Five Forces Analysis

Question 1

What are the five forces of an industry

Answer 1

Rivalry among competitors, Threat of new entrants, Threat of substitute products, Bargaining power of suppliers, bargaining power of buyers

Question 2

Rivalry among competitors (and impact on profitability)

Answer 2

• examines pressure existing companies put on one another
• numerous or equally balanced competitors
• lack of product differentiation
• slow industry growth, (fighting for market share)
• high exit barriers
  Impact on profitability:
• lowers industry profits as firms compete on price
• spend on marketing and R&D

Question 3

Threat of new entrants

Answer 3

• measures how easy or difficult it is for new competitors to enter the market
• threat high when barriers to entry are low
• barriers: economies of scale, high $$ requirement
• government policies
• threat high if existing firms have resources to overcome barriers.
  Impact on profitability:
• new entrants fight for market share, leads to price reduction and lower returns ($$)

Question 4

Threat of substitute products

Answer 4

• substitutes have similar functions
• adoption of new technology
• change consumer preferences
  Impact on profitability:
• strong substitutes place a “ceiling” on prices firms can charge (limit profit)

Question 5

Bargaining power of suppliers

Answer 5

• suppliers gain power by raising prices or reducing quality of goods/services
• supplier group more concentrated than industry it sells to
• none or few substitutes for suppliers products
• supplier product is differentiated
• suppliers threaten to enter buyer industry (forward integration)
  Impact on profitability:
• powerful suppliers can lower industry profits by charging higher prices

Question 6

Bargaining power of buyers

Answer 6

• buyers exert power by demanding lower prices or higher quality
• they purchase a large portion of industry’s output
• industry products undifferentiated
• buyers threaten to bring suppliers function in house
• can threaten to go elsewhere cause of low switching costs
  Impact on profitability
• powerful buyers force prices down or demand more expensive services, both decrease firm profits.