Question

Identify the five most common threats facing firms from their local competitive environment that are represented in the five forces framework, and discuss under what conditions firms in a specific industry are most likely to earn an above average profit and when they are likely to earn a below average profit ?

Answer 1

Ques Identify the five most common threats facing firms from their local competitive environment that are represented in the five forces framework and discuss under what conditions firms in a specific industry are most likely to earn an above-average profit and when they are likely to earn a below-average profit.

Five threats facing the firm from their local competition include :

Threat from new competitive entrants- Market that yield high returns will lead to more new entrants which lead to increased competition and reduced profit for a single firm

Threat from competition among existing companies,--Rivalry between the companies is another aspect as high competition reduces profits as they vie for the same market share. The airlines' industry is an example.

The threat of substitutes,---This means the existence of a product outside the scope of common product which fulfills the same requirements and increases the chances of a customer to switch to alternatives. Eg threat for a car company with the introduction of subways or metro trains.

Threat of suppliers---This also depends on the factor of scarcity if there is more supply of raw material, labor then firm will have higher profits and alternatives to choose from but if the opposite happens then the supplier may charge high for the service which puts them in power and reduce firms profit

Threat of buyers.---If the supply outstrips the demand then customer or buyer has more power than supplier which can put the firm under pressure and reduce profits

When these five threats are low, the firm begins to approach monopoly(greater market share) and gain above-average profits as there is less competition, because of no or few entrants, no rivalry from the competitors and no bargaining power to supplier and buyer

Again if the five forces are very high, then it leads to perfect competition and only the best firms are able to earn and others get below-average profit as the market share gets divided amongst the firms thus reducing the profits. Competiton increases and no single firm has the power to influence the market. The perfect competition includes no barrier to entry and exit

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