3.1 Business Objectives and Strategy Flashcards

1
Q

How is Corporate Objectives defined?

A

The objectives of a medium to large sized business as a whole.

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2
Q

How is Departmental and Fundamental Objectives defined?

A

The objectives of a department within a business.

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3
Q

How is Mission Statement defined?

A

A brief statement, written by the business, describing its purpose and objectives, designed to encapsulate its present operations.

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4
Q

How is Objective (or goal) defined?

A

A target of or outcome for a business that allows it to achieve its aims.

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5
Q

How is SMART defined?

A

Acronym for the attributes of a good objective; specific, measurable, agreed, realistic, timed.

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6
Q

What are Business Aims?

A
  • All businesses have aims – things they wish to achieve in the short and long term.
  • ultimately, aims are what the business is striving to achieve
  • The business aims will be less specific and more general; to grow; to make more profit;
  • A business will communicate these aims through their mission statement
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7
Q

What is a Mission Statement?

A
  • A mission statement declares the business’s overriding purpose, but may also reflect its goals and values
  • In general terms it is considered to be the company’s core activities and may also reference such information as the markets in which it operates
  • What its key commercial objective are, in what way it values its stakeholders or what its ethics involve
  • a good mission statement should help guide the decision making of the firm.
  • a firm may share a mission statement to make a commitment to its customers or to be used to bring a company’s workforce together with a shared purpose
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8
Q

What are Corporate Objectives?

A
  • are objectives set by senior managers and directors for a company.
  • they should be specific to the company, its particular history, visions of the future and sit well with its missions statement.
  • should focus mainly on desired performance and results of the business over time (medium - long term), and may include such as goals as market share, profit levels, creation of new products or processes, resources usage and scale economics.
  • to set successful corporate objective they must be SMART objectives.
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9
Q

What are SMART Objectives?

A
  • Specific –> objectives clearly sets out what the business is aiming to achieve and refer to a particular aspect or function of the business ( easily defined)
  • Measurable –> quantifiable and can be measured. Most corporate objectives will have a finance or quantifiable element because this makes it easier to measure the success of the business
  • Agreed –> everyone responsible for achieving the objective agrees on what the target is and what needs to be done.
  • Realistic –> ensure that the objective can be met within the resources available and the market conditions. if an objective is too unrealistic and it failing is likely to have a negative impact on the business
  • Time - Bound –> based on explicit timescale. All objective must have an end point to ensure urgency and a point at which the objective can be assessed
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10
Q

What are Departmental and Functional objectives?

A
  • these are more specific than corporate objectives which set the day-to-day goals and may include human resources, finance, operations, logistics and marketing.
  • these all refer back up the hierarchy to the corporate objective and missions statements, so that the goals and activities of the business are consistent
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11
Q

What is the Objectives Hierarchy?

A
  • it is a tool that helps analyse and communicate a project’s objectives
  • Aims
  • Mission Statement
  • Corporate objectives
  • Functional Objectives e.g. Finance, Marketing , Operations etc.

An objective will ultimately flow from the firm’s overall aim and be effective if it contributes to achieving the level above

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12
Q

What are the difference in objective set between small and large firms?

A

Small businesses may have a wide variety of objectives, such as:

  • To ensure that the company breaks even at he end of the tax year
  • to improve the firm’s liquidity in the next six months
  • To increase sales by 10% over the next 3 years
  • To hire 5 new staff with skills in marketing, and build a strong marketing department over the next year

By contrast, the objective of large firms and MNC tend to be most financial. This is because they have many stakeholders to satisfy, the for most being the shareholders.
- Financial objective are more objective and quantifiable therefore easier to communicate to a wide variety of interest parties.

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13
Q

Why may a business need to critically assess its missions statements and corporate aims?

A
  • Mission statement must be constantly assessed to ensure than have continued relevance for the business
  • Sometimes they are not appropriate anymore e.g. a company’s missions statement includes respect and integrity would not align if fraud were to be reported
  • Many organisations may put in place a mission statement that is appealing to its customers, but they may need to consider the balance of the appeal of some of these objective to their customers if the organisation is not achieving profit for shareholders
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14
Q

How is Corporate strategy defined?

A

The plans and policies developed to meet a company’s objectives. It is concerned with what range of activities the business needs to undertake in order to achieve its goals. It is also concerned with whether the size of the business organisation makes it capable of achieving what is set.

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15
Q

How is Distinctive Capability defined?

A

A form of competitive advantage that is sustainable because it cannot easily be replicated by a competitor.

