Porter's five forces analysis for UK's venture capital industry - Essay Example

This industry emerged in 1945 following the adoption of the Macmillan committee report, the industry was founded by three banks and they include private bank of England, London clearing bank and the Scottish clearing bank. It was formed due to capital raising problems faced by small companies that were emerging. The following is a discussion of the industry using the Porter’s five force model. Porter identified five forces that influence and shape an industry and they include rivalry, barriers to entry, buyer power, supplier power and substitution threat, the following is a discussion of the five forces and the characteristics of the UK venture capital industry.

This refers to the degree of competition. The degree of competition in markets is determined by the concentration ratio which is a measure of market share, as many firms enter an industry the profits of the firm decline. (Porter, 22) A firm will choose a number of strategies in order to increase its market share, a firm will reduce prices to increase market share, vertical integration which include integration with suppliers and buyers and differentiation of its products. Rivalry intensifies when many firms enter the industry, existence of substitutes, existence of exit barrier and when product differentiation of products is limited.

(Porter, 22) Degree of competition in the venture capital market is high given that there are over 1,300 firms in the industry. Venture capital industry products also have close substitutes which include loans and equity, therefore the industry firm’s degree of rivalry is considerably high. Rivalry has intensified over the years with the entry of many firms into the industry, initially there were only 3 firms in the industry and over the years many firms have entered the market. (Lerner, 41) The existence of substitute products produced in an industry constrains a firm in the industry to increase prices.