CIPS L4m6 Supplier Relationships · Free Practice Question Medium
Question 15
According to Porter’s Five Forces model, which of the following are barriers to new entry that can deter potential competitors from entering an industry? Select TWO that apply.
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A
High rivalry among existing competitors
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B
High bargaining power of buyers
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C
High threat of substitute products or services
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D
High customer loyalty for existing brands
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E
High capital requirements
Reveal correct answers
Correct answers: D, E
Explanation
The correct answers, High customer loyalty for existing brands and High capital requirements, serve as significant barriers to entry in an industry. These factors contribute to the challenges new competitors may face when attempting to establish themselves against well-established firms.
High customer loyalty implies that the existing brands have successfully cultivated a satisfied customer base. These customers have a strong preference for the products or services offered by these brands, which often results from consistent quality, reliability, or emotional connection. As a result, these customers are less inclined to experiment with offerings from new market entrants, making it difficult for these newcomers to gain a foothold.
On the other hand, High capital requirements refer to the substantial financial investment necessary for a new entrant to even begin competing in the market. This includes the costs associated with acquiring fixed assets such as property, plant, and equipment, as well as the expenses related to marketing efforts, research and development, and other operational aspects. The need for such a significant initial outlay can deter many potential entrants, as it poses a considerable risk without any guaranteed return.
Together, these barriers not only protect the market share of existing firms but also provide them with a competitive edge. They limit the number of new competitors that can afford to enter the market and sustain the necessary investment over time. Consequently, these barriers help maintain the status quo within the industry, ensuring that the threat posed by potential new entrants remains low. This dynamic can lead to a more stable market environment for the incumbent firms, allowing them to focus on growth and innovation rather than defending their market position against a constant influx of new competitors.
If you want to learn more about Porter’s Five Forces model and how it can help you analyse the attractiveness and profitability of an industry, you can check out these articles:
Porter’s Five Forces - Strategy Skills Training From MindTools.com Porter’s Five Forces: Analyzing the Competition Porter’s five forces analysis - Wikipedia
Reference: CIPS L4M6 study guide page 33-38 / The new syllabus 2024
LO 1, AC 1.3
Discussion
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