Q2. Describe Porter’s five forces Model.
Answer: Porter suggests that there are five basic competitive forces, which influence the state of competition in an industry. He calls the “structural determinants of the intensity of competition‟, which collectively determine the profit potential of the industry as a whole. Some industries have a bigger profit potential than others, since keener competition means lower profits. These five competitive forces are as follows:
Threat of New Entrants: A new entrant into an industry will bring extra capacity. The new entrant will have to make an investment to break into the market, and will want to obtain a certain market share. The strength of the threat from new entrants depends on two factors:
- · The strength of the barriers of entry
- · The likely response of existing competitors to the new entrants.
Threat from Substitute Products: The products or services that are produced in one industry are likely to have substitutes that are produced by another industry, which satisfy the same customer’s need. Which firms in an industry are faced with threats from substitute products, they are likely to find that demand for their products is relatively sensitive to price.
Bargaining Power of Customers: Customers should want better quality products and services at a lower price, and if they succeed in getting what they want, they will force down the profitability of supplies in the industry. The profitability of an industry is therefore dependent on the customers’ bargaining power.
The Bargaining Power of Suppliers: Just customers can influence the profitability of an industry by exerting pressure for higher quality products or lower prices, so too can suppliers influence profitability by exerting pressure for higher prices.
The Rivalry amongst Current Competitors in the Industry: The intensity of competitive rivalry within an industry will affect profitability of the industry as a whole. Competitive action might take the form of price competition, advertising battles, sales promotion campaigns, introducing new product from the market, improving after sales services or providing guarantee or warranties.
Q3.Define the term “Business policy”. Explain its importance.
