?
A: Charge about a 10% price premium.
Q: What does it mean to "shape" industry structure?
A: Change the Five Forces to make competition more favorable.