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16
Q

How is Diversification defined?

A

Developing new products in new markets.

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17
Q

How is Penetration defined?

A

Using tactics such as the marketing mix to increase the growth of existing products in an existing market.

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18
Q

How is Portfolio Analysis defined?

A

A method of categorising all the products and services of a firm to decide where each fits within the strategic plans.

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19
Q

How is Product Development defined?

A

Marketing new or modified products in existing markets.

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20
Q

What is Business Strategy?

A
  • A Strategy is the medium to long term plan through which an organisation aims to attain its objectives.
  • Strategies are plans which include details of what should be done to achieve the businesses objectives.
  • Strategies should not be considered until the company’s corporate and functional objectives have been set.
  • A successful strategy will give the firm an advantage in the competitive market place and fulfil stakeholder expectations
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21
Q

How is a Corporate Strategy developed?

A
  • developing an effective corporate strategy requires a significant amount of time and research.
  • the process of strategic ;planning involves looking critically at what the business has done before and what it may need to do in the future in order to achieve its corporate objectives.
  • This is a very big task but there are numerous tools to help managers during the planning process, including value chain analysis, Ansoff’s Matrix, Porter’s Strategic Matrix and portfolio analysis
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22
Q

What is Ansoff’s Martrix?

A
  • Ignor Ansoff was an applied mathematician and influential business strategist. He developed a strategic tool to help a business achieve growth
  • Ansoff’s Matrix is a useful decision-making tool because it allows the owners of a business to consider a number of factors will determine its corporate strategy:
  • the level of investment in existing and new products
  • the exploitation of different markets
  • the growth strategy for business
  • the level of risk the business is willing accept.

Ansoff’s Matrix reveal four possible strategies that a business might adopt. The key issue is that risk becomes greater the further a firm strays form its core of existing products consumers

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23
Q

What does Ansoff’s Matrix look like?

A
  • A Matrix with Product on the x-axis and Market on the y-axis. With Existing and New as the two titles
  • From top left to bottom right the sections are:
  • Market penetration
  • Product devloepment
  • Market development
  • Diversification
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24
Q

What is Market Penetration in Ansoff’s Matrix?

A

the purpose of market penetration is to achieve growth in existing markets with existing products. there are several ways a business can achieve it:

  • Increase the brand loyalty of customers so they use substitute brands less frequently e.g. loyalty scheme
  • Encourage consumers to use the product more regularly e.g. encouraging people to eat cereal as a night-time snack
  • encourage consumer to use more of the product e.g. offering a maxi-sized crisp packets rather than standard-sized
  • this is the strategy with the lowest risk as it involves the lowest level of investment. in addition the business will have a good understanding of the product and how the market might respond
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25
Q

What is Product Development Ansoff’s Matrix?

A
  • Product development is concerned with marketing new modified products in existing markets
  • this might be an appropriate strategy to adopt where the product life cycle is traditionally short or where trends or technology change quickly
  • This strategy is associated with product innovation and continuous development, which some businesses have gained a successful reputation from doing so e.g. Apple and Cadbury’s
  • there is more risk involved in product development than product penetration and heavy investments in R&D and promotion are needed
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26
Q

What is Market Development in Ansoff’s Matrix?

A
  • Market development involves the ,marketing of existing product in new market. The most basic form of the strategy is entering geographically new markets.
  • This is not always simple as customers from different places may have different tastes and preferences.
  • This strategy relies heavily on understand local, habits, tastes and needs.
  • even where market development is appropriate and successful it is often necessary to make slight modification to suit the new market, even if this is simply changing the name to more acceptable or accessible in a different language, or labelling the product differently to meet international laws
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27
Q

What is Diversification in Ansoff’s Matrix?

A
  • Diversification occurs when new products are developed for new markets. It enables a business to move away from reliance upon existing market and products, thus allowing the company to spread risk and increase safety.
  • if one product faces difficulties or fails, a successful product another market may prevent the business overall facing problems.
  • However, diversification will take a business outside its area of expertise, and for this reason it is the strategy with the highest risk.
  • this might mean that its performance in new markets is relatively poor compared with more experienced operators.
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28
Q

What is Porter’s Strategic Matrix?

A
  • developed by Michael Porter to identity the source of competitive advantage that a business might achieve in a market.
  • Porter stated that any business that does not adopt one of these generic strategies is ‘stuck in the middle’ and unlikely to succeed
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29
Q

What does the Porter’s Strategic Matrix look like?

