Chapter 7 Competitive Forces

Question 1

How market is defined?

Answer 1

 A market is a place where buying and selling takes place.
 A market can be defined by the:
- Products or services that are sold (e.g. clothes market, banking market, air travel)
- Customers or potential customers (e.g. consumer market, ‘youth market’)
- Geographical area (e.g. North American market or European market, Global vs Local)

Question 2

Define industry?

Answer 2

 An industry consists of suppliers who produce similar goods and services.
(e.g. aerospace industry, automobile manufacturing industry, a construction industry etc)
 Within an industry, there may be different segments.
 An industry segment is a separately-identifiable part of a larger industry.
(e.g. insurance industry has several sectors, including general insurance and life assurance)
 Management need to recognise which industries and segments they operate in

Question 3

Name generic type of industry by Porter? Only names

Answer 3

1. Fragmented industries
2. Emerging industries
3. Mature industries
4. Declining industries
5. Global industries

Question 4

Define generic type of industry by Porter
1.Fragmented industries

Answer 4

• Businesses are small and each sells to a small portion of the total market
• Examples are dry cleaning services, hairdressing services, and shoe repairs

Question 5

Define generic type of industry by Porter
2.Emerging industries

Answer 5

• That have only just started to develop, and likely to become much bigger
• Examples are space travel industry and telecommunication industry in Africa

Question 6

Define generic type of industry by Porter
3.Mature industries

Answer 6

• Where products have reached the mature phase of their life cycle.
• Examples are automobile manufacture and soft drinks manufacture.

Question 7

Define generic type of industry by Porter
4.Declining industries

Answer 7

• Total sales are falling and number of competitors in market is also falling.
• An example in landline telephone services

Question 8

Define generic type of industry by Porter
5.Global industries

Answer 8

• Operate on a global scale
• Examples are microprocessor industry and the professional football industry

Question 9

Define convergence in industry, what are two types of convergence?

Answer 9

 Sometimes, 2 or more industries or segments converge, and become part of same industry
 This can have a major impact on business strategy.
 Convergence can be either:
- Demand-led convergence; where the pressure for convergence comes from customers. Customers begin to think of two or more products as interchangeable.
- (e.g. consumers reading newspaper online free of cost)
- Supply-led convergence; where suppliers see a link between different industries and decide to bridge the gap between industries.
(e.g. Convergence of entertainment, voice and data communication industries)

Question 10

What is five forces model by porter?

Answer 10

Michael Porter (‘Competitive Strategy’) identified five factors or ‘forces’ that determine the strength and nature of competition in an industry or market. These are:
 threats from potential entrants
 threats from substitute products or services
 the bargaining power of suppliers
 the bargaining power of customers
 competitive rivalry within the industry or market.
 Five Forces model provides a framework for analysing strength of competition in a market.
 It can also be used to explain why some industries are more profitable than others

Question 11

What are two factors affecting profitability of a company according to Porter?

Answer 11

 Porter argued that two factors affect the profitability of a company:
- Industry structure and competition in the industry; and
- Sustainable competitive advantage

Question 12

1.Threats from potential entrants ,Write factors which might create threat of high bariers to entry?

Answer 12

A number of factors might help to create high barriers to entry:
 Economies of scale
 Capital investment requirements
 Access to distribution channels
 Time to become established
 Know-how
 Switching costs.
 Government regulation

Question 13

threats from substitute products or services, write how to identify it ?

Answer 13

1.Can we find new markets for our product?
2.To what extent is there a danger?
3.Can it be minimized by differentiation and low costs?

Question 14

About bargaining power of buyers, write where it is high.

Answer 14

1.Concentration of buyers
2.Alternative source of supply exist
3.Cost of purchse is high in proportion of total cost
4.Threat of backward integration
5.Low switching cost
6.Buyers have low profit
7.Buyers have full information

Question 15

About Bargaining power of suppliers, write where it is high.

Answer 15

1.Few suppliers
2.Few substitutes
3.Switching cost is high
4.Possiblity og integrating forward
5.Customers not significant
6.Suppliers product is differentiated

Question 16

About Porter five forces , write about rivalry where it is greater.

