Question

a. According to the five forces of the Porter's model, the organization of an industry can be analyzed in terms of its structure, conduct and performance. Discuss

b. Is it always true that structure causes the conduct and thus performance of an industry? Is it possible for the reverse causation? Explain

Answer 1

The five forces of Porter's model make up a framework that tells us the level of competition within an industry by analyzing its structure, conduct, and performance. The forces are those that affect a firm's ability to make a profit. They include the following: threat of new entrants, threat of substitute products or services, bargaining power of customers, bargaining power of suppliers, and intensity of competitive rivalry.

The threat of new entrants means that the profitability for firms in an industry may decrease as a result of new entrants. Several factors influence how great this threat is, including barriers to entry (patents), government policy, customer loyalty, sunk costs, and economies of scale.

The threat of substitute products or services increases elasticity of demand and makes customers more likely to switch to alternatives. Factors that influence this threat include switching costs, product differentiation, and prices.

Bargaining power of customers means that customers can put pressure on firms. This is related to the threat of substitute products and services because the more alternatives customers have, the more bargaining power they have. Loyalty programs are one way that firms can reduce bargaining power. Other factors that influence bargaining power include bargaining leverage, switching costs, and information availability.

Bargaining power of suppliers means that suppliers of capital and labor can also put pressure on firms. Factors that influence this power include switching costs, substitute inputs, differentiation of inputs, and unions.

Intensity of competitive rivalry describes how competitive an industry is. Factors that influence it include competitive advantage, technology, marketing expenses, number of firms, and degree of transparency.

These components make this model is a useful tool for evaluating an industry and a firm's strategic position.