The costs of producing steel declined substantially from building a conventional hot¬-rolled steel mill down to the new mini-mill technology that requires only scrap metal, an electric furnace, and 300 workers rather than iron ore raw materials, enormous blast furnaces, rolling mills, reheating furnaces, and thousands of workers. What effect on the potential industry profitability would Porter's Five Forces framework suggest this new technology has? Why?
Source: Economics for Managers, 7th Edition, Chapter 10/ Q3
Before we get into the answer for this question, it's important that we review the finer points of Porter's Five Forces model.
1. Supplier Power: A producing industry requires raw materials - labor, components, and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products. Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry's profits.
2. Threat Of Substitutes: In Porter's model, substitute products refer to products in other industries. To the economist, a threat of substitutes exists when a product's demand is affected by the price change of a substitute product. A product's price ...