Answer 16

1.Rivals are of similar size
2.Slow growth in market
3.High fixed costs
4.Price wars to maintain turnovers
5.Lack of differentiation
6.High exit barriers

Question 17

What is The ‘classical’ product life cycle?

Answer 17

 A ‘life cycle’ is the period from birth or creation of an item to the end of its life.
 Products, companies and industries all have life cycles.
 Classical life cycle for a product/industry goes through 4 stages or phases:

Question 18

What are 4 stages of life cycle of poduct ,

Answer 18

1.Introduction (in which product take off)
2.Growth Phase (in which it shake out)
3.Maturity Phase (in which it is at peak, saturation)
4.Declining Phase

Question 19

What are benefits of life cycle costing?

Answer 19

Benefits of Life cycle costing
 Potential profitability of products can be assessed before its major development
 Non-profit-making products can be abandoned at early stage before costs are committed.
 Techniques can be used to reduce costs over the life of the product.
 Pricing strategy can be determined before the product enters production.
 Attention can be focused to get the product to market as quickly as possible.
(The longer company can operate without competitors the more revenue can be earned)
 By monitoring actual performance against plans, lessons can be learnt for future products.
 Also useful for assessing strategic position and the nature of competition in a market.

Question 20

What are Criticism on PLC approach?

Answer 20

Criticism on PLC approach:
 Relevant only for products where consumer demand is high
 Underlying stage of PLC is determined by marketing actions.
 Stages cannot be easily defined.
 Strategic decisions can change PLC

Question 21

What is Timing of market entry and market exit (Relevance to strategic management)?

Answer 21

 Entrepreneurial companies might look for entering a new market during introduction
 More cautious companies might delay their entry into the market until the growth phase
 Companies are unlikely to enter a market during maturity phase
(unless they see growth opportunities in a particular part of the market)
 A company might need to make strategic decision about leaving a market, when product is in its decline phase. It should be possible to make profits in a declining market, but better growth opportunities might exist in other markets

Question 22

What is Cycle Of Competition?

Answer 22

 It is another concept for understanding the behaviour of competitors in a market.
 When a company achieves some success in market, competitors might try to do something even better in order to gain a competitive advantage.
 A new initiative by one company will result in a counter-measure from another company.
 A typical cycle of competition affects prices and quality.
- A rival company might start to sell its product at a lower price to take its share
- Another rival company might improve the quality at same same price as yours
- First company might respond to them by improving its quality and reducing price.
 In maturity or decline phase
- It becomes more difficult to lower prices without reducing quality.
- Competitors might try to gain a bigger share by selling at a lower price with low quality
- It lead to a ‘spiral’ of falling prices and falling quality and the life cycles comes to an end
 Concept of the cycle of competition is useful for strategic analysis, because it can help to explain strategies of companies in a market, and to assess future initiatives of competitors.

Question 23

What are strategic groups ?

Answer 23

 It is a number of entities that operate in the same industry and that have similar strategies
 All entities in same strategic group can then be treated as if they are a single competitor.
 Instead of analysing each competitor individually, they can be analysed in groups
 When there are only a few competitors in the same industry, the concept of strategic groups has no practical value

Question 24

What is Strategic space?

Answer 24

 When all companies in an industry are put into strategic groups, and these groupings are analysed, a strategic space might become apparent.
 It is a gap in the market that is not currently filled by any strategic group.
 Existence of strategic space might provide an opportunity for a company to fill the space.

Question 25

What is Product differentiation?

Answer 25

 In most markets, products are differentiated in various ways.
 They are similar, but there are also noticeable differences like product design, pricing or branding etc
 Products might also be differentiated by the way in which they are delivered to customers. (e.g. internet service, home-delivery meal etc).
 Should make a product different from rival products in a way that customers can recognise.
 This strategy is usually associated with charging a premium price for the product - often to reflect higher production costs and extra value-added features provided for consumer
 Examples are Mercedes cars, Marriot hotels, Nesvita Milk (perceived for strong bones)

Question 26

What is Market segment?

