Chapter 2 Flashcards
What is an industry?
Group of companies offering products and services
What are opportunities
Company taking advantage of the conditions in its industry to make profit
What are threats
Conditions of the external environment endangers the integrity and the profitability of a company
What is the supply side of a market?
Industry
Who are each companies closets competitors
Other companies that serve the same basic customer needs
How do we identify competitors
Managers look at the basic customer needs their company is serving and look at companies that serve the same or similar products/service
Why is it important for industry boundaries to be defined
- Managers may get caught off guard by the rise of competitors that serve the same basic customer needs
- Industry boundaries change overtime bc of evolving customer needs and emerging new technologies
What is the demand side of the market?
Customers
What is a sector?
Bigger than an industry and its closely related industries
What are the determinants of shareholder value?
- Effectiveness of strategies
- Profitability
- Shareholder value
- Profit Growth
What are market segments?
Distinct groups of customers in the market that is differentiated from each other on the basis of their individual attributes and demands
What are the 6 forces competitive forces model?
- Risk of entry by potential competitors
- Intensity of rivalry among established companies
- Bargaining power of buyers
- Bargaining power of suppliers
- Closeness of substitutes to an industry products
- Power of complement providers
What are porter’s 5 forces?
This framework help determine if there isa strong competitive force (threat) or a weak competitive force (opportunity) and formulate appropriate strategic responses
What are potential competitors
Companies that are not currently competing in an industry but have the capability to do so
What does it mean to have a high risk of entry
This represents a threat to establishe dcompanies
What is the risk of entry by potential competitors
A function of how attractive the industry is and the height of barriers to entry
What does it mean to have high entry barriers
May keep potential competitors out of an industry even when industry profits high
What are important barriers to entry
- Economies of scale
- Brand loyalty
- Absolute cost advantages
- Customer switching costs
- Government regulations
What is economies of scale
Unit costs fall as a firm expands its output
What are the sources of scale economies
- Cost reductions gained through mass producing a standardized output
- Discounts on bulk purchases on raw material inputs and component parts
- Advantages gained by spreading fixed production costs over a large production volume
- Cost savings associated with distributing, marketing and ad costs
What are low threat of new entrants?
- High brand loyalty
- Well known brand names
- High initial capital investment
- Little to no access to suppliers and distribution channels
- Strong government regulations
- Threat of retaliation from existing competitors
- Proprietary technology
What is brand loyalty?
- Exists when consumers have a preference for products of established companies
- This is done through ads, patent protection, product innovation, emphasis of high quality products and after sales service
How does brand loyalty make it difficult for new entrants
They have major market share
What is absolute cost advantages
Entrants can’t expect to match the companies’ lower cost structure
Where does absolute cost advantage come from
- Superior production operations and processes due to accumulated experiences, patents or trade secrets
- Control of particular inputs required for production, labour, materials, equipment and management skills that limit in supply
- Access to cheaper funds because of existing companies represent lower risk than entrant
What does switching cost mean
When a customer invests time, energy and money switching from products offered by one established company to the products offered by new entrants
Why does switching cost make it hard for new entrants
High switching costs can lead to customers be locked in the product offerings of established companies even if new entrants offer better products
Why are government regulations a major entry barrier
Basically establish rules on what should be provided
What are high threat of new entrants
Opposite
What is rivalry
When the competitive struggle between companies to gain market share from each other
How can competitive struggle to be fought?
- Price
- Product Design
- Ads/Promotional spending
- Direct selling efforts
- After sales service and support
What is intense rivalriy
- Lower prices or more spending on non price competitive strategies
- Squeezes out profits of the industry bc this lowers prices and raises costs
What happens when the rivalry is less intense?
Companies may have the opportunity to raise prices or reduce spending on non price competitive strategies leading to higher industry profits
What are the four major impacts of intense rivalry?
- Industry competitive structure
- Demand conditions
- Cost conditions
- Height of exit barriers in the industry
What is industry competitive structure
Number and size distribution of companies within the it
When do managers determine the competitive structure?
Beginning of an industry analysis
What is a fragmented industry
Large number of smb, none of which is in a position to determine industry price
What is a consolidated industry
Dominated by a small number of large companies or just buy one company and they position industry prices
What does low entry barriers mean
New entrants will flood the marking and hope that profit will boom when demand is strong and profits are high
How can price war occur
When companies cut prices and differentiating their products become difficult from those competitors which lead to excess capacity
How do companies become interdependent in consosidated industries
One company competitive actions directly affect the market share of its rival and their profitability
When do rivalry increase
Undercut each others prices or offer customers more value, pushing the industry profits down
How can companies in consolidated industry reduce the threat of rival increase
Matching prices set by the dominant company in the industry
How do companies set prices
Watching, interpreting, anticipating and responding to one another’s strategies
What happens when there’s a growing demand
- Moderates competition, providing a greater scope for companies to compete for customers
- Reduce rivalry bc companies can sell more without taking market share away
- High industry profits
What happens where there’s a lower demand
- Customers exit the marketplace
- Company growth is relied on taking market share away from it rivals
- This is a threat because this increases rivalry
What are cost conditions
- Industries having high fixed costs, profitability tends to be leveraged to sales volume and the desire to grow volume can spark intense rivalry
- When demand is not growing, companies will lower profits and not cover their fixed cost
What happens where the fixed costs are high
Companies may not be able to cover this cost if the sales volume is low
What is exit barriers
Economic, strategic, and emotional factors that prevent companies from leaving an industry
What happens when exit barriers are high
Companies become locked into an unprofitable industry where demand is declining leading to an excess of productive capacity, more rivalry and price competition
What are the common exit barriers
- Specific machines
- High fixed costs of exit
- Emotional attachment
- Economic dependence
- Economic
What do power buyers be viewed as
A threat
When are buyers powerful
- Buyers choice especially in industries with two or more companies
- Buyers purchase in larger quantities and leverage price reductions
- When supply industry depend upon buyers for a large percentage of total orders
- When switching costs are lowland buyers can pit the supplying companies against each other to force down prices
- Economically feasible for buyers to buy an input for several companies at once
- Buyers can threaten to enter the industry and produce their products supplying their own need
What does the bargaining power of suppliers force?
