THE FIVE COMPETITVE FORCES 1 POTENTIAL NEW ENTRANTS Capital requirements and

The five competitve forces 1 potential new entrants

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the level of competition in the industry. THE FIVE COMPETITVE FORCES 1. POTENTIAL NEW ENTRANTS. Capital requirements and economies of scale are examples of two potential barriers to entry that can keep new competitors. THREATS OF NEW ENTRANTS ARE HIGH WHEN: a. Low amount of capital is required to enter a market. b. Existing companies can do little to retaliate. c. Existing firms do not possess patents. d. There is no / little government regulation. e. Customer switching is low. 2. BARGAINING POWER OF BUYERS. Informed customers become empowered customers. BUYERS EXERT STRONG BARGAINING POWER WHEN: a. Buying in large quantities or control many access points to the final customer. b. Only few buyers exist. c. Switching costs to other suppliers are low. d. There are many substitutes. e. Buyers are price sensitive. 3. BARGAINING POWERS OF SUPPLIERS. The concentration of suppliers and the availability of substitute suppliers are significant factors in determining supplier power. SUPPLIERS HAVE STRONG BARGAINING POWER WHEN: a. There are few suppliers but many buyers. b. Few substitute raw materials exist. c. Suppliers hold scarce resources. d. Cost of switching raw materials is especially high. 4. THREATS OF SUBSTITUTE PRODUCTS. The power of alternatives and substitutes for a company’s product may be affected by changes in cost or in trends that will deflect buyer loyalty. 5. RIVALRY AMONG COMPETITORS. This is influenced by the preceding four forces, as well as by cost and product differentiation. RIVALRY AMONG COMPETITORS IS INTENSE WHEN: a. There are many competitors. b. Exit barriers are high. c. Industry growth is slow or negative. d. Products are not differentiated and can be easily substituted. Technological Institute of the Philippines – Quezon City Campus 2 nd Semester SY 2017-2018
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APPLIED ECONOMICS 001 HANDOUTS CHAPTER 6 -7 PROF. BERNARD O. ESTIOCO e. Competitors are of equal size. The Porter’s five forces model determine an industry and the level of competition in that industry. The stronger the competitive forces in the industry, the lesser chance its profitability. STEPS USED IN PORTER’S FIVE FORCES FRAMEWORK: 1. GATHER THE INFORMATION ONE EACH OF THE FIVE FORCES . What managers should do during this step is to gather information about their industry and to check it against each of the factors. 2. ANALYZE THE RESULTS AND DISPLAY THEM ON A DIAGRAM . After gathering all the information, you should analyze it and determine how each factor is affecting an industry. Rate them either VERY LOW / VERY WEAK, LOW / WEAK, MODERATE / AVERAGE, HIGH / STRONG, or VERY HIGH / STRONG. For example, if there are many companies of equal size operating in the slow
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  • Spring '16
  • Mrs. Lopez
  • Technological Institute, Quezon City Campus, PROF. BERNARD O. ESTIOCO

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