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History[ edit ] The model is an extension of Porter's five forces model The extended model including the sixth force, complementary products, and was proposed in the s.
High competition between rivals can stifle an industry's profitability. Intensity of competition is highest if: Competitors are equal in size and power as poaching business is hard to avoid Industry growth is slow. This causes competing organisations to fight for market share Exit barriers are high e.
This can cause companies making low or negative returns to stay in the market leading to excess capacity meaning that healthy competitors' profitability will suffer.
Competitors are competing on price. Price competition is particularly destructive to profitability as it is easy to identify price competition meaning other competitors can retaliate. Competing in areas such as product features, customer support, delivery time, and brand image isn't likely to be as damaging to profits because it will increase customer value in the product or service and may help establish customer loyalty.
This in turn can improve industry profitability through increasing value relative to substitutes and raising the barriers of entry for new potential competitors.
This in turn puts pressure on prices, costs and the rate of investment needed to sustain a business within the industry.
The threat of new entrants is particularly intense if they are diversifying from another market as they can leverage existing expertise, cash flow and brand identity as it puts a strain on existing companies profitability.
Barriers to entry restrict the threat of new entrants. If the barriers are high, the threat of new entrants is reduced and conversely if the barriers are low, the risk of new companies venturing into a given market is high.
Barriers to entry are advantages that existing, established companies have over new entrants. This can discourage new entrant because they either have to start trading at a smaller volume of unit and accept a price disadvantage over larger companies or risk coming into the market on a large scale in an attempt to displace the existing market leader.
Demand-side economies of scale — this occurs when a buyers willingness to purchase a particular product or service increases with other people's willingness to purchase it.
Also known as network effect, people tend to value being in a 'network' with a larger number of people who use the same company. Capital requirements — the amount of capital needed to start up within an industry can be a deterrent to new entrants as they will have to self-fund the venture or convince investors that their business model is good enough for an investment.
Incumbency advantages independent of size — No matter the size of an existing business within an industry they always tend to have certain advantages over new entrants.
They are more established so will tend to have better access to raw materials, established connections with suppliers, brand identity, cumulative experience about best working practices etc.
Restrictive government policies — policies set out by the government can help or hinder new entrants. Through licensing requirements and restriction on foreign investment the government can regulate industries aiding or preventing new entrant from gain access to a particular market.
Bargaining power is high in a customer group if: A supplier group is powerful if: It is more concentrated than the industry it is selling to It doesn't heavily rely on the industry to gain revenue Switching costs are high for the industry members Suppliers produce unique products that have no substitutes Can legitimately threaten forward integration — if the industry itself is making a higher amount of money in relation to the supplier, it may provoke them to enter the market.
This limits the profitability of an industry as there is not only the threat of a new entrant, there is also the threat of losing the supplier.Craft beer targets only local area.
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