In the 5F5I assignment is assigned five items from the item listed in Porter’s 5 forces. For each item you need to: (1) explain the item, (2) explain how it affects the specific force, (3) bring real-world example that shows both the item and its effect on the specific force (the effect may be either to reduce or to increase the specific force). There is no need to do any/much research; you can use examples based on your / common knowledge; the example can be of either direction (that is, the effect can be of either increase or decrease in the force); please find new examples (can’t use our class examples) 

The five items are;

1.Rivalry: Fixed costs are 

 2.Rivalry: Industry demand growth rate is 

3. Rivalry: Buyers’ switching costs are 

4.  Buyers: Extent of buyer’s profits is 

5.  Rivalry: Number of competitors is 

J.R.

Meilich BUS 444

5 Forces 5 items Assignment

#4 New entry: Capital requirements are

The threat of potential entry is high when capital requirements are low. This means that

any new entrant who is interested in entering the market can do so easily because the start

up costs may be very low. An example of this type of industry would be at-home

businesses that can sell their products online and require very little to no money to sell

the products. For example, a person who knits sweaters at home and then sells them

through online sites does not have the same start up costs as a firm who rents a local retail

space to sell products and overhead costs such as electricity. It is for this reason, that

firms or people in this industry face a higher threat by new entrants as they bring new

options to the marketplace. As more new entrants enter the industry, rivalry also

increases and profitability decreases.

#9 New entry: Securing favorable location

The threat of potential entry is high when securing a favorable location is easy for new

firms in the industry. Most of the incumbents have selected their location strategically

and the locations that remain for new start-ups may be low. In this case, the threat of

potential entry is lower. An example of a firm that does very well in reducing the threat

of potential entry by making it difficult to find favorable locations is McDonald’s. They

often take the most favorable locations for themselves.

#12 New entry: Government policy: regulation is

The threat of potential entry is high when regulation is low. This means that when there is

little government regulations imposed on a certain industry, it makes it more attractive

and much easier for new entrants to enter the market. A good example of an industry that

has well-established policies that make it difficult for new entrants to enter the market is

the physician and health care industry. It is regulated with laws that require many licenses

and other approvals before a firm can enter the market. The existing firms in the industry

are benefitting from this as there are fewer rivals.

#19 Rivalry: Fixed costs are

The intensity of rivalry is higher when fixed costs are high because there is a need to sell

in higher volume to spread the costs or break even. An example of an industry that has

high fixed costs could be one in which a company produces cell phones. They must sell

higher volumes in order to cover the fixed costs but the problem is that the other firms in

the industry are in the same situation so rivalry heats up when all the firms in the industry

try their hardest to gain the most market share.

#34 Suppliers: Availability of substitute supplies is

The power of a supplier is high when the availability of a substitute is low. When there

are fewer substitutes, the supplier is in control because the buyer cannot easily change to

something different and thus must continue to make business with the supplier. An

example for this can be a company that supplies paint for cars that are manufactured. The

buyer, which is the manufacturer of cars in this example, has very little choice of other

materials that it can apply to a car instead of paint. So here, the availability of substitutes

is low and the car manufacturer most likely remains in business with the paint supplier.

S.L. Bus 444 Meilich

Porter’s 5 Forces

Item 1: Availability of Substitute Supplies (power of a Suppliers group)

When there is a low availability of substitute supplies the suppliers for an industry the

supplier has more power than if there was a high availability of substitute supplies. For

example, there are not many substitutes (i.e. different makers of) for anesthesia, a supply used in

operating rooms. Doctors, hospitals and insurance companies must pay whatever those few

companies charge because you cannot operate on a person without it. However if there is a high

availability of substitute supplies—like lumber the supplier has less or no power and must

accept either what the purchaser is willing to pay or at the very least, be willing to negotiate the

price of the supply needed.

Item 2: Incumbents’ control of access to raw materials/inputs (Threat of potential entry)

The threat of new entry is very low if the firms already in the industry already have

control of the raw materials needed to produce the outputs of that industry. For example if

you need iron to make cast iron pans, you have to get the iron from a mine, quarry or refinery

that deals in the production of iron. However, if your competitor(s) own(s) or has/have contracts

with most of these sources of iron, there is a very low chance that you will be able to break in to

the cast iron market, unless you have the capital required to find, open and operate the sources

yourself. On the other hand the threat of new entry is very high if there is an abundance of the

materials needed and there is no incumbent control of those resources. For example plastic

pellets for creating different plastic products are very generic. Wet ‘n’ wild uses plastic pellets in

its lipstick cases but it doesn’t have complete control over those plastic pellets and if I decided I

wanted to make a line of lipsticks I could go to the same plastic pellet producer to get raw

material for my lipstick cases.

