PORTER’S FIVE FORCESREVISION NOTES

Porters Five Forces:What is this?

• A tool used to assess the attractiveness of an industry• Used at strategic business unit (SBU) level not for whole

organisation due to diverse nature of different operations and

markets within a company – for instance, Airlines: Longhaul vs

Domestic flights and Consumer base: leisure, business etc

What does it do?• Helps identify sources of competition • Forces aren’t separate from each other• Helps to better understand the industry’s context

Competitive Rivalry• The CR indicates the percent of market share held by the four largest

firms

• When only a few firms hold a large market share, the competitive

landscape is less competitive (closer to a monopoly).

• A low concentration ratio indicates that the industry is characterized

by many rivals, none of which has a significant market share. These

fragmented markets are said to be competitive.

• High fixed costs, sizes of companies and industry growth rates

impact competitive rivalrly.

In pursuing an advantage over its rivals, a firm can choose from several

competitive moves:

• Changing prices - raising or lowering prices to gain a temporary

advantage.

• Improving product differentiation - improving features,

implementing innovations in the manufacturing process and in the

product itself.

• Creatively using channels of distribution - using vertical

integration or using a distribution channel that is novel to the

industry. For example, with high-end jewelry stores reluctant to

carry its watches, Timex moved into drugstores and other non-

traditional outlets and cornered the low to mid-price watch market.

The intensity of rivalry is influenced by the following industry

characteristics:

1. A larger number of firms increases rivalry because more firms must

compete for the same customers and resources. The rivalry

intensifies if the firms have similar market share, leading to a

struggle for market leadership.

2. Slow market growth causes firms to fight for market share. In a

growing market, firms are able to improve revenues simply because

of the expanding market.

3. High fixed costs result in an economy of scale effect that increases

rivalry. When total costs are mostly fixed costs, the firm must

produce near capacity to attain the lowest unit costs. Since the firm

must sell this large quantity of product, high levels of production

lead to a fight for market share and results in increased rivalry.

4. Low switching costs increases rivalry. When a customer can freely

switch from one product to another there is a greater struggle to

capture customers.

5. Low levels of product differentiation is associated with higher

levels of rivalry. Brand identification, on the other hand, tends to

constrain rivalry.

6. High exit barriers place high cost on abandoning the product. The

firm must compete. High exit barriers cause a firm to remain in an

industry, even when the venture is not profitable. A common exit

barrier is asset specificity. When the plant and equipment required

for manufacturing a product is highly specialized and cant be sold to

other buyers.

Threat of new entrants• Capital requirement of entry – the cost will vary according to

technology and scale. Dot.com businesses would be easier to set up

– they just lease a building and launch their site. However, entrance

into the fuel or power industry would be harder and more expensive.

• Access to supply channels – In many industries manufacturers have

had control over supply and/or distribution as sometimes they

directly own the suppliers(vertical integration) or have high supplier

loyalty. This can be overcome by bypassing distributors and selling

directly to customers online(Amazon)

• Customer loyalty

• Experience – gives advantages in terms of costs and consumer/

supplier loyalty

• Expected retaliation – e.g. Kellogs cereal big player – would be hard

to compete against

• Leglislation – e.g. Patents, regulation of markets

Threat of SubstitutesE.g. The price of aluminum beverage cans is constrained by the price of glass

bottles, steel cans, and plastic containers. These containers are substitutes, yet they

are not rivals in the aluminum can industry.

