Five Forces Model Flashcards, test questions and answers

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What is Five Forces Model?

Five Forces Model is a strategic business analysis tool developed by Michael Porter which helps businesses understand the competitive environment in which they operate. It looks at five different forces that act upon an industry and determine its overall attractiveness. The model is often used to assess industries and identify potential areas of growth or risk.The Five Forces Model consists of five components: threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitute products or services, and competitive rivalry between existing firms. Each force has a different impact on the overall industry structure and profitability. Threat of New Entrants: This force looks at how easy it is for new competitors to enter an existing market. Factors such as economies of scale, access to capital and distribution networks can make it difficult for new firms to compete in established markets. Bargaining Power of Buyers: This force looks at how much leverage customers have over their suppliers when negotiating prices or terms. When buyers have more leverage than suppliers this can lead to lower profits for existing firms in the market since they will be forced to reduce prices in order to remain competitive with each other, thus leading to lower margins across the board. Bargaining Power of Suppliers: This force looks at how much leverage suppliers have over their customers when negotiating prices or terms on goods or services that are purchased from them by companies operating within an industry sector. When suppliers have more leverage than customers this can lead to higher costs for manufacturers within the market since they will be forced into paying higher prices from their suppliers in order to remain competitive with each other, thus leading to increased expenses across the board. Threat Of Substitute Products Or Services: This force examines how easily consumers can switch from one product or service offering within an industry sector into another one that serves a similar purpose but may come from another provider instead (e.g., switching from Coca Cola’s soft drinks into Pepsi’s).