Item 3: Concentration of suppliers relative to industry (power of a Suppliers group)

This is common sense, if there are many firms within an industry asking for supplies

from a small number of suppliers the power of the suppliers is very high. I’ll use the same

example from before, with the anesthesia. There are very few companies that actually produce

anesthesia and many hospitals, surgeons and patients that require it for their use. Those suppliers

S.L. Bus 444 Meilich

of anesthesia can effectively charge whatever they want and they’ll get it. The opposite is true

for an industry that is run by an oligopoly or monopoly. The fewer firms there are in

comparison to suppliers the less power the suppliers will have.

Item 4: Product/Service differentiation (Threat of potential entry)

If an industry is offering a unique product it is very difficult to break in to it making

the threat of potential entry very low. A good example of this is screws for space craft in

NASA, there is probably very few people who could make a screw that is that specialized—and

who NASA would trust to make those screws—entry in to this market would be very difficult. In

contrast, Home Depot carries a wonderful variety of screws that no one cares anything about;

virtually anyone can use these screws interchangeably—there’s low differentiation between them

and therefore a higher threat of entry. If you have a factory and startup capital you can make

your own brand of generic screw just as easily.

Item 5: Available Substitutes (power of substitutes)

The number of available substitutes that are good/superior greatly increases the power of

the substitutes. For example if you have a small wood working shop that has power tools that

require electricity to work and the power goes out but you have a backup generator that kicks in

almost immediately and allows you to continue your work uninterrupted, that backup generator

is a powerful substitute. In addition to this you could also have back up solar power, tesla

batteries etc. to get the electricity you need to run your business. But if all you have are few, poor

substitutes like using hand tools (the non-electric kind) when the electricity goes out that counts

as a poor substitute.

E.W.

14. Rivalry: Their size and power is

When the companies’ size and power is equal, intensity of rivalry is high. For example,

when two sandwich shops opened in the same town, they do not compete with franchise

restaurants such as Benihana or Olive Garden. The companies’ size is different and the power is

different, besides, their target competitors are different. Since both sandwich shops are family

owned businesses, they compete with each other and they think they will make a profit against

each other. If there are many similar restaurants there, you will have many competitors;

therefore, the intensity of rivalry is high. Benihana or Olive Garden are not their rivals or

competitors. They need to compete with the same size and power and they will think they will

make more profits.

23. Rivalry: Exit barriers are

Exit barriers are opposite side of barriers to entry. There are five categories of exit

barriers such as specialized assets, high cost of exit, strategic interrelationship, emotional

barriers, and government/ social restrictions. I would like to explain exit barriers applying into

the car industry. A company makes only a car roof for a specific car, but the company has to

close their business. Since the company is not making sufficiently high profits, which is zero

asset, most likely they cannot sell the machine to any companies. The shape and the size of the

roof were created for a specific car model; therefore, the intensity of rivalry is high. There is a

huge risk if they cannot resell to another companies or anybody their compressors and machines

after they closed their business. On the other hand, if other companies are able to repurchase the

compressors and machines, then exit barriers are low as well as the intensity of rivalry is low.

Another example is that when a family own business, you have no choice to leave the company

then emotional barriers are high which means the intensity of rivalry is high. Government/ social

restrictions are when the government wants you to stay in the business even though you do not

want to stay there, exit barriers are high. When the exit barriers are high then the intensity of

rivalry is high. It is not common these problems in the US, but it happened in different countries.

When a company has one of these categories is high, then exit barriers are high.

30. Buyers: Buyers’ knowledge about the industry’s cost structure is

When a buyer knows the price of products, the industry’s cost structure is high, the power

of a buyers group is high. If a buyer knows the cost of coffee beans, for example, the buyer

knows about the 10% of profit margin is reasonable, then the power of a buyers group is high.