• Reduces the demand for a particular class of products as consumers

decide to buy alternatives• Product for product substitution – e.g email instead of post• Complimentor products – eg. Butter and bread

Buyer Power• Concentration of buyers – if it’s high, buyer power is strong• If the product accounts for high percentage of buyers total

purchases, they are more likely to shop around and squeeze firms

for cheaper prices• Cost of switching to another supplier – if it is low, there’s more

pressure on the firm

Supplier Power• If suppliers have a wide range of customers they wont be as

concerned to lose the firm’s business• If switching costs are high – firms will find it harder to get cheaper

goods• Suppliers competing with buyers directly

I Easy to exit if there are: •Salable assets•ndependent businesses

Difficult to exit if there are: •Specialized assets•High exit costs•Interrelated businesses

Markets are easy to enter if there is: • Common technology• Little brand franchise• Access to distribution channels• Low scale threshold

Difficult to enter if there is: • Patented or proprietary know-how• Difficulty in brand switching• Restricted distribution channels• High scale threshold• Low exit costs

Thanks For Reading!

A GRADE ESSAYS

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Aging populations are the most significant factor in population change in MEDCs.

How valid is this view? (30)

Throughout the world, MEDCs face the issue of an aging population and population

change. This is due to the stage in which that county is according to the demographic

transition model which indicates that as birth rates decline and death rate remain

stagnant, an aging population is created. In the UK for example the baby boom of the

1950s due to increased confidence and the feeling of opportunity mean at the time now

has resulted is a high population of elderly people in the UK. This, combined with the

generous welfare benefits (attributed with Aneurin Bevan), rising economic wealth and

the technological developments in medicine has meant the population in MEDCs is

increasing rapidly and now makes up a significant proportion of the population in many

MEDCs, for example the over 65s make up 16% of the UK population in 2009. However there are other factors such as migration, government policies, social

expectations and regional differences which make an aging population a significant, but

not the only factor attributed to population change. The effect of an aging population in the UK can have impact on society and the

economy which can fed through to escalating population change. It can also cause

political, social and economic tensions due to it's impacts. Firstly, an aging population is

likely to be a drain on resources, both physical and financial, as older people will draw a

pension from the government and require extra resources in terms of healthcare and

mobility. The NHS for example is increasingly spending on elderly patients, which cost

several times more to treat than younger patients due to the fact hat they can remain

unwell for prolonged periods of time. Moreover, older people generally live in a house

with one other person, or alone. This can cause a housing shortage, as seen in South

East England where house prices are increasing and 25% of new homes are built in a

plot of land originally dominated by a single property- a term commonly known as

"garden grabbing". This cause issues for first time buyers who find it difficult to climb

the property ladder. Furthermore, as the proportion of an aging population increase, it would be expected

that the birth rate declines. This is because an older population is not expected to have

children, and this as the proportion of older people grows, the fertility rate of the country

declines below the maintenance fertility rate of 2.1. This is certainly true in Italy where

the fertility has fallen below 2.1 with a population over 66 at 20% of the population.

However it is important to refi nose other factors which lead to declining fertility rates.

The greater importance of women in society through jobs and education and the fact

that women are waiting longer to have children as a career is preferred is increasing. In

the UK, more women 30-35 are having children than the age group of 25-30. In Sweden

for example the impact of womens right to a career has impacted the fertility rate as the

government policy was passed to make the transition from career to motherhood easier

with an 18 month paid maternity leave. This helped the fertility rate to increase as

women were more confident financially to have children. This highlights the importance

Aging populations are the most significant factor in population change in MEDCs.

How valid is this view? (30)Throughout the world, MEDCs face the issue of an aging population and population

change. This is due to the stage in which that county is according to the demographic

transition model which indicates that as birth rates decline and death rate remain

stagnant, an aging population is created. In the UK for example the baby boom of the

1950s due to increased confidence and the feeling of opportunity mean at the time now

has resulted is a high population of elderly people in the UK. This, combined with the

generous welfare benefits (attributed with Aneurin Bevan), rising economic wealth and

the technological developments in medicine has meant the population in MEDCs is

increasing rapidly and now makes up a significant proportion of the population in many

MEDCs, for example the over 65s make up 16% of the UK population in 2009.

