Competitive Environment (AQA A Level Business): Flashcards
Exam code: 7132
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Define Porter's five forces model.
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Define Porter's five forces model.
Porter's five forces model identifies the key pressures on an industry that affect a business's ability to compete with rivals.
What are the five forces in Porter's model?
The five forces are entry threat, buyer power, supplier power, rivalry and substitute threat.
What does the substitute threat measure?
The substitute threat measures how easily customers could switch to a different type of product that meets the same need.
True or False?
The entry threat measures how intense competition is between existing businesses in the same market.
False.
That describes rivalry. The entry threat measures how easily new competitors could enter the market.
Why is rivalry high when a market is growing slowly?
In a slow-growing market, businesses can only grow by taking customers from rivals, so they compete harder.
Rivalry is high when __ barriers are high, because struggling firms keep competing rather than leaving the industry.
Rivalry is high when exit barriers are high, because struggling firms keep competing rather than leaving the industry.
True or False?
Buyer power is high when there are only a few large buyers.
True.
When there are few large buyers, each one matters more to the seller. This gives buyers more power over the seller.
How does the ability to compare prices online affect buyer power?
Easy comparison of price and quality makes it simpler for customers to switch, so it increases buyer power.
Why is supplier power high when a buyer makes up only a small share of the supplier's sales?
The supplier has less to lose if it loses that customer, so it can be firmer over price and terms.
Supplier power is high when the material or component supplied is hard to _____.
Supplier power is high when the material or component supplied is hard to replace.
What makes the entry threat high?
The entry threat is high when it is cheap and easy to start up and existing businesses have weak brand loyalty. It is also high when it is easy to reach customers and there are few laws or licences restricting entry.
True or False?
A substitute threat is only high when the substitute is cheaper than the original product.
False.
The substitute threat is also high when substitutes work just as well, when many products meet the same need and when it is easy and cheap to switch.
How can the five forces model help a business decide whether to enter or leave an industry?
It helps a business judge whether entering, staying in or leaving an industry is likely to be profitable. Strong forces overall reduce profitability through higher costs, lower prices or more intense competition.
Weak forces overall support higher profitability, since a business has more control over _____.
Weak forces overall support higher profitability, since a business has more control over pricing.
True or False?
How much each of the five forces matters depends on the industry.
True.
Different forces matter more or less in different industries. A business therefore needs to work out which pressures affect it most.
Why does fast fashion retail tend to have lower average profit margins than patented pharmaceuticals?
Fast fashion faces high rivalry, strong buyer power and a real threat of new entrants. Patented pharmaceuticals face weaker forces overall, which supports higher margins.
According to Porter, why should a business fully understand the five forces in its own context?
Understanding the forces allows a business to take strategic decisions to achieve and sustain a competitive advantage.
How can a business reduce the entry threat?
It can raise barriers to entry, for example by investing in patents, large-scale production or a strong brand. This makes it expensive for others to enter.
When buyer power is strong, a business can make its products stand out or use _____ schemes to lock customers in.
When buyer power is strong, a business can make its products stand out or use loyalty schemes to lock customers in.
How can a business reduce the power of its suppliers?
It can use multiple suppliers, make its own parts or sign long-term contracts to secure better prices.
How can a business defend itself against the substitute threat?
It can add unique features, bundle services or improve convenience to keep customers loyal.
True or False?
In a market with intense rivalry, the only way to compete is to become the lowest-cost producer.
False.
A business can also differentiate on quality and service. For example, Ryanair competes on low cost, while British Airways focuses on premium service.
Why should a business monitor the market regularly in relation to the five forces?
Monitoring helps it spot early signs that a force is getting stronger or weaker, so it can react in good time.
How might a business respond if rivalry increases because a new competitor arrives?
It may need to cut prices, improve its product or invest more in marketing to defend its position.
How might a business respond if buyer power increases because customers gain more choice or information?
It may need to improve customer service to keep its customers.
True or False?
Blockbuster survived the rise of streaming by quickly changing its business model.
False.
Blockbuster failed to respond quickly enough and collapsed. Netflix adapted its business model from DVD rental by post into streaming, helping it survive and grow.
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