A

A triangle with the points labelled:

  • Focus (cost focus and differentiation focus)
  • Cost leadership
  • Differentiation
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30
Q

What is Cost Leadership in Porter’s Strategic Matrix?

A
  • This involves striving to be the lowest- cost provider in the market.
  • This does not necessarily mean that the business will offer the lowest price, although this may be an option. Generally speaking, the firm that is able to operate as the lowest-cost provider in am market will compete in two ways.
    1 - Increase profits, while still charging market level prices.
    2 - Increase market share, while charging lower prices ( still marketing a profit since costs are reduced)
  • it is generally held by only one business as it requires significant market share
  • the business can minimise costs by operating on a large scale it can leverage economies of scale, negotiation with suppliers, efficiency and streamlining operations.
  • A cost leader will also offer a ‘ no frills’ product to minimise the cost and the level of service and variation in the product will he minimal and the scale associated with mass production
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31
Q

What is Differentiation in Porter’s Strategic Matrix?

A
  • This involves a business operating in a mass market but adopting a unique position instead of the lowest-cost position.
  • Unlike cost leadership. a differentiation strategy may be adopted by any business providing it can deliver a defensive way of differentiating itself from competition
  • a business may add value to its product by having good quality, design brand identity or customer service
  • An advantage of operating under a differentiation strategy is that the business may be able to charge a premium price in customers value their USP.
  • However, it is difficult to guarantee that the rewards of differentiation will justify the additional cost as differentiating requires good R&D and effective marketing.
  • Comparatively, differentiation is much easier to copy than cost leadership unless the differentiation is sustainable and defensible e.g. acquiring patents or trademarks.
32
Q

What is Focus in Porter’s Strategic Matrix?

A
  • The strategy involves targeting a narrow range of customers in one of two ways. A focus strategy is closely aligned to niche marketing. it tends to be used by small or very specialist firms.
  • by targeting a small market segment it can understand its customers specific need and create high level of customer satisfaction and loyalty.
  • Furthermore, by definition a focus strategy will result in less competition and higher profit margins,
  • On the other hand as the market is very small, a firm adopting this strategy tend to have low bargaining power with suppliers. A focus strategy can take one of two forms:
  • Cost focus –> emphasising cost-minimisation with a focused or niche market e.g. Aldi focuses on low price food even though they arent cost leaders
  • Differentiation focus –> pursing different strategies within a focused market e.g. Ferrari targets a very small percentage of the popular for its Supercars
33
Q

How can a business achieve competitive advantage through distinctive capabilities?

A
  • distinctive capability is a form of competitive advantage that is difficult for competitors to understand, let alone imitate
  • The importance of distinctive capability is that because it cannot be easily reproduced, it can be the source of a sustainable competitive advantage
  • The three types of distinctive capability are: Architecture, reputation and Innovation
34
Q

How is Architecture a Distinctive Capability?

A
  • refers to contracts and relationship within and around an organisation
  • these include relationship between the business and its employees, and the collaborative relationship it has with partners, suppliers and customers.
  • These effective relationships allow a business to add value by being more efficient through easy ope transfer of-knowledge and information.
  • the value of this architecture is often intangible and closely linked to the culture within an organisation
35
Q

How is Reputation a Distinctive Capability?

A
  • closely linked to brand image and takes time for a business to build
  • the organisational characteristics cannot be built overnight, and any negative publicity or deterioration of the brand can have a lasting impact on a firm’s reputation
36
Q

How is Innovation a Distinctive Capability?

A
  • often a sustainable competitive advantage will arise when a business is able to innovate by developing a new product or process in the production of a product
  • For successful innovation to take place, considerable investment in R&D and in no small part luck is often required
  • Sometimes innovation will not only give a business a distinctive capability, but on occasion it will also create a whole new market or industry.
37
Q

What is the Aim of Portfolio Analysis?

A
  • it is a method of categorising all of the products and services of a firm (its portfolio) so as to decide where each fits within the strategic plans.
  • The product are then evaluated according to their competitive potential and potential growth - this involves a two step process:
  • Step 1 –> Give a full and detailed overview of all of the products and services in the current business portfolio
  • Step 2 –> look at the performance of each of these products and service by examining
  • current and projected sales and cost
  • competitors activity and future competitions
  • risk that may affect performance
38
Q

What is the Boston Matrix?

