Information Systems and Strategy

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1. Threat of new entry: The ease with which new firms can enter an industry.
2. Threat of substitutes: The likelihood that customers will switch to substitute products or services.

These five forces interact with each other to determine the overall profitability of an industry. The stronger the forces, the less profitable the industry is likely to be. Competitive Rivalry Competitive rivalry is the intensity of competition among existing firms in an industry. It is influenced by factors such as the number and size of competitors, the level of product differentiation, and the rate of industry growth. When competitive rivalry is high, firms are forced to compete on price, quality, and innovation. This can lead to lower profits for all firms in the industry. Supplier Power Supplier power is the bargaining power of suppliers to an industry. It is influenced by factors such as the number and size of suppliers, the availability of substitutes, and the importance of the supplier's product to the industry. When supplier power is high, suppliers can charge higher prices or reduce quality, which can hurt the profitability of firms in the industry. Buyer Power Buyer power is the bargaining power of buyers from an industry. It is influenced by factors such as the number and size of buyers, the availability of substitutes, and the buyer's sensitivity to price. When buyer power is high, buyers can demand lower prices or higher quality, which can hurt the profitability of firms in the industry. Threat of New Entry The threat of new entry is the ease with which new firms can enter an industry. It is influenced by factors such as the level of barriers to entry, such as economies of scale, government regulation, and brand loyalty. When the threat of new entry is high, firms in the industry must be careful not to charge too high prices or earn too high profits, as this will attract new entrants. Threat of Substitutes The threat of substitutes is the likelihood that customers will switch to substitute products or services. It is influenced by factors such as the relative price and performance of substitutes, and the switching costs for customers. When the threat of substitutes is high, firms in the industry must be careful to differentiate their products or services from substitutes, and to make it difficult for customers to switch. Implications for Strategy Firms can use Porter's Five Forces model to identify the key competitive forces that are shaping their industry, and to develop strategies that address these forces. For example, if competitive rivalry is high, a firm may need to focus on differentiating its products or services from those of its competitors. If buyer power is high, a firm may need to negotiate favorable terms with its buyers. And if the threat of new entry is high, a firm may need to erect barriers to entry or develop strategies to deter new entrants. Example The airline industry is a good example of an industry where all five forces are strong. Competitive rivalry is high, with many airlines competing for passengers. Supplier power is also high, as aircraft manufacturers have a great deal of bargaining power. Buyer power is also high, as passengers have many choices when it comes to airlines and can easily switch to a different airline if they are unhappy with the service. The threat of new entry is relatively low, as there are significant barriers to entry, such as the high cost of aircraft and the need to obtain government licenses. The threat of substitutes is also relatively low, as there are few good substitutes for air travel for long distances. Given these forces, it is not surprising that the airline industry is a notoriously competitive industry with low profits. Airlines must constantly compete on price, quality, and innovation in order to attract and retain passengers. Conclusion Porter's Five Forces model is a powerful tool for analyzing the competitive landscape of an industry. By understanding the five forces, firms can develop strategies that address these forces and improve their profitability.  

Sample Answer

   

Porter's Five Competitive Forces Model

Porter's Five Forces model is a framework for analyzing the competitive landscape of an industry. It was developed by Michael E. Porter, a Harvard Business School professor, and published in his 1980 book, Competitive Strategy: Techniques for Analyzing Industries and Competitors.

The five forces are:

1. Competitive rivalry: The intensity of competition among existing firms in an industry.
2. Supplier power: The bargaining power of suppliers to an industry.
3. Buyer power: The bargaining power of buyers from an industry.