Suppliers ability to raise prices and raise the costs of industry in various ways
What do powerful suppliers do
Squeeze profits out of an industry by raising costs of companies in the industry, imposing a threat
How can suppliers be powerful?
- Product that suppliers sell has few substitutes and is vital to the companies in the industry
- Profitability of suppliers is not significantly affected by the purchases of companies in a particular industry w
- Companies in an industry would experience significant switching costs if they moved to the product of a different supplier because a particular suppliers products are unique
- Suppliers can threaten to enter their customers industry and use their inputs to produce products that would compete directly with those companies
- Companies in the industry cannot threaten to enter their suppliers’ industry and make their own inputs as a tactic for lowering the price of inputs
What does the threat of substitute product force?
- Products of different businesses or industries can satisfy similar customer Neds
- This limits the price that companies in one industry can charge for their product which also limits industry profitability
What are complementary
Companies that sell products that add value to the products of companies in an industry because when used together the combined products better satisfy customer demands
Why are complements important
- They are an important determinant of demand for an industry products, industry profits depend on the supply of complementary products
- Complementors are able to extract profit from the industry which they provide complements
- They can slow down industry growth and limit profitability
What are strategic groups?
Different groups of companies within most industry but follow similar strategies but are different from the strategy pursued by companies in other groups
What are second strategic groups
Pursue low risk, low return strategies
What are some implications of strategic groups
- All companies in a strategic group are pursuing a similar strategy, customers tend to view the products of such enterprises as substitutes
- Different strategic groups can have different relationships to each of the competitive forces and each strategic group may face different set of opportunities and threats
- Companies in a generic group have been in a weaker position because many companies are able to produce different versions of the same generic product
- Products are substitutes
- Rivalry is high
- Price competition leads to lower profits
What are the role of mobility barriers
- They inhibit the movement of companies between strategic groups
- Include barriers to entry into a group and the barriers to exit from an existing group
What is industry life cycle analysis
Identifies 5 stages in the evolution of an industry that lead to five distinct kinds of industry environment
What are the 5 sequential stages?
- Embryonic
- Growth
- Shareout
- Mature
- Decline
What happens during the embryonic stage?
- Industries that are just beginning to develop
- Barriers to entry tend to be based on the access to key technological know how’s
- Rivalry is based on educating customers, opening up distribution channels and perfecting the design of the product
- This is the creation of one company innovative efforts
What are growth industries?
- Demand begins to grow and develops a characteristics of a growth industry
- First time demand expands and new customers enter the market
- Industry grows when customers become familiar with a product, prices fall because scale economies have been attained and distribution channels develop
What are mature industries?
- Market is totally saturated
- Demand is limited to replacement demand
- Growth is low or zero
- Growth comes from population expansion, bringing new customers into the market or increasing replacement demand
- Barriers to entry increase and threat of potential competitors decrease
- Competition for market share develop, driving down prices and produce price war
- Surviving companies hav secured brand loyalty and efficient, low cost operations
- Threat of entry by potential competitors is gone
- High entry barriers in mature industries give companies the opportunity to increase prices and profits
What are declining industries
- Growth becomes negative from technological substitution, social changes, demographics, international competition
- Rivalry increasing
- Falling demand leads to emergence of excess capacity
- Exit barriers play a part in adjusting the excess capacity
- Higher exit barriers, the harder it is for companies to reduce capacity and severe price competition
What are life cycle issues
Industry growth can be revitalized after long periods of decline through innovation or social change
What happens during innovation change
- Major industry evolution and propels a company’s movement through the industry life cycle
- Helps companies pioneer new products, processes or strategies
- Can transform the nature of industry competition
- This is unfreezing and reshaping industry structure
What are Macroeconomic forces
Affect the general health and we all being of a nation and the regional economy of an organizatin
What are the four primary macroeconomic forces
- Growth rate of economy
- Interest rates
- Currency exchange rates
- Inflation
What does economic growth lead to
Expansion in customer expenditures
What are technological forces
- Affects the height of barriers to entry and radically reshape industry structure
- Can be creative and destructive
What are demographic forces
- Results from changes in the characteristics of a population such as age, gender, ethnic origin, race, sex, and social class
- These present opportunities, threats and major implications
What are social forces
- Changing in social mores and values
- Creates opportunities and threats
What are political and legal forces
- Changes of laws and regulations that affect managers and companies
- Political processes shape society laws and constrain operations of organizations and mangers and create opportunities and threats
