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CIPS L4M2 - Defining Business Need > Chapter 2.2 > Flashcards

Chapter 2.2 Flashcards

1
Q

What is the basic purpose of a market?

A

To provide products or services that deliver value to the buyer by meeting its needs

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2
Q

Define industry

A

An industry is a set of organisations whose purpose is to satisfy the needs of a group of buyers who are collectively known as the market

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3
Q

What does a market need to be sustainable in the long term?

A

It must be a profitable industry for the businesses competing in it, and those businesses must find ways to remain competitive

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4
Q

How does Porters 5 forces help with industry analysis?

A

It helps to understand the attractiveness of the industry in question

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5
Q

Name Porters 5 forces

A
  1. Rivalry among existing competitors
  2. Potential entrants
  3. Buyers
  4. Substitutes
  5. Suppliers
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6
Q

What does porters 5 forces determine

A

The ability of organisations in the industry to earn a profit that gives an acceptable return on the financial investment made by each organisation

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7
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9
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10
Q

What does market analysis involve?

A

Gaining an understanding of how attractive an industry is to the businesses in the industry and a key way to do this is to use Porters Five Forces Model

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10
Q

What’s the difference between a market and an industry

A

Markets meet the needs of one or more groups of buyers. Industries are collections of organisations whose business is to meet those needs at a profit

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11
Q

When is a market likely to attract new entrants into the industry?

A

If it enables all organisations within it to make profits

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12
Q

Name 4 barriers to a company entering a market

A
  1. Substitutes
  2. Buyer power
  3. Supplier power
  4. Rivalry
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13
Q

What does rivalry between existing companies usually result in?

A

Taking positive action to try and take market share from each other, which in turn can mean increase profits for those that gain market share and lower profits for those that lose market share

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14
Q

What is the effect of rivalry on profits?

A

Profits in the industry as a whole reduce due to the costs involved if market share is gained by reducing prices. This is because companies usually retaliate if action is taken by one organisation. A price reduction by one can turn into a price war

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15
Q

Name 6 factors that determine the intensity of the rivalry

A
  1. Many or equal-size suppliers
  2. Slow industry growth
  3. High fixed costs
  4. Lack of differentiation and fixed costs
  5. Capacity is added in significant amounts
  6. High exit barriers
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16
Q

Name 3 factors that create high barriers to exit

A
  1. Specialised assets
  2. Fixed costs of exit
  3. Social restrictions
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17
Q

Define exit barriers

A

Obstacles that prevent a business from leaving an industry

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18
Q

What does businesses need to do in order to stay in a market?

A

Make a profit

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19
Q

What is how much profit an individual company makes largely down to?

A

The amount of rivalry in the market

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20
Q

What’s more likely to happen with the larger degree of rivalry

A

That other companies retaliate if one organisation tries to win market share from them

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21
Q

What can the cost of retaliation result in?

A

Lower profits for all companies competing in that market

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22
Q

What happens to profit if supplier power is strong?

A

More of the profit available is captured by suppliers

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23
Q

What is the bargaining power between buyers and suppliers reflected in?

A

The configuration of their value chains

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24
Q

What determines the sustainability of value chain configurations?

A

The threat of new entrants and the availability of substitutes

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25
Q

What is a major determinant of the structure of an industry and how much profit is available to organisations operating in that industry?

A

The bargaining strength of suppliers

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26
Q

Name 5 different types of supplier

A
  1. Manufacturers sell products to wholesalers, distributers and retailers
  2. Distributers and wholesalers purchase in large lot sizes and sell smaller quantities to their customers
  3. Independent craftspeople and small businesses sell directly to retailers and individual customers
  4. Importers and exporters buy products from manufacturers in different countries and distribute them to customers in others
  5. For service firms, individuals are important suppliers of skills and capacity. This can be as people recruited as permanent employers or as contract workers
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27
Q

Name 7 reasons when supplier bargaining power is strong

A
  1. There are no substitutes
  2. Suppliers are larger than the organisations in the industry and more concentrated
  3. The industry is not very important to the seller
  4. The sellers product or service is an important part of the industry’s value chain
  5. The sellers product or service is differentiated
  6. There are significant switching costs
  7. Sellers pose a definite threat of forward integration
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28
Q

Name 7 reasons when supplier bargaining power is weak

A
  1. Substitutes are available and easy to access
  2. Suppliers are small and fragmented
  3. The industry is important to the seller
  4. The seller’s product or service is not an important part of the industry’s value chain
  5. The sellers product or service is undifferentiated
  6. There are no significant switching costs
  7. There is no threat of forward integration
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29
Q

What can suppliers do if their bargaining strength is high?

