Strategic Management Quiz and Notes
QUESTION 1
1. Porter’s Five Forces Model
Porter’s Five Forces Model focuses on the forces that shape competition within an industry. These forces are namely; Risk of Entry by potential competitors, Rivalry amongst established companies, Bargaining power of buyers, bargaining power of suppliers, Substitute products and Competitors.
A strong competitive force can be regarded as a threat as it decreases profits while a weak competitive force can be regarded as an opportunity as it allows companies to earn greater profits.
A Cellular Network Providers industry will be used to explain these forces.
• Risk of entry by potential competitors.
Potential competitors are companies that are currently not competing in the industry but have potential to do so. The Cellular Network industry is mainly dominated by Vodacom, MTN and Cell C. The network providers have created significant brand loyalty through advertising, pricing and good service therefore making it very difficult for new competitors to enter this industry. These companies also have absolute cost advantage over potential competitors as they have control over means of production such as labour, equipment, management skills and access to cheaper funds. Because of the strong brand loyalty these companies have created this have resulted in high switching costs for customers, as it takes time and money to switch from one network to another new network even though the new entrant maybe offering better products. Government regulation can prevent new entrants from entering this established industry. Evidence suggests that the height of barriers to an entry is one of most important determinants of profit rates in an industry. Even when entry barriers are high, new companies may still enter an industry if they perceive that the benefits outweigh the substantial costs of entry, for example Virgin Mobile and 8-ta are the new network providers who have entered this industry despite of the high barriers to entry.
1. Porter’s Five Forces Model
Porter’s Five Forces Model focuses on the forces that shape competition within an industry. These forces are namely; Risk of Entry by potential competitors, Rivalry amongst established companies, Bargaining power of buyers, bargaining power of suppliers, Substitute products and Competitors.
A strong competitive force can be regarded as a threat as it decreases profits while a weak competitive force can be regarded as an opportunity as it allows companies to earn greater profits.
A Cellular Network Providers industry will be used to explain these forces.
• Risk of entry by potential competitors.
Potential competitors are companies that are currently not competing in the industry but have potential to do so. The Cellular Network industry is mainly dominated by Vodacom, MTN and Cell C. The network providers have created significant brand loyalty through advertising, pricing and good service therefore making it very difficult for new competitors to enter this industry. These companies also have absolute cost advantage over potential competitors as they have control over means of production such as labour, equipment, management skills and access to cheaper funds. Because of the strong brand loyalty these companies have created this have resulted in high switching costs for customers, as it takes time and money to switch from one network to another new network even though the new entrant maybe offering better products. Government regulation can prevent new entrants from entering this established industry. Evidence suggests that the height of barriers to an entry is one of most important determinants of profit rates in an industry. Even when entry barriers are high, new companies may still enter an industry if they perceive that the benefits outweigh the substantial costs of entry, for example Virgin Mobile and 8-ta are the new network providers who have entered this industry despite of the high barriers to entry.