5. Micro Environment Flashcards
Porters 5 forces
Threat of New Entrants:
Description: The risk that new competitors may enter the market and disrupt the existing players.
Impact: If it’s easy for new companies to enter the market, profitability can be reduced due to increased competition.
Barriers: High capital requirements, brand loyalty, economies of scale, and government regulations can deter new entrants.
Bargaining Power of Suppliers:
Description: The ability of suppliers to influence the price of materials or services.
Impact: If suppliers have strong power, they can raise prices or reduce the quality of supplies, hurting profitability.
Factors: The number of suppliers, uniqueness of their products, and the cost of switching between suppliers determine their bargaining power.
Bargaining Power of Buyers:
Description: The ability of customers to influence pricing and product quality.
Impact: When buyers have strong power, they can demand lower prices or higher quality, which reduces profitability for businesses.
Factors: Buyer power increases when there are fewer buyers, products are standardized, or switching costs are low.
Threat of Substitute Products or Services:
Description: The risk that customers can switch to alternative products or services.
Impact: If substitutes are easily available and affordable, companies may face reduced demand and pressure to lower prices.
Key Drivers: Innovation, technological advancements, and customer willingness to switch influence the threat of substitutes.
Industry Rivalry:
Description: The level of competition among existing companies in the market.
Impact: Intense rivalry can lead to price wars, higher marketing expenses, and reduced profitability.
Factors: High competition is often driven by a large number of competitors, slow market growth, and low differentiation between products.
What are two additional forces?
Government - in some countries, the state is a factor and influences forces by ownership, subsidy or regulation of competition.
Complementors - relationships may develop between two or more industries/products that mutually thrive off each other
Give critisicms of the model
- Disregards not-for-profit organisations
- Student positioning vierw of strategy, not resource based e.g. position within a market, not how it could use its competences to innovate in new industries.
- Less useful in dynamic industries
- Ignores potential for collaboration - assuming every party is selfish and wants to maximise own benefit
Explain Life cycle
The concept of life cycle analysis is popular in strategic management and can be used to describe the
phases that an industry, or market segment within an industry goes through, and in turn the products
and companies that participate in them
Intro
A newly invented product or service is made available for purchase and
organisations attempt to develop buyer interest. There may be significant
competitive advantage to those firms who are first in the industry
Growth
A period of rapid expansion of demand or activity as the industry finds a
market and competitors are attracted by its potential
Shakeout
In this stage many businesses will not be successful and will exit the market.
Maturity
A relatively stable period of time where there is little change in sales volumes
year to year but competition between firms intensifies as growth slows down.
Decline
A falling off in activity levels as firms leave the industry and the industry ceases
to exist and is absorbed into some other industry.
Uses of life cycle model
The suitability of a proposed strategy.
R&D expenditure to be incurred both now, in the future and the reasons for this.
Determining the stage of industry/product life cycles and developing a balanced portfolio.
What kinds of marketing costs to incur at each stage.
Explain industry life cycles
Intro: Unproven market, few competitors, R&D necessary to attract more customers and outperform competition. With investment and marketing costs, likely low profitability
Growth: Viable market now, gain new entrants, ^comp and strategies, ^market share. Continued R&D investment, ^barriers to entry with patents and brand loyalty.
Shakeout: Crowded market, underperforming comp will be weeded out. R&D will reduce production costs. Markets may be pushed elsewhere e.g. geographically or new segments. Successful companies profits grow
Maturity: Fully established market, competitors will seek to maximise returns through continual refinement of production processes and focusing on customer database. Strong brands left, low R&D and marketing costs.
Decline: Products become commodities, customers are more price sensitive, new alternative technologys become more enticing. Companies squeeze profits from loyal customers, thinning product variations, then exit plans are made.
What are ways to extend life cycle
Operating obroad, as decline starts in home country, growth occurs in other countrys
Explain international trade life cycle
- Product created in high income country with skills that reside within it (USA), export to similar countries (UK, aus, Canada)
- Those in export market (UK etc) begin domestically producing
- Third party export markets e.g. brazil, india
- Third party countries start domestically producing where they have significant cost advantages and start exporting back to originator’s markets where they compete for business and price them out.
What should be considered when choosing target export markets
- Level of economic development: Presence or absence of a factor may create an opportunity for an exporter (Lack of fixed telecomm lines in Africa, may push mobile phone infrastructure)
- Culturual similarities: Whether the product would have demand in that culture
- Members of economic groups e.g. EU will have common trade rules affecting exports
- Market similarities: Similar tastes may work, not if alrdy competition too similar etc
- Market timing differences: Lags in trends etc domestic trends may not meet export markets till later
- Brand travel: May not translate well to foreign markets, unaware of the big name
- Legal barriers
Public sector markets considerations
Public accountability - govt must be seen spending taxpayer funds wisely
Intrinsic variability - different government departments may exhibit different cultures, agendas and resources.
Political consideration
Purchase by tender - acquire services through tendering, opportunity for any business
