Analysing the industry environment (A Level) flashcards

Topic 8: Analysing the industry environment

Porter’s five forces (9725)

Rivalry, buyer power, supplier power, entry threat and substitute threat. Strong forces mean lower industry profitability; weak forces mean higher.

What makes rivalry strong?

Many equal firms, slow market growth, standard products, high fixed costs and barriers to exit. A firm might weaken it by branding, differentiation, a niche focus, or merger or takeover.

What makes buyer power strong, and how can a firm reduce it?

Strong if there are few big buyers, a standard product, easy price comparison and cheap switching. Reduce it by widening the customer base, raising switching costs, adding unique features or selling direct.

What makes supplier power strong, and how can a firm reduce it?

Strong if there are few suppliers, a unique input, high switching costs and the firm is a small customer. Reduce it with multiple suppliers, long contracts, alternative inputs or backward integration.

Rival vs substitute

A rival makes the same kind of product; a substitute meets the same need in a different way. A ferry operator’s rival is another ferry; its substitute is a bridge or a flight.

Switching cost

The money, time or effort a customer loses by changing supplier. Firms raise it with loyalty schemes, contracts, products that work only with their own parts or software, and service history.

A dairy sells £2.7m of its £7.5m output to one supermarket group. What share is this, and what does it suggest?

2.7 ÷ 7.5 × 100 = 36%. That buyer has strong power over the dairy’s prices.

A component costs £2.40 and its only supplier raises the price by 25%. The firm uses 40,000 a year. Find the rise in annual cost.

New price = 2.40 × 1.25 = £3.00. Rise = 0.60 × 40,000 = £24,000.

Five forces vs PESTLE vs SWOT

Five forces analyses the industry; PESTLE analyses the wider external environment; SWOT combines internal strengths and weaknesses with external opportunities and threats. Five forces and PESTLE feed the O and T of SWOT.

Limitations of the five forces model

A snapshot that technology and laws can change quickly; industry boundaries and ratings are judgements; firms in one industry are affected unequally; influencing a force costs time and money. Use it with PESTLE and internal data.