Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What does Porter's Five Forces model assess?

1. The financial performance of a company

2. The competitive environment of an industry

3. The operational efficiency of a business

4. The marketing strategies of a firm

The correct answer is: The competitive environment of an industry

Porter's Five Forces model is a framework used to analyze the competitive environment of an industry. This model helps businesses understand the dynamics that influence competition and profitability within a given sector. It identifies five key forces that shape the competitive landscape: 1. **Threat of New Entrants**: This assesses how easily new competitors can enter the market. If entry barriers are low, new companies can enter quickly, increasing competition. 2. **Bargaining Power of Suppliers**: This force examines how much power suppliers have over the pricing of goods and services, impacting a company’s bottom line. 3. **Bargaining Power of Buyers**: This looks at the influence consumers have on pricing and quality, which can pressure companies to improve or lower prices. 4. **Threat of Substitute Products or Services**: This identifies how easily customers can switch to products outside the industry, which can affect demand. 5. **Industry Rivalry**: This measures the intensity of competition within the industry, influencing pricing and profitability. By evaluating these forces, organizations can develop strategies to enhance their market position, respond to competitive pressures, and ultimately ensure sustainable profitability. The other options mentioned do not align with this strategic focus on industry competition assessment.