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