Answer 26

 A market segment is a section of the total market in which the potential customers have certain unique and identifiable characteristics and needs.

Question 27

What is Market segmentation?

Answer 27

 Market segmentation is the process of dividing the market into separate segments, for the purpose of developing differing products for each segment.
 A business entity might try to sell its products to all customers in the market.
 However, a business might instead choose to target its products to a particular segment

Question 28

Name Various ways of Market segmentation?

Answer 28

There are various ways of segmenting the market such as:
 Geographical area
 Quality and performance
 Function (e.g. running shoes, football boots, hiking boots, riding boots, snow boots etc)
 Type of customer: for example, consumers and commercial customers
 Social status or social group
 Age (e.g. adults, teenagers and younger children)
 Life style.

Question 29

What are benefits of market segmentation?

Answer 29

1.Better matching of customer needs
2.Enhanced profits for business
3.Better opportunities for growth
4.Retain more customers
5.Target marketing communications
6.Gain share of the market segment

Question 30

In BCG Matix , what are stars?

Answer 30

 High growth businesses or products which are relatively strong as regards competition.
 Often they need heavy investment to sustain their growth
 Eventually their growth will slow and will become cash cows(if maintain its market share)

Question 31

In BCG Matrix , what are cash cows?

Answer 31

 Cash cows are low-growth businesses or products with a relatively high market share.
 These are mature, successful businesses with relatively little need for investment.
 They need to be managed for continued profit

Question 32

In BCG Matrix , What are question marks?

Answer 32

 Businesses or products with low market share but operate in higher growth markets.
 They have potential, but may require significant investment to grow market share
 Management have to think hard about “question marks”
(which ones should they invest in and which ones should they allow to fail or reduce)

Question 33

In BCG Matrix , What are dogs?

Answer 33

 Businesses or products that have low relative share in unattractive, low-growth markets.
 May generate enough cash to break-even, but they are rarely worth investing in.
 A strategic decision for entity may be to choose between immediate withdrawal from the market or enjoying the cash flows for a few more years before eventually withdrawing.
 It would be an unwise decision to invest more capital in ‘dogs’, in hope of increasing share

Question 34

How BCG Matrix is used?

Answer 34

 Build Share Company can invest to increase market share
(e.g. turning a “question mark” into a star)
 Hold: Company invests just enough to keep the SBU in its present position
 Harvest: Company reduces the investment in order to maximize short-term cash flows & profits from SBU (May be turning Stars into Cash Cows)
 Divest: Company can divest the SBU by phasing it out or selling it
(e.g. investing in the more promising “question marks”).

Question 35

What are Weaknesses in BCG model analysis?

Answer 35

 A product can have a strong competitive position in market, even with a low market share.
 Competitive strength can be provided by factors such as product quality, brand name or brand reputation, or even low costs.
 A company might benefit from investing in market where sales growth is low.
 It might be difficult to define the market.
- There might be problems with defining the geographical area of the market.
- It might also be difficult to identify which products are competing with each other.
 BCG matrix might be better for analysing performance of strategic business units (SBUs) and market segments but It is not so useful for analysing entire markets
 It might be difficult to define what is meant by ‘high rate’ and ‘low rate’ of growth
 It might be difficult to define what is meant by ‘high’ market share and ‘low’ market share.
 Care is therefore needed interpreting a BCG analysis.

Question 36

What is strategy for Cash Cows?

Answer 36

 Defend and maintain market share.
 Possibly low spend on Research & Development (R&D).
 Use cash from this product to invest in otherSBU.

Question 37

What is strategy for questions marks ?

Answer 37

 The product will need a lot of cash to increase market share.
 The choice is between investing or to disinvest/ abandon it.

Question 38

What is strategy for stars

Answer 38

 Promote aggressively.
 Invest in R&D.
 Stars should generate enough cash to be self-sustaining.

Question 39

What is strategy for dogs?

Answer 39

 Product has a limited future, and strategic decisions should focus on
its short-term future.
 Should avoid risky investment trying to change the game.