Porter's five forces
The five forces that set an industry's profitability, the factors that strengthen or weaken each, and reading a fall in margins through the force at work.
- 22 cards
- 5 topics
- Free
The outline, topic by topic
Each topic is weighted the way the exam weighs it.
- Concepts
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A few cards from the deck
Barrier to entry: what is it?
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An obstacle that makes it costly or hard for a new firm to move into an industry: high initial investment, established brands, access to distribution.
The higher they are, the weaker the threat of new entrants. When they collapse, margins fall.
On Paris-Marseille, the high-speed train takes a share of an airline's passengers. For the airline, it is:
- A substitute product
- A new entrant
- A direct competitor in the industry
- A powerful supplier
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A substitute product
The train meets the same need (getting from Paris to Marseille) by another means, in another industry. A direct competitor would sell flights.
Porter's five forces determine the average … of an industry, not that of one particular firm.
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Porter's five forces determine the average profitability of an industry, not that of one particular firm.
They describe the structure of the industry. A firm can beat the average through its strategy, but within the room the forces leave it.
Substitute product: what is it?
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A product from another industry that meets the same need as the original, by a different means.
The high-speed train replaces the plane on a short route: same need, different means. A new entrant sells the same product as the incumbents.
The web agencies of a region see their prices halved in three years, while demand for sites is rising and dozens of freelance designers set up every year. Which reading and response are the soundest?
- Customers have gained bargaining power: cut prices further to keep them
- Substitutes are gaining ground: leave website building
- Suppliers have toughened their prices: do without them by building own tools
- No-code tools have lowered barriers to entry: specialise and build loyalty through maintenance
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No-code tools have lowered barriers to entry: specialise and build loyalty through maintenance
Rising demand with collapsing prices signals an influx of suppliers: barriers to entry have gone. Specialising and building loyalty rebuilds a protection that price alone cannot give.