24 Questions
What is one way that Starbucks has reduced the threat of substitutes?
By offering high-quality fresh coffee
What happens to average industry profitability when many new entrants join an industry?
It declines
What is the purpose of barriers to entry in an industry?
To keep the number of new entrants low
What is an example of a barrier to entry in an industry?
Economies of scale
Why is it difficult for new firms to enter an industry with strong brands?
Because of high advertising costs
What is the result of many firms in an industry being highly profitable?
The industry becomes more attractive
What is one of the Five Competitive Forces Model?
Threat of new entrants
What is the result of firms in an industry erecting barriers to entry?
The number of new entrants decreases
What is the goal of well-managed firms in terms of the Five Competitive Forces Model?
To beat the average rate of return of the industry
What determines the price that consumers are willing to pay for a product?
The availability of substitute products
In which type of industry is the competition among firms stronger?
Slow-growth industry
Why is the pharmaceutical industry so profitable?
Because there are few substitutes for prescription medicines
What happens to industry profitability when close substitutes for a product exist?
It is suppressed
What is the effect of a supplier reducing the quality of the components it supplies?
The manufacturer will eventually have to lower its price
Why do firms in an industry offer their customers amenities?
To reduce the likelihood that customers will switch to a substitute product
What determines the intensity of the rivalry among existing firms in an industry?
The growth rate of the industry
What determines the extent to which substitutes suppress the profitability of an industry?
The propensity for buyers to substitute between alternatives
What happens when a firm has high fixed costs?
It must sell a higher volume of its product to reach the break-even point
What is the likely outcome if a customer can easily get a product cheaper at a competitor's store?
The customer will switch to a substitute product
What is the result of powerful suppliers relative to the firms in the industry to which they sell?
Industry profitability can suffer
What is the relationship between the availability of substitute products and industry profitability?
There is a negative correlation between the two
What is the impact of suppliers raising prices on the industry?
The industry profitability can suffer
What is the role of suppliers in the industry?
To suppress the profitability of the industry
What is the relationship between the growth rate of an industry and the competition among firms?
The competition is stronger in slow-growth industries
Study Notes
The Five Competitive Forces Model
- Well-managed firms try to position themselves to avoid or diminish the forces that affect their profitability.
Threat of Substitutes
- The price consumers are willing to pay for a product depends on the availability of substitute products.
- Industries with few substitutes, such as prescription medicines, are highly profitable.
- Close substitutes for a product can suppress industry profitability, as consumers will opt out if the price gets too high.
- Firms may offer amenities to reduce the likelihood of customers switching to a substitute product, even with a price increase.
Rivalry Among Existing Firms
- The intensity of rivalry among firms in an industry depends on factors such as growth rate and fixed costs.
- Firms with high fixed costs must sell a higher volume of their product to reach the break-even point.
- Rivalry is stronger in slow-growth industries than in fast-growth industries.
Bargaining Power of Suppliers
- Suppliers can suppress industry profitability by raising prices or reducing the quality of components.
- Powerful suppliers can lower industry profitability if they raise prices or reduce quality.
- Firms may take steps to reduce their dependence on powerful suppliers.
Threat of New Entrants
- Highly profitable industries attract new entrants, which can increase competition and lower average industry profitability.
- Firms may try to erect barriers to entry to keep new entrants out.
- Barriers to entry include economies of scale and product differentiation.
This quiz covers the concepts of Porter's Five Competitive Forces Model, including the threat of substitutes and how firms can position themselves to beat the average rate of return of the industry.
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