A
  • The Boston Consulting Group created an advanced tool for portfolio analysis called the Boston Matrix/ Growth Share matrix
  • they categories these products into one of four different areas based upon their current and potential market share or market growth.
  • The 4 areas are –> Stars, Cash cows, Question marks (problem child/ wildcats), Dogs.
  • The Boston Matrix may be used to assist a business in identifying which strategy to adopt.
39
Q

What is the Star in the Boston Matrix?

A
  • are high-growth products that are strong compared to those of competitors .
  • Star require investments but the hope is that they will become cash cows
40
Q

What is the Cash Cow in the Boston Matrix?

A

are low-growth products with high market shares.
- They generate more cash than they consume, and so can provide a return for investors and can fund investment in other areas

41
Q

What is the Question Mark in the Boston Matrix?

A
  • are products with low market shares in high- growth markets.
  • they consume a lot of cash, but give little return.
  • however they have the potential to turn into stars, Keeping these lines requires a belief that there is a potential for growth
42
Q

What is the Dog in the Boston Matrix?

A
  • are products with low market share in low-growth markets.
  • They may break-even, but nevertheless take up time and effort with little prospect of future growth.
  • They should be sold or divested
43
Q

What is the difference between Strategies and Tactics?

A
  • Strategies set out the long-term direction that a firm will take to achieve its objective
  • Tactics are short-term responses to an opportunity or threat in the market. Most day-to-day decision in business are tactical and involve decision making responding to the current conditions
  • by nature tactical decisions have to be made quickly without significant research or planning, for this reasons tactical decision can backfire if they are made poorly
44
Q

How is External Audit defined?

A

An audit of the external environment in which a business finds itself, such as the market within which it operates or government restrictions on its operations.

45
Q

How is Internal Audit defined?

A

An analysis of the business itself and how it operates.

46
Q

How is SWOT analysis defined?

A

An analysis of the internal strengths and weaknesses of the business and the opportunities and threats presented by the external environment.

47
Q

How is Trade Association defined?

A

An organisation whose members are all involved in the same industry or trade. The organisation pursues the interests of these businesses.

48
Q

What is an Internal Audit?

A

This will analyse the organisation andattempt to identify the strengthsand weaknesseswithin it. it will consider:
- Theproducts made, including production costs, quality andR&D
- The current financial position; cashflow,profits, reserves
- Production, including; methodologycapacity, efficiency
- Businessstructure, and
HR,trainingand recruitment
In a large business the internal audit might be conducted by outside management consultant. This could help produce a more independent-minded analysis of the business’s situation

49
Q

What is an External Audit?

A

Takes acritical look atthecompetitive environmentthat theorganisation operates in. Itwillconsider:
- Size and growthpotentialof the market
- Characteristicsof thecustomers
- Alternative products
- Pricingof alternatives
- Methods of distribution
- Methods of promotion
- Industrypractices,trade unionsorgovernment regulation
It should also included an analyse of competition such as –> the number and size of the competitions, production capacity, finance, investments, profits, etc.

50
Q

What is SWOT analysis?

A

It is a helpful way of summarising information gathered.
- In the case it look at the Internal Strengths (S) and Weaknesses (W) of a business and the External Opportunities (O) and Threats (T) it may face.

51
Q

What are Strengths as part of the SWOT analysis?

A

These are the positive aspect of a business that may be identified from the internal audit. For Example:

  • a respected, intelligent and inspirational leader
  • loyal and motivated workforce
  • a product with USP
  • a loyal customer base
52
Q

What are Weaknesses as part of the SWOT analysis?

A

These are the negative aspects of a business that may be identified from the internal audit. For example:

  • A high staff turnover with poorly motivated workforce
  • A organisation structure with too many layers
  • A product range that is out of date
  • Poor cash flow and debt
53
Q

What are Opportunities as part of the SWOT analysis?

A

these are options or opening that the business might be able to exploit that are identified by the external audit. For Example:

  • a new overseas market opening up following political changes
  • a fall in the cost of essential raw material
  • low interest rates, which provide cheap finance for investment
  • a fall in the exchange rates, which will make export cheaper
54
Q

What are Threats as a part of the SWOT analysis?

A
  • These are the possible hazards or perils that have the potential to damage the performance of the business which have been identified by the external audit. For Example:
  • a new entrant in the market
  • a rival appoint a new and highly successful CEO
  • a looming recession
  • new legislation aimed at improving right of employees
55
Q

When may SWOT analysis be used?

A
  • To make a decision about which newproduct to launch
  • Help design a new marketing strategy
  • Help decide whether to outsource a specific business task or activity, such as IT
  • Prepare for a completely new business venture
    The analysis is only as useful as the action a business takes after the analysis e.g. a business need to take measure to eliminate weaknesses in order to actually improve
56
Q

How is Monopoly defined?

