5 Forces Model
5 Forces Model
-Examines competitive forces that influence the profitability potential in an industry
-Each force can reduce the probability that a firm can earn profits while competing in an industry
Potential Entrant
- can take market share away
- force to learn new ways to compete
- Barrier
- Economies of scale – cost disadvantage
- Capital – lack the resources (physical & human) to compete, competitive disadvantage
- Switching costs – college, machine
- Differentiation – brand loyalty
- Access to distribution channels – creating of switching cost, price breaks, and cooperative advertising allowances
- Government policy – license or permit, radio & TV station, airlines
Substitute Products
- Products that perform functions similar to an existing product
- Cassette, CD, MP3
- Strong threat – more effective & lower price, especially lack switching costs
- Differentiate the existing product, after sales service
Bargaining Power of Suppliers
- Increase price, decrease quality
- Few large suppliers
- Substitute products are not available
- Not significant customer for suppliers
- Essential to marketplace success
Bargaining Power of Buyers
- Increase quality, lower price
- purchase large portion
- Lower switching costs
-Threat to integrate backward
Rivalry among Existing Firms
- Compete for advantageous market position
- Price, quality, innovation, responsiveness
- Degree of differentiation – established brand loyalty
- Switching costs – lower, easier to be attracted
- Equally balanced competitors – similar size and capabilities
- Slow industry growth
- High strategic stakes – to perform well in chosen market
- High fixed costs – large volume, increase inventory cost, price cutting
- High exit barriers – continue competing to survive, specialized assets, fixed cost of exit, emotional, government and social restrictions
-Examines competitive forces that influence the profitability potential in an industry
-Each force can reduce the probability that a firm can earn profits while competing in an industry
Potential Entrant
- can take market share away
- force to learn new ways to compete
- Barrier
- Economies of scale – cost disadvantage
- Capital – lack the resources (physical & human) to compete, competitive disadvantage
- Switching costs – college, machine
- Differentiation – brand loyalty
- Access to distribution channels – creating of switching cost, price breaks, and cooperative advertising allowances
- Government policy – license or permit, radio & TV station, airlines
Substitute Products
- Products that perform functions similar to an existing product
- Cassette, CD, MP3
- Strong threat – more effective & lower price, especially lack switching costs
- Differentiate the existing product, after sales service
Bargaining Power of Suppliers
- Increase price, decrease quality
- Few large suppliers
- Substitute products are not available
- Not significant customer for suppliers
- Essential to marketplace success
Bargaining Power of Buyers
- Increase quality, lower price
- purchase large portion
- Lower switching costs
-Threat to integrate backward
Rivalry among Existing Firms
- Compete for advantageous market position
- Price, quality, innovation, responsiveness
- Degree of differentiation – established brand loyalty
- Switching costs – lower, easier to be attracted
- Equally balanced competitors – similar size and capabilities
- Slow industry growth
- High strategic stakes – to perform well in chosen market
- High fixed costs – large volume, increase inventory cost, price cutting
- High exit barriers – continue competing to survive, specialized assets, fixed cost of exit, emotional, government and social restrictions