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Questions and Answers
What is one way that Starbucks has reduced the threat of substitutes?
What happens to average industry profitability when many new entrants join an industry?
What is the purpose of barriers to entry in an industry?
What is an example of a barrier to entry in an industry?
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Why is it difficult for new firms to enter an industry with strong brands?
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What is the result of many firms in an industry being highly profitable?
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What is one of the Five Competitive Forces Model?
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What is the result of firms in an industry erecting barriers to entry?
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What is the goal of well-managed firms in terms of the Five Competitive Forces Model?
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What determines the price that consumers are willing to pay for a product?
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In which type of industry is the competition among firms stronger?
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Why is the pharmaceutical industry so profitable?
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What happens to industry profitability when close substitutes for a product exist?
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What is the effect of a supplier reducing the quality of the components it supplies?
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Why do firms in an industry offer their customers amenities?
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What determines the intensity of the rivalry among existing firms in an industry?
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What determines the extent to which substitutes suppress the profitability of an industry?
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What happens when a firm has high fixed costs?
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What is the likely outcome if a customer can easily get a product cheaper at a competitor's store?
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What is the result of powerful suppliers relative to the firms in the industry to which they sell?
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What is the relationship between the availability of substitute products and industry profitability?
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What is the impact of suppliers raising prices on the industry?
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What is the role of suppliers in the industry?
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What is the relationship between the growth rate of an industry and the competition among firms?
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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.
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Description
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.