Casualty Actuarial Society (CAS) Practice Exam

How can management use the Five Forces Model?

1. To understand employee satisfaction

2. To evaluate financial statements

3. To improve internal processes

4. To assess competitive advantage

The correct answer is: To assess competitive advantage

The Five Forces Model, developed by Michael E. Porter, is a framework that helps management analyze the competitive environment of an industry. By assessing the five forces—threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products, and intensity of competitive rivalry—management can identify the dynamics that influence profitability and competition within their sector. Using this model allows management to evaluate the competitive advantages of their firm in relation to these forces. For example, if the threat of new entrants is low, a company might enjoy a stronger position in the market, which is a significant competitive advantage. Similarly, understanding the bargaining power of suppliers and buyers helps management strategize on pricing and sourcing decisions, further enhancing their competitive stance. In contrast, while understanding employee satisfaction, evaluating financial statements, and improving internal processes are all important aspects of management, they do not directly relate to the core purpose of the Five Forces Model, which specifically focuses on external competitive factors. Thus, leveraging the Five Forces Model primarily aids management in assessing and developing competitive advantages, making it the most appropriate answer in this context.