Answer to Question #199048 in Microeconomics for aman

Question

1. The Five Forces model of business strategy identifies threat of substitutes, threat of entry, power of buyers, power of suppliers, and the intensity of rivalry as the determinants of sustainable incumbent profitability in a particular industry. Discuss each of the Five Forces and provide relevant examples to support your answers.

Answer 1

1.Threat of new entrants

Newcomers to an industry bring with them new capacity and a desire to gain market share. The severity of the threat is determined by the barriers to entry into a particular industry. The lower these entry barriers are, the less threat existing players face. The need for economies of scale is an example of a barrier to entry.

2. Bargaining power of suppliers

This force examines how much power and control a company's supplier (also known as the inputs market) has over the potential to raise prices or lower the quality of purchased goods or services, lowering an industry's profit potential. Supplier power is determined by the concentration of suppliers as well as the availability of substitute suppliers.They have more power if there are fewer of them. When a business has a large number of suppliers, it is in a better position. Boeing and Airbus, for example, are the only major suppliers. As a result, Boeing and Airbus

3.Bargaining power of buyers

This force assesses the extent to which customers can exert pressure on the company, which has an impact on the customer's price sensitivity. Customers have a lot of power when there aren't many of them and they have a lot of options to choose from.In the airline industry, buyers have a lot of negotiating power. Many online price comparison websites, such as Skyscanner and Expedia, allow customers to quickly compare the prices of various airline companies.

4. Threat of substitute products or services

Customers are more likely to switch to alternatives when products exist outside of the realm of the common product boundaries. To find these alternatives, one must look beyond similar products with different branding from competitors. a few examples The general need of airline customers, in terms of the airline industry, can be said to be travel.

5. Existing industry rivalry

examines the level of current market competition, which is determined by the number of existing competitors and the capabilities of each competitor. When there are many competitors of roughly equal size and power, when the industry is slowing down, and when customers can easily switch to a competitor's offering for little cost, rivalry is high. When we look at the airline industry in the United States, we see that it is extremely competitive for a variety of reasons, including the entry of low-cost carriers, the industry's tight regulation, which places a premium on safety, resulting in high fixed costs and high exit barriers, and the fact that the industry is currently stagnant in terms of growth.