Question

1.) Within the framework of the Five-Forces Model of Competition, describe industry conditions that would lead to the highest level of profitability for industry participants. What about the lowest level of profitability? What are the differences between these two conditions?

Your answers will be short essays and should be three full paragraphs or longer.

Answer 1

Within the framework of the Five-Forces Model of Competition, describe industry conditions that would lead to the highest level of profitability for industry participants. What about the lowest level of profitability? What are the differences between these two conditions?

Definition of Five-Forces Model of Competition:

Five-Forces Model of Competition is an analysis tool or a method of analysis that utilize five forces of the industry to discover and determine the intensity of competition in an industry.

The five forces are as follows:

1. Threat of newcomers in an industry.

2. Threat of replacement.

3. Negotiating powers of customer.

4. Negotiating powers of suppliers.

5. Competitive companies.

Industry conditions that would lead to highest level of profitability for industry participants are as follows:

a. Entry Barriers: The entry barriers are the barriers set in place that determine how easy or hard it is to enter an industry. Therefore, if the barriers of entry are hard and no new comer can enter easily, the profitability within the industry will be high for those in the industry.

b. Strong bargaining powers of the suppliers: if supplier has strong bargaining powers, then he can create pressure in the industry and can increase company’s profitability.

c. Weak bargaining powers of buyer: if the buyers is weak and does not have any substitute for the products they are seeking, they will have to pay higher prices. Leading to industry profits.

Industry conditions that would lead to lowest level of profitability for industry participants are as follows:

a. The threat of substitutes: if a product can be easily available in substitutes, then the buyer will have other options to buy product of cheaper value. And, in this case the profitability would be low in the industry.

b. Competitive rivalry: if the rivalry in the industry is intense and is competing each other for market share or profitability. Then, due to increased competition in market the profitability will be low.

c. Strong bargaining power of the buyer: if the bargaining power of the buyer is strong and buyer can negotiate over product price or when buyer demands the higher quality products or lower prices, this affects business profitability.

Different between the two conditions:

The difference between the two conditions is that, the industry participants can or cannot make profit depends upon the condition of the above mentioned five market forces.

If market forces are in favour of the industry participant to make profit as mentioned above, they can make profit. If the market forces are not in favour of the industry to make profit as mentioned above, they cannot make profit.