A

a market dominated by a single businesses

57
Q

How is Oligopoly defined?

A

a market dominate by a few large businesses

58
Q

How is PESTLE Analysis defined?

A

analysis of the external political, economic. social, technological, legal and environmental factor affecting a business

59
Q

What is PESTLE analysis?

A
  • The impact of external forces on a business can be both positive and negative, but also substantial.
  • Businesses need to consider the wider economic environment when making investment and other important decisions, such as product design or expansion
  • One approach is to use PESTLE analysis which involves identifying the Political (P), Economic (E), Social (S), Technological (T), Legal (L) and Environmental (E) factors that might influence business activity and performance
60
Q

What is the Political factor in PESTLE analysis?

A
  • Some part of the world are politically volatile and special attention has to be paid if business venture politically unstable countries
  • However, political factors can also influence business in stable, democratic countries.
  • Some Political factors are:
  • Members joining and leaving Trade Blocs
  • Measured designed to improve national security restrict movement of goods, people and capital
  • Pressure groups such as Action on Smoking and Health (ASH) may affect businesses in the tacbacco industry such as persuading the government to increase the tax on tobacco
  • Changes in government - could be pro- business
61
Q

What is the Economic factor in PESTLE analysis?

A
  • The general state of the economy can have a huge impact on business activity. Some examples may include:
  • Falling unemployment might help to increase demand for many business
  • Stable prices creates more certainty, which should encourage businesses to invest for the future
  • A strengthening exchange rate could make exporting more difficult, in contrast imports become cheaper
  • During recession businesses with products that are price elastic will have a big impact to their demand
62
Q

What is the Social factor in PESTLE analysis?

A

Over time there are likely to be changes in the way society operates, Although social and cultural changes tend to be gradual, they can still have an impact:

  • In the UK, more people are going to university, This could increase the quality of human resources which would benefit business
  • The population in many countries is ageing, This could affect demand patterns and create new opportunities for some businesses
  • increasing migration might increase the size of potential workforce, making recruitment easier and may boost demand
  • People are more health-consciousness –> more demand for those selling health food or running fitness centres
63
Q

What is the Technological factor in PESTLE analysis?

A

The rate of technological change seem to gather pace all the time. Business usually welcome technological development because they often provide new product opportunities or help to improve efficiency.

  • Changes in technology can shorten product life cycles
  • Development in technology often mean that business can replace labour with capital. This is welcome by a business as human resources are often to be the most expensive and difficult to manage
  • The development of social media has helped to improve communication between businesses and customers –> allows business to keep abreast of changing consumer needs
64
Q

What is the Legal factor in PESTLE analysis?

A

the government provides the legal framework in which businesses operate. However , it also directs legislation at business to protect vulnerable groups that might otherwise get get exploited.

  • EU legislation affect tax laws changing VAT etc.
  • Calls to ban the advertising of alcohol on television which could negatively impact the beverage industry
  • The government in the UK often state that it wants to reduce the amount of ‘red tape’ in business. This might benefit a wide range of businesses
65
Q

What is the Environmental factor in PESTLE analysis?

A

People are increasingly protective of the environment, for instance because the threats posed by global warming. people are also concerned about the threats to wildlife and natural habitats that business sometimes pose

  • People are more inclined to buy ‘green’ goods. This provides opportunities for business that specialise in such products
  • New wats of generating power using renewable sources rather than by burning hydrocarbons are providing new opportunities
  • The trend towards recycling is gather pace in the UK. By using recycled resources, businesses can cut their costs.
66
Q

What are some features of a Competitive market?

A
  • Large number of buyers and sellers.
  • Low barriers to entry
  • Market can dictate pricing e.g. if a firms tries to charge more than its rival it is likely to lose nearly all of its business
  • Free flow of information about the nature of products, prices, methods of production etc.
67
Q

What are some features of Uncompetitive Markets?

A
  • Dominated by single or small number of suppliers –>Monopoly or oligopoly such as Thames Water who are the only providers only Tap Water in London
  • High barriers to entry – infrastructure costs
  • Consumers have limited impact on prices - independence occurs in Oligopolies as the actions of one business will affect another so prices tend to stay the same.
  • business are likely to engage in non-price competition such has advertising and promotion
68
Q

How can the Competitive Environment change overtime?

