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Case Study: Competitive Forces

This document discusses competitive forces in an industry and barriers to entry. It analyzes five competitive forces: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitutes, and rivalry among existing competitors. It describes factors that determine the strength of each force. The document also lists significant entry barriers that can impact a business's strategic plan, such as economies of scale, product differentiation, capital requirements, switching costs, and government policy.

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Arif Qureshi
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64 views

Case Study: Competitive Forces

This document discusses competitive forces in an industry and barriers to entry. It analyzes five competitive forces: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitutes, and rivalry among existing competitors. It describes factors that determine the strength of each force. The document also lists significant entry barriers that can impact a business's strategic plan, such as economies of scale, product differentiation, capital requirements, switching costs, and government policy.

Uploaded by

Arif Qureshi
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Case Study: Competitive Forces

We have analyzed the case study and have provided answers to the questions mentioned at the
end of it.

Question (a) Answer:


Those Five Competitive Forces and the threats imposed to a firm by these forces are explained
below:
1. Threat of new entrants. 
2. Bargaining power of suppliers
3. Bargaining power of buyers
4. Threat of substitute products
5. Rivalry among existing competitors

Threat of new entrants. This force determines how easy (or not) it is to enter a particular
industry. If an industry is profitable and there are few barriers to enter, rivalry soon intensifies.
When more organizations compete for the same market share, profits start to fall. It is essential
for existing organizations to create high barriers to enter to deter new entrants. Threat of new
entrants is high when:

 Low amount of capital is required to enter a market;


 Existing companies can do little to retaliate;
 Existing firms do not possess patents, trademarks or do not have established brand
reputation;
 There is no government regulation;
 Customer switching costs are low (it doesn’t cost a lot of money for a firm to switch to
other industries);
 There is low customer loyalty;
 Products are nearly identical;
 Economies of scale can be easily achieved.

Bargaining power of suppliers. Strong bargaining power allows suppliers to sell higher priced
or low-quality raw materials to their buyers. This directly affects the buying firms’ profits
because it has to pay more for materials. Suppliers have strong bargaining power when:

 There are few suppliers but many buyers.


 Suppliers are large and threaten to forward integrate.
 Few substitute raw materials exist.
 Suppliers hold scarce resources.
 Cost of switching raw materials is especially high.
Bargaining power of buyers. Buyers have the power to demand lower price or higher product
quality from industry producers when their bargaining power is strong. Lower price means lower
revenues for the producer, while higher quality products usually raise production costs. Both
scenarios result in lower profits for producers. Buyers exert strong bargaining power when:

 Buying in large quantities or control many access points to the final customer.
 Only few buyers exist.
 Switching costs to another supplier are low.
 They threaten to backward integrate.
 There are many substitutes.
 Buyers are price sensitive.

Threat of substitutes. This force is especially threatening when buyers can easily find substitute
products with attractive prices or better quality and when buyers can switch from one product or
service to another with little cost. For example, to switch from coffee to tea doesn’t cost
anything, unlike switching from car to bicycle.

Rivalry among existing competitors. This force is the major determinant on how competitive
and profitable an industry is. In competitive industry, firms have to compete aggressively for a
market share, which results in low profits. Rivalry among competitors is intense when:

 There are many competitors;


 Exit barriers are high;
 Industry of growth is slow or negative;
 Products are not differentiated and can be easily substituted;
 Competitors are of equal size;
 Low customer loyalty.

Although, Porter originally introduced five forces affecting an industry, scholars have suggested
including the sixth force: complements. Complements increase the demand of the primary
product with which they are used, thus, increasing firm’s and industry’s profit potential. For
example, iTunes was created to complement iPod and added value for both products. As a result,
both iTunes and iPod sales increased, increasing Apple’s profits.

Question (b) Answer:


These are the significant “Entry Barriers” that can effect on the formulation of a strategic plan
for a business which is already established in the industry:

 Economies of scale: The cost of producing each unit declines as the quantity of a product
produced during a given period increases (new entrants are unlikely to quickly generate
the level of demand for its products that in turn allow it to develop economies of scale).
 Product differentiation: Over time customers may come to believe that a firm’s
products is unique. customers consistently purchase a firm’s product (to combat
uniqueness, new entrants frequently offer products at lower prices, may result in lower
profit or loss).

 Capital requirements: require firms to have resources to invest, capital is also needed
for inventories, marketing activities, and other business functions (defense industries are
difficult to enter b/c of the substantial resource investments required).

 Switching costs: Onetime costs customers incur when they buy from a different supplier
(if switching costs are high, new entrants must offer either a substantially lower price or
much better product to attract buyers
-EX: switching university when a freshman versus when a senior

 Access to distribution channels: Once a relationship with distributors has been built, a
firm will nurture it, creating switching costs for distributors (new entrants have to
persuade distributors to carry their products, in addition to or in place of those currently
distributed).
-less a barrier for products sold online

 Cost disadvantages independent of scale: established competitors have cost advantages


that new entrants cannot duplicate (access to raw materials, desirable locations, and
government subsidies).
 -EX: Zara, owned by Inidtex, the largest fashion clothing retailer in the world. relied on
class, well-tailored, inexpensive items to enter the market

 Government policy:
decisions about issues such as granting of licenses and permits, governments can also
control entry into an industry.
EX: liquor retailing, radio and TV broadcasting, banking, and trucking are industries in
which gov't decisions and actions affect entry possibilities

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