However there are other factors such as migration, government policies, social

expectations and regional differences which make an aging population a significant, but

not the only factor attributed to population change. The effect of an aging population in the UK can have impact on society and the

economy which can fed through to escalating population change. It can also cause

political, social and economic tensions due to it's impacts. Firstly, an aging population is

likely to be a drain on resources, both physical and financial, as older people will draw a

pension from the government and require extra resources in terms of healthcare and

mobility. The NHS for example is increasingly spending on elderly patients, which cost

several times more to treat than younger patients due to the fact hat they can remain

unwell for prolonged periods of time. Moreover, older people generally live in a house

with one other person, or alone. This can cause a housing shortage, as seen in South

East England where house prices are increasing and 25% of new homes are built in a

plot of land originally dominated by a single property- a term commonly known as

"garden grabbing". This cause issues for first time buyers who find it difficult to climb

the property ladder. Furthermore, as the proportion of an aging population increase, it would be expected

that the birth rate declines. This is because an older population is not expected to have

children, and this as the proportion of older people grows, the fertility rate of the country

declines below the maintenance fertility rate of 2.1. This is certainly true in Italy where

the fertility has fallen below 2.1 with a population over 66 at 20% of the population.

However it is important to refi nose other factors which lead to declining fertility rates.

The greater importance of women in society through jobs and education and the fact

that women are waiting longer to have children as a career is preferred is increasing. In

the UK, more women 30-35 are having children than the age group of 25-30. In Sweden

for example the impact of womens right to a career has impacted the fertility rate as the

government policy was passed to make the transition from career to motherhood easier

with an 18 month paid maternity leave. This helped the fertility rate to increase as

women were more confident financially to have children. This highlights the importance

Aging populations are the most significant factor in population change in MEDCs.

How valid is this view? (30)Throughout the world, MEDCs face the issue of an aging population and population

change. This is due to the stage in which that county is according to the demographic

transition model which indicates that as birth rates decline and death rate remain

stagnant, an aging population is created. In the UK for example the baby boom of the

1950s due to increased confidence and the feeling of opportunity mean at the time now

has resulted is a high population of elderly people in the UK. This, combined with the

generous welfare benefits (attributed with Aneurin Bevan), rising economic wealth and

the technological developments in medicine has meant the population in MEDCs is

increasing rapidly and now makes up a significant proportion of the population in many

MEDCs, for example the over 65s make up 16% of the UK population in 2009.

However there are other factors such as migration, government policies, social

expectations and regional differences which make an aging population a significant, but

not the only factor attributed to population change.

The effect of an aging population in the UK can have impact on society and the

economy which can fed through to escalating population change. It can also cause

political, social and economic tensions due to it's impacts. Firstly, an aging population is

likely to be a drain on resources, both physical and financial, as older people will draw a

pension from the government and require extra resources in terms of healthcare and

mobility. The NHS for example is increasingly spending on elderly patients, which cost

several times more to treat than younger patients due to the fact hat they can remain

unwell for prolonged periods of time. Moreover, older people generally live in a house

with one other person, or alone. This can cause a housing shortage, as seen in South

East England where house prices are increasing and 25% of new homes are built in a

plot of land originally dominated by a single property- a term commonly known as

"garden grabbing". This cause issues for first time buyers who find it difficult to climb

the property ladder. Furthermore, as the proportion of an aging population increase, it would be expected

that the birth rate declines. This is because an older population is not expected to have

children, and this as the proportion of older people grows, the fertility rate of the country

declines below the maintenance fertility rate of 2.1. This is certainly true in Italy where

the fertility has fallen below 2.1 with a population over 66 at 20% of the population.

However it is important to refi nose other factors which lead to declining fertility rates.

The greater importance of women in society through jobs and education and the fact

that women are waiting longer to have children as a career is preferred is increasing. In

the UK, more women 30-35 are having children than the age group of 25-30. In Sweden

for example the impact of womens right to a career has impacted the fertility rate as the

government policy was passed to make the transition from career to motherhood easier

with an 18 month paid maternity leave. This helped the fertility rate to increase as

women were more confident financially to have children. This highlights the importance

GEOGRAPHY SKILLS: REVISION GUIDE