37. Suppliers: Threat of forward integration by the supplier is

Suppliers can make an industry more competitive and decrease profit potential for the buyers if

they are strong. One the other hand, weak suppliers are less competitive and increase profit

potential for the buyers. For instance, retail clothing outlets who owned by the manufacture is

one of the forward integration. When retail clothing companies start producing their own clothes

and sell them directly to their buyers instead of purchasing from their suppliers and then sell to

their customers, the supplier’s power is high. In addition, their buyers are not price sensitive and

uneducated regarding the product, then supplier power is high.

38. Suppliers: Available substitutes/ if there are good/ suppliers?

If there are no substitutes for the products, there is no option for new entrants to doing the

business. For example, the cigarette industry. Substitutes of cigarettes are the patch, the nicotine,

the cigarette gum, the e-cigarette, the hookah, the cigarette mint, etc. If many substitutes in the

cigarette industry are good, then the power of substitutes is high. The cigarette, the nicotine, and

the patch are not the same product, but those are meeting the same need with work in a different

way. Again, substitute is any product that satisfies the same need, but in a different way.

1Meilich, BUS444

Porter’s 5-Forces Model

Threat of POTENTIAL ENTRY is high when:

Product/Service differentiation is low perceived / real uniqueness (brand loyalty

Buyers’ switching costs are
(3 types: Monetary, Cognitive, Emotional)

low for the buyers, after purchase! [Mac vs PC]
(for the next purchase)

Economies of scale are low Increased efficiency in Volume per Period
In: production, R&D, marketing,

distribution, service.

Capital requirements are low plants & equipment, working K, R&D

Incumbents’ proprietary knowledge is low patents, trade secrets

Experience curve effects are low experience curve: labor component, or complex production; Effect of cumulative
volume; need be non-transferable

Incumbents’ control of access to raw materials /
inputs is

low [e.g., mines]

Incumbents’ control of distribution channels is low

Securing favorable location easy

Incumbents’ access to government subsidies is low Note: These subsidies are assumed not to be
available for any new entrants

Expected retaliation low

Government policy: regulation is low

attractive industry = high profit potential => more new entrants => more rivals, more rivalry
 build ENTRY BARRIERS

2 Meilich, BUS444

Intensity of RIVALRY is high when:

Competitors = firms in the same industry, competing over same customer base

[usually: similar products; utilizing similar production techniques]

Number of competitors is

Their size & power is

Diversity of competitors is

many

equal

extensive

mentality differences, hard
to cooperate

Industry demand growth rate is low win/lose situation

Product / service differentiation is low easy to compare

Buyers’ switching costs are low switching costs for
BUYERS after purchase!

Fixed costs are high need high volume to spread
costs/ break even

Capacity increases are in increments that are large Incentive to over-produce ->
dumping

Perishability high perishable: produce,
fashion, movies, airline

seats

Strategic stakes (opportunities) are high High chance to make big $
increase willingness to take

risks and fight

Exit barriers are: high too many desperate &
inefficient competitors

Specialized assets sunk costs

High cost of exit

strategic inter-relationships needed for other business

Emotional barriers

Government / social restrictions

3 Meilich, BUS444

Power of a BUYERS group is high when:

Volume of purchase is (% of industry’s capacity) high relative to the focal industry, not

buyer industry! [whatever each

buyer/decision maker buys]

Percentage of total buyer’s cost spent on the

industry’s product/service is

high = price sensitivity

Product / service differentiation of the industry is low easy to shop and compare

Buyer’s switching costs are low After the purchase

Threat of backward integration by buyers is high [tapered integration]

Buyer’s knowledge about industry’s cost structure is high information = $

Extent of buyer’s profits is low = price sensitivity

Cost savings from the industry’s product are low Same effect as buyer’s profits

 A ‘strong’ buyer: has either the ability or motivation to extract lower prices from the focal industry.
 Important distinction between types of buyers and groups of buyers:

Buyers can be divided into several types [e.g., young vs old, educated vs. not, businesses vs. consumers];
Within each type, we are looking at the typical group – a group therefore may contain a single buyer, or
more than one. What’s important is that each group acts as a single decision maker [to buy or not to buy,
etc.]. A group of buyers may contain a single person/company, or a collection of persons/companies.