A

Keep the price of their product or service high and so retain more of the available profit

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30
Q

Define the bargaining strength of buyers

A

The ability of buyers to drive down prices and take more of the available profit for themselves. It also means that strong buyers are able to make more demands on suppliers in respect of factors such as quality and functionality

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31
Q

What happens to the supplier if the buyer has high bargaining strength

A

Increases supplier costs and reduces their profitability

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32
Q

Name 8 factors that determine buyer strength

A
  1. Buyer concentration
  2. Size of account
  3. Undifferentiated product
  4. Switching cost
  5. Threat of integration
  6. Information
  7. Price sensitivity
  8. Availability of substitutes
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33
Q

Name 9 circumstances where buyer bargaining power is strong

A
  1. Buyers are more concentrated than sellers
  2. Buyer switching costs are low
  3. Threat of backward integration is high
  4. Buyers are price sensitive
  5. Buyers are well informed about the product or service
  6. The product or service is undifferentiated
  7. Buyers purchase in large volumes
  8. Substitutes for the product or service are available
  9. The amount purchased by the buyer is a significant proportion of the seller’s sales
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34
Q

Name 9 circumstances where buyer bargaining power is weak

A
  1. Sellers are more concentrated than buyers
  2. Buyer switching costs are high
  3. Threat of backward integration is low
  4. Buyers are not price sensitive
  5. Buyers are not well informed about the product or service
  6. The product or service is differentiated
  7. Buyers purchase in small volumes
  8. There are no substitutes for the product or service
  9. The amount purchased by the buyer is not a significant proportion of the sellers sales
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35
Q

What is it useful to understand before analysing buyer bargaining strength?

A

Where the products or services are in their life-cycle and the different types of buying groups associated with that cycle

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36
Q

Define buyer bargaining power

A

The ability of one or more groups of buyers to keep prices low and so take more of the profit that is available

37
Q

When do buyers tend to be more powerful?

A

If just a few of them dominate the market, they are knowledgeable about the products and their prices, they buy in large volumes and they are able to use other products or services if they have to

38
Q

Name the 4 stages of the product life-cycle

A
  1. Introduction
  2. Growth
  3. Maturity
  4. Decline
39
Q

Explain the introduction stage of the product life-cycle

A

Covers the research and development of a product or service to meet an identified need and then all of the activities associated with launching the product or service

40
Q

Explain the growth stage of the product life-cycle

A

Sales grow faster than at any other time in the life-cycle

41
Q

Explain the maturity stage of the product life-cycle

A

Sales are still near their peak but the growth in sales starts to slow down

42
Q

Explain the decline stage of the product life-cycle

A

Final stage in the product life-cycle and it is the point at which sales fall to such a low level that the product or service is withdrawn from the market

43
Q

Why is the product life-cycle important for procurement and supply?

A

The life-cycle is a major determinant of a suppliers pricing policy. Knowledge of this is useful in deciding a target price when tendering or negotiating

44
Q

Name the 4 stages of the Boston Consulting Group Matrix

A
  1. Question mark
  2. Star
  3. Cash cow
  4. Dog
45
Q

What is the product life-cycle closely aligned with?

A

The Boston Consulting Group Matrix

46
Q

What does the Boston Consulting Group Matrix do?

A

Expands the life of a product, service or market into four distinct phases

47
Q

What may be slow in the introduction phase?

A

Sales

48
Q

What happens if sales are slow in the introduction phase?

A

It means this stage can last for months, if not years. Marketing effort is aimed at innovators

49
Q

Define innovators

A

People who like to be the first to try new ideas, goods and services

50
Q

Why do profits tend to be low in the introduction phase

A

The cost of marketing to establish product awareness plus distribution costs can be far higher than the revenue received from sales

51
Q

How can you off-set low profits in the introduction phase?

A

By ‘skimming’ prices in the very early stages

52
Q

Explain what skimming a price means

A

Where a business charges the highest price that it thinks the market will bear initially until product recognition brings in other buyers and then the price drops

53
Q

Who is sales growth fuelled by?

A

Early adopters

54
Q

Define early adopters

A

A group of consumers who are the first after the innovators to buy or use a new product or technology

55
Q

How does a businesses focus change when moving from the introduction to the growth stage?

A

It no longer has to focus on getting buyers to try the product but on creating brand loyalty through differentiation

56
Q

Whats the main objective for all organisations in a market during the growth stage?

A

To build market share - this comes at a price

57
Q

When do you know if a product has entered the maturity stage?

A

The sales of the product start to slow down because there are fewer new buyers

58
Q

What are new buyers in the maturity stage known as?

A

The middle majority

59
Q

Define the middle majority

A

A group of consumers who buy or use a new product or technology after seeing it used successfully by innovators and early adopters

60
Q

What is likely to happen during the maturity stage?

A

Price competition sets in as more and more supply capacity has been added by new entrants. The focus turns to maintaining market share through many small improvements to meet emerging buyer needs

61
Q

What happens to sales in the decline stage of the product life-cycle

A

Sales decline rapidly to the point where it is uneconomic to continue supply and so the product or service is withdrawn from the market

62
Q

Name 2 reasons why a product or service may decline

A
  1. Changes in technology
  2. Changes in consumer fashions and tastes
63
Q

What would you call people who buy a product in its decline phase?

A

Laggards

64
Q

Define laggards

A

The last group of consumers who buy or use a new product or technology

65
Q

Why may profits in the decline stage stay reasonable?