A

Governments try to encourage competitiveness in markets.
Increased competitiveness is good for consumers as it drives down prices. This is through:
- Business using price to encourage product trial
- Drive to reduce costs in a business to maintain/increase margins
- Development of new procedures (manufacture, materials, training)
- Development of new products
Governments can help by reducing regulation that can act as a barrier to entry, or force companies to make changes to allow others to enter market.

69
Q

What is the impact does changes in the competitive environment have on Businesses?

A

New Entrants –>
- Competition gets stronger due to increased suppliers
- New methods of selling/delivery can make the competition more appealing
New Products –>
- Forces businesses to consider their own offering and adjust their portfolio.
- They may need to innovate existing products, or reduce the price to maintain market share
Consolidation –>
- This occurs when the number of businesses in a market reduces either through closure or mergers and acquisitions
- Larger organisations can pose a threat to smaller ones through dominant market position or the benefits of economies of scale.

Failure to respond effectively to the changing competitive environment could adversely affect the performance of a business environment, at worst certain change may threaten the business’s survival

70
Q

What is Porter’s Five Forces Model?

A
  • An analysis tool looking at the nature and the strength of the competitive environment in which a business operates.
  • the success of the business will be governed by the strength of those forces. If the are in your favour, then a business would make above average returns
71
Q

What are Porter’s Five Forces?

A
  • The bargaining power of suppliers
  • The bargaining power of buyers
  • Threats of New Entrants
  • Substitutes
  • Rivalry among existing firms
72
Q

What is The Bargaining Power of Suppliers in Porter’s Five Forces model?

A
  • Suppliers like any business want to maximise the profit they make from their customers.
  • The more power a supplier has over its customers, the higher the price it can charge and the more it can re-allocate profit from the customer to itself
  • by limiting the power of the supplier improve the competitive position of a business and this can be done in a variety of ways:
  • it can grow vertically ( backward vertical integration) either acquiring a supplier or setting it own business by growing organically upwards.
  • Seek out new supplier to create more competition amongst suppliers
  • engage in technical research to find substitutes for a particular input to broad then supply base
  • it may also minimise the information provide to supplier in order to prevent the supplier realising its power over the customers
73
Q

What is the Bargaining Power of Buyers in Porter’s Five Forces Model?

A
  • Buyers want to obtain supplies for the lowest prices
  • If buyers or customers have considerable market power, they will be able to beat down prices offered by suppliers
  • One way to boost the power of buyers is through forwards vertical integration –> e.g. a car manufacturer might set up its own dealership, this could encourage other businesses to set up in its customer’s markets’ to reduce the power of existing customers
  • Another way is to try to make it expensive for customers to switch to another supplier –> game console manufacturers keep game prices high as the console are technically incompatible with other machines
74
Q

What is the Threat of New Entrants in Porter’s Five Forces Model?

A
  • If businesses can easily come into an industry and leave it again, if profits are low it makes it hard for existing businesses to charge high prices and make high profits
  • Existing businesses are constantly under threat that if their profit, rise too much, this will attract new suppliers into the market who will undercut their prices
  • business can counter this by erecting barriers to entry
  • It can create strong brands which will attract customers loyalty and make customers less price sensitive
  • Large amounts of advertising can be a deterrent –> represent a large cost for new entrants if they want to increase market share
  • As well as the initial large sunk costs could be a deterrent to moving into a new market
75
Q

What is the Substitutes in Porter’s Five Forces Model?

A
  • the more substitutes there are for a particular product, the fiercer the competitive pressure on a business making the product
  • Equally a business making a product with few or no substitutes is likely to be able tho charge high prices and make high profits
  • A business can reduce the number of potential substitutes through R&D then patenting the substitutes itself
  • Sometimes a business will buy the patent for a new invention from a third party and do nothing with it just to prevent it coming to market
  • Businesses also use market tactics to stop the spread of substitute products e.g. predatory pricing
76
Q

What is Rivalry among existing firms in Porter’s Five Forces Model?

A
  • rivalry in a market will also determine prices and profits for any single firm
  • If rival is fierce, businesses can reduce that rivalry by forming cartels or engaging in a broad range on anti-competitive practices –> this is illegal in UK and EU but it is not uncommon
  • Businesses can also reduce competition by buying their rivals –> again competition laws may intervene to prevent this happening but most horizontal mergers are allowed
  • In industries well there are relatively few businesses. often business dont compete on prices
  • -> this allows then to maintain high profitability and compete with new products or advertising instead thus creating strong brands
  • While this may make costs higher they can also charge higher prices than in a more competitive market creating high profits