Question

List Porter 5 forces and explain when each force is more likely to be low/high.

What is the relationship between Porter 5 forces and profits.

How to apply the tool  VRIO and how the framework functions. What is the level of analysis for firm level, resource level and infustry level?

What is the relationship between economic returns and competitive advantages.

Answer 1

Porters Five Forces- It is a tool for identifying and analyzing the competitive forces existing in a particular industry and determining its strengths and weaknesses. The five forces are:

1. Supplier power- It refers to how easily suppliers can drive up their prices. Thus, if the number of suppliers is high or there are low switching costs between them, then they have the low bargaining power of driving up prices.

2. Buyer Power- It refers to how easily customers can drive prices down. A smaller or more powerful client base indicates that each customer has the power to lower down prices.

3. Competitive Rivalry- It refers to the number of competitors in the market. Thus, the larger the number of competitors and their equivalent products or services, the lesser will be the power of a company.

4. Threat of Substitution- If there is a presence of close substitute products in a market, then customers are more likely to switch to alternatives in case a company increases the prices of its products.

5. Threat of New Entrants- An industry with strong barriers to entry like patents, capital requirements, government policies, or economies of scale, it will be more difficult for new companies to enter the market.

In any industry, if the above five forces are lower, then the company would have the capability of increasing its prices and revenues in the market, leading to higher profits.

VRIO framework is a tool for analyzing the resources of an organization. The dimensions of the framework are:

Value- It refers to the added value of a resource of a company that enables it to exploit opportunities or defend against threats.

Rareness- It refers to how limited or rare a particular resource is and whether any other company can acquire it.

Imitability- It refers to how much it will cost to other companies for imitating a resource.

Organization- It refers to whether a resource can be the source of competitive advantage for the company.

VRIO analysis is a firm-level analysis as it examines the company's micro-environment. It helps in analyzing the financial, human, material and non-material resources of a firm.

Competitive advantage refers to the condition that allows a company to produce a good or service of equal value at a lower price or in an improved way. Thus, it makes a firm's goods or services superior to that of its competitors in the market. Different factors considered in this include its cost structure, branding, quality of product offerings, distribution network, customer service and intellectual property. This, in turn, helps the company to achieve higher profit margins compared to its competition and generate value for the shareholders. Hence, it can be said that having a competitive advantage helps in generating higher economic returns for a company.