A

Laggards may still pay a premium price and costs of promotion and distribution are low

66
Q

Why is it essential to understand buyers?

A

So you can understand what bargaining powers they have

67
Q

What two things create additional competition?

A
  1. New entrants
  2. Threat of substitute products and services
68
Q

What are substitutes?

A

Alternative ways for a buyer to meet its needs and so all businesses at some time or other face the threat of substitutes

69
Q

Whats a problem with substitutes existing?

A

They put a ceiling on the prices that can be charged and in turn the amount of profit that can be made. this is because higher prices for existing products or services make substitutes from other suppliers more attractive to the buyer

70
Q

What is the simplest form of substitution?

A

A different product or service which performs the same function as the existing one such as the use of oil or gas

71
Q

What can make the decision to switch to a substitute more complex?

A

Situations where the substitute performs a different range of functions

72
Q

What wider alternatives should be considered when thinking about substitution? (4)

A
  1. It takes place if a buyer decides to purchase nothing rather than the product or service
  2. Another option open to a buyer is to reduce the usage rate.
  3. Instead of the regular product, a buyer may be able to choose recycled or reconditioned product. Recycled paper is a common form of this
  4. The buying organisation may also choose to perform the function of the purchased item itself - a form of backward integration
73
Q

When may the buying organisation choose to perform the function of a purchased item themselves?

A

This could happen if a company decides to self-insure rather than take out insurance. The occasional cost from loss could be lower than the sum of the insurance premiums over the same time period

74
Q

Name one important role of substitute products and services

A

Limit the price that can be charged. The higher the price the more likely it is that organisations will look for a substitute that can meet needs but at a lower price

75
Q

Name a key factor when considering a substitution

A

The economics of substitution

76
Q

Name three aspects of the economics of substitution

A
  1. The relative value-to-price ratio between the existing product and the substitution
  2. The switching costs involved in moving from the existing product or service to the substitute
  3. The inclination of the buying organisation to make the switch to the substitute
77
Q

What is value-to-price ratio

A

The value that a product or service provides in meeting a buyer’s needs compared to its purchase price

78
Q

Name 7 factors that you need to consider before switching to a substitution

A
  1. Are the usage rates needed to perform the function the same?
  2. Are there any significant delivery or installation costs?
  3. Are any significant financing costs involved?
  4. How stable are the supplier’s costs?
  5. Are there any availability issues?
  6. Are there any significant direct costs of use?
  7. Are there any indirect costs to take into account?
79
Q

When may a substitute affect indirect costs?

A

If it results in lower productivity of other activities outside of those that use the substitute

80
Q

What should be considered carefully when considering relative value-to-price?

A

The number and nature of additional functions that the substitute provides

81
Q

Define switching costs

A

All of the costs for the buying organisation in moving from one product or service to another or from one supplier to another

82
Q

Name 5 examples of possible switching costs

A

1.The redesign of the buyers product in order to accept the substitute
2. The costs of retraining and relearning
3. A possible change to the role of the user
4. A perceived or actual risk of failure
5. The cost of switching back to the former product or service if the new one fails or the relative value-to-price changes

83
Q

Why may buyers in the same industry and with the same understanding of relative value and price still make different decisions about whether to switch?

A

Due to differing inclinations or propensities to change

84
Q

Name 6 examples of buyer inclination

A
  1. Resources such as access to finance
  2. Risk profile
  3. Technological understanding
  4. Previous substitutions
  5. Intensity of rivalry
  6. Buying organisations strategy
85
Q

When will companies use a substitute product or service?

A

If the economics of doing so are favourable

86
Q

Name three things the economics being favourable are dependent on

A
  1. The relationship between the value the organisation gets from the product and the price it has to pay
  2. How costly the change would be
  3. The inclination of the buyer to make a change
87
Q

What do new entrants into an industry reduce?

A

The profitability of existing companies in that industry

88
Q

Name 8 examples of barriers to entry

A
  1. Economies of scale
  2. Product differentiation
  3. Brand identity
  4. Capital requirements
  5. Access to distribution
  6. Access to technology
  7. Cost advantages
  8. Access to market relationships or associations
89
Q

When do economies of scale occur?

A

When one or more existing competitors have such a dominant position in the industry that the volume of goods and services that they produce results in a lower unit cost than a new entrant would be able to achieve

90
Q

Name 6 factors that determine whether the threat of new entrants is high

A
  1. Many companies in the industry with no dominant companies
  2. No proprietary differentiation of products or services
  3. No brand recognition in the industry and/or brand loyalty is low
  4. Low or no capital requirements to enter the industry
  5. Easy access to distribution channels and suppliers
  6. No threat of retaliation from existing companies in the industry
91
Q

Name 6 factors that determine whether the threat of new entrants is low

A
  1. Few companies with one or more dominant companies
  2. One or more companies have proprietary differentiation of products and services
  3. Existing brands are well known and/or brand loyalty is high
  4. Major capital investment needed to compete in this industry
  5. Little or no access to distribution channels and suppliers
  6. Threat of major retaliation is high

CIPS L4M2 - Defining Business Need (12 decks)

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