Question

Present as an essay form to define what is risk of entry and five force ( INTERNATIONAL STRATEGIC MANAGEMENT)

Answer 1

Risk of entry is defined as when firms stand a chance to lose value when they enter a particular market.

The five industry forces are used to determine the intensity of competition level in an industry. The stronger the forces are, less profitable it is for the firms. The five forces are supplier power, barriers to entry, rivalry, buyer power and threat of substitutes. The five force ensures that it is an attractive industry with high barriers to entry, weak bargaining power of the suppliers, as well buyers, fewer products of substitution, and low competition.

Force of threat of new entrants estimates how difficult it is for the new firms to enter. This force is strong when high capital is required to enter the market, companies have monopoly, firms possess patents, government regulation is strong, and when customer switching costs are high.

Bargaining power of suppliers allows them to sell high priced products or low quality products to buyers. There are many buyers and few suppliers. Suppliers threaten to forward integrate, and cost of switching raw materials is high.

Buyers bargaining power is strong when they demand at low price and there are many suppliers. Very few buyers are there in the economy. Switching costs to other supplier are low. Buyers are price sensitive.

Threat of substitutes is when there are chances of substitutes being available, with attractive prices and better quality. The threat is especially high when the cost of switching is low.

Rivalry is the main determinant of how competitive the industry is and profitable. This force is strong when there are many competitors, and exit barriers are high. Products can be easily substituted and there is low customer loyalty.