Five Forces

1. What are the five competitive forces described by Michael Porter?

Comment on them briefly.

① Threat of new entrants : Barriers to entry measure how easy or difficult it is for new entrants to enter into the industry. The threat of entry in an industry depends on the height of entry barriers that are present and on the reaction entrants can expect from incumbents. Entry barriers are advantages that incumbents have relative to new entrants. There are seven major sources : Supply-side economies of scale, Demand-side benefits of scale, Customer switching costs, Capital requirements, Incumbency advantages independent of size, Unequal access to distribution channels, Restrictive government policy.

② Bargaining power of suppliers : Powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants. A supplier group is powerful if concentrated, monopoly, high switching costs in changing suppliers, differentiated products, no substitute for what the supplier group provides, forward integration.

③ Bargaining power of buyers : Powerful customers can capture more value by forcing down prices, demanding better quality or more service and generally playing industry participants off against one another, all at the expense of industry profitability. Buyers are powerful if they have negotiating leverage relative to industry participants, especially if they are price sensitive, using their clout primarily to pressure price reductions.

④ Threat of substitute products or services : A substitute performs the same or similar function as an industry’s product by a different means. The threat of a substitute is high if it offers an attractive price-performance trade-off to the industry’s product, the buyer’s cost of switching to the substitute is low.

⑤ Rivalry among existing competitors : Rivalry among existing competitors takes many familiar forms, including price discounting, new...