Reduce buyer power by:
– make buyer’s business more profitable
– diversify buyer base
– differentiate, improve quality
• Important to identify both the direct buyer and the final customer/consumer

4 Meilich, BUS444

Power of a SUPPLIERS group is high when:

Concentration of suppliers relative to industry is
(i.e., supplier group is dominated by fewer companies)

high

Availability of substitute supplies is low Substitute! (eg – for cola,
sugar vs. high fructose

corn syrup)

Differentiation of the supplier’s products/services is high Uniqueness of raw material
/ inputs

Switching costs of the focal industry are high For the industry, after
purchasing supplies

Threat of forward integration by the supplier is high i.e., supplier moving into
the focal industry

Concentration = % of market share held by largest 2, 4, 8, .. firms.
• Suppliers of: raw material, components, labor, …
 A ‘strong’ supplier: has either the ability or motivation to charge more from, or deliver less to, the focal

industry.
 Important distinction between types of suppliers and groups of suppliers:

Suppliers can be divided into several types [look again at your PVCh!]. Within each type, we are looking
at the typical group – a group therefore may contain a single supplier, or more than one. What’s
important is that each group acts as a single decision maker [to sell or not to sell to our industry, etc.]. A
group of suppliers may contain a single person/company, or a collection of persons/companies.

Power of SUBSTITUTES is high when:

substitute = any product that satisfies similar need/s, but in a different way

Available substitutes many

(If there are any substitutes -) These substitutes are good/superior

– technological advancement  better price/performance ratio for the substitutes.
– Improvements: new technology can make the whole industry obsolete!

Porter’s 5-Forces Model
Threat of POTENTIAL ENTRY is high when:
Intensity of RIVALRY is high when:
Power of a BUYERS group is high when:
Power of a SUPPLIERS group is high when:
Power of SUBSTITUTES is high when:

A.N. Professor Ofer Meilich Bus 444 9/23/2016

5F5I

21. When perishability of items is high, so too is rivalry among firms. An obvious

example of this is with grocery stores. Nearly every item sold at a grocery store has a shelf life.

Companies must compete to sell these perishable items before they become useless and

unmarketable. Because of the small window of time to sell a tomato, for example, grocery stores

will use aggressive sales tactics to incentivize the buying of their products. When walking

through the produce section, one might see a buy one get one free offer on blueberries or an offer

to buy five packs of cherry tomatoes for five dollars when a single pack is sold for two dollars.

Items such as kitchen supplies, on the other hand, do not perish easily and thus we will likely

never see a deal for buying three ladles for the price of one.

32. Buyers have high power when an industry’s products have little cost saving

value. When an industry has low cost savings in regards to its product, they do not have much

leverage over the buyer, and thus the buyer has more power over the seller. A buyer will be

highly price-sensitive to products that do not save them much money. For example, printers have

a high up keep, and thus those products have a low cost saving value. Because of this, a buyer

will take a lot of time deciding on a printer, and will weigh their options before buying a

company’s printer that has the potential of having a higher upkeep then another printer.

36. If switching costs of the focal industry is high, supplier power is high. An

example of this is if two firms were engaged in just-in-time manufacturing, in which suppliers

must be highly reliable and consistent with their shipments. If a company were to switch from a

reliable supplier, they would potentially incur the costs of having to find a new, reliable supplier

that could handle their just-in-time supplying needs.

Another example could be with electricity. It is extremely costly to leave an electricity

company’s service in lieu of solar energy. Thus many people who want to have a smaller carbon

footprint can’t do so due to financial reasons.

8. If incumbents’ control over distribution is low, threat of entry is high. An example

of a new entrant struggling to come into an industry could be that of accessing a retail store. If a

new brewery opens up, it will be difficult for the brewery to get its beer to be sold at retail stores

across the US. An example of a distribution channel that is easy to access could be online

jewelry websites. It is quite easy to make jewelry and sell it on a website like Etsy, thus many

new entrants can be allowed entrance into the jewelry industry.

3. If economies of scale are high, it is very difficult for a new entrant to enter the

market. If a burger restaurant wanted to compete against McDonalds, they would have an

exceptionally, or nearly impossible, task of competing with McDonalds’ prices. This is due to

McDonalds having economies of scale. Because of their undeviating menu options, production

costs are kept low and predictable. They also mass produce their raw materials and a vertically

integrated on many levels, allowing for them to save costs and thus keep prices low. They

purchase massive amounts of raw materials as well, which allow for cost savings with bulk buys.

All of these factors would stifle the competitive ability of a start up fast food restaurant.