CHAP 7: COMPETITIVE FORCES [External Analysis]

Question 1

What is Competitive advantage?

Answer 1

Competitive advantage is the ability of an organization to generate greater returns than those of competitors over the long term.

Question 2

What are External Analysis? [Analysis of environment]

Answer 2

This is based on Market-based view i.e. Competitive Advantage comes from external environment.
Famous theories are:
 PESTEL Analysis
 Porter’s Five Forces Model
 Study of Market and Industry

Question 3

What are Internal Analysis? [Analysis of business]

Answer 3

This is based on Resource-based view i.e. Competitive Advantage comes from internal environment.
Famous theories are:
 BCG Matrix
 Product Life Cycle
 Value Chain Analysis
 Resources and Competence
 Three Generic Strategies
 Benchmarking

Question 4

What is Convergence?

Answer 4

This is where 2 or more industries come together and serve the same marketplace. When industries emerge, some new markets appear and some old may disappear.

Question 5

Types of convergence.

Answer 5

1. Demand - led Convergence
   Customers bring the industries together e.g.
    Smart Phone
    Streaming Services.
2. Supply - led Convergence
   Suppliers bring the industries together e.g.
    Electric Cars and Renewable Energy
    Augmented Reality (AR) and Virtual Reality (VR)
    Fintech

Question 6

Bargaining Power of Customers

Answer 6

1. Small number of customers
2. They make high volume purchases
3. Products they are buying are undifferentiated
4. Alternative sources of supply are available (substitute or switching)

Question 7

Bargaining Power of Suppliers

Answer 7

Suppliers have high power if:
1. Small number of suppliers
2. Good substitutes are not available.
3. Suppliers are not dependent on the buyer for a lot of their sales
4. Suppliers have differentiated their products
5. It is costly to switch suppliers

Question 8

Threat of new Entrants

Answer 8

Barriers That Block New Entrants
1. Economies of scale
2. Large capital requirements
3. Product differentiation/Brand
4. High switching cost
5. Limited access to distribution channels
6. Some government policies and regulations
7. Other advantages that are hard to duplicate such as patents, great locations, subsidies, partnerships, etc.

Question 9

Rivalry between Competitors

Answer 9

Rivalry is intense if:
1. Slow industry growth
2. High fixed costs (plants, machinery, outlets)
3. Undifferentiated products
4. A large number of competitors
5. Customer can easily switch to competitor.
6. No customer loyalty.
7. High exit barriers (what you lose if you leave the business)
8. Small changes in market share have a big pay-off

Question 10

Threat of Substitute/ Indirect Competitors

Answer 10

1. Existence of Close substitutes
2. Price of substitute
3. Performance of substitutes
4. Cost of switching to substitutes

Question 11

What is a Product Life Cycle?

Answer 11

The Product Life Cycle (PLC) is a concept that describes the stages a product goes through from when it first enters the market until it is removed from the market.

Question 12

Cost of Introduction.

Answer 12

 Production Set-up Cost.
 Manufacturing costs
 Marketing and advertisement costs (for product awareness)
 Set up of distribution channels

Question 13

Cost of Growth.

Answer 13

 Increasing capacity and production
 Increased marketing and advertisement costs (to raise customer base)
 Increased working capital

Question 14

Cost of Maturity.

Answer 14

 Cost to maintain manufacturing capacity.
 Cost to extend maturity.

Question 15

Cost of Decline.

Answer 15

 Reducing Production Capacity.
 Reduce marketing
 Cost of obsolete inventory.
 Costs of remaining warranties
 Increase in discounts

Question 16

Benefits of Life Cycle Costing.

Answer 16

1. Potential profitability can be assessed before major development.
2. Better understanding of various types of costs over life of product, which will be helpful to control and reduce these costs.
3. More accurate Pricing Strategy.
4. Unnecessary costs may be removed, after comparing with initial plans.

Question 17

Strategies for Extend Product Life.

Answer 17

1. Reformulate Product.
2. Sell to Untapped Market.
3. Revise Pricing Strategy.