chp#7

Question 1

Customers and markets (3)?

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

Industries and sectors? 4 points

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

Generic types of industry (by Porter)?

Answer 3

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

Question 4

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

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

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

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

Global
industries

Answer 8

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

Question 9

Convergence

Answer 9

1.Sometimes, 2 or more industries or segments converge, and become part of same industry
2.This can have a major impact on business strategy.

Question 10

Market segment?

Answer 10

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

Question 11

** ways of segmenting the market **

Answer 11

1. Geographical area
   2 Quality and performance
   3 Function (e.g. running shoes, football boots, hiking boots, riding boots, snow boots etc)
   4 Type of customer: for example, consumers and commercial customers
   5 Social status or social group
   6Age (e.g. adults, teenagers and younger children)
   7 Life style.

Question 12

Benefits of Segmentation? (6)

Answer 12

1 Better matching of customer needs
1 Customer needs differ.
2 Creating offers for each segment makes sense & provides customers with better solution
2 Enhanced profits for business
1 Customers have different disposable income.
2 They are, therefore, different in how sensitive they are to price.
3 By segmenting, businesses can raise average prices and subsequently enhance profits
3 Better opportunities for growth
1 Market segmentation can build sales.
4 Retain more customers
1 Customer circumstances change, for example they grow older, form families, change
jobs or get promoted, change their buying patterns.
2 By marketing products that appeal to customers at different stages of life, a business can
retain customers who might otherwise switch to competing products and brands
5 Target marketing communications
1 Businesses **need to deliver their marketing message **to a relevant customer audience.
2 If the target market is too broad, there is a strong risk that the key customers are missed
and the cost of communicating to customers becomes too high / unprofitable.
3 By segmenting markets, target customer can be reached more often and at lower cost
6 Gain share of the market segment
1 Through careful segmentation, businesses can often achieve competitive production and
marketing costs and become the preferred choice of customers and distributors.
2 Segmentation offers the opportunity for smaller firms to compete with bigger ones.

Question 13

. Convergence can be either:2 ?

Answer 13

**- **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 14

Market segmentation ?

Answer 14

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 15

Strategic groups**4?

Answer 15

1 It is a number of entities that operate in the same industry and that have similar strategies

2 ** All entities ** in same strategic group can then be treated as if they are a single competitor.
3 ** instead **of analysing each competitor individually, they can be analysed in groups

4 When there are only a** few competitors** in the same industry, the concept of strategic groups has no practical value

Question 16

Strategic space**2

Answer 16

**When all companies **in an industry are put into strategic groups, and these groupings are analysed, a strategic space might become apparent.
1 It is a gap in the market that is not currently filled by any strategic group.

2 **Existence of strategic space **might provide an opportunity for a company to fill the space.

Question 17

Ways of product differentiation? 3

Answer 17

1 Product price
2Product branding
3 Product delivery

Question 18

Define Product price with examples?

Answer 18

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.

For example:

✓ Mercedes cars,

✓ Marriott hotels,

✓Nesvita Milk (perceived for strong bones)

Question 19

Define Product branding with examples?

Answer 19

Product branding

Products might be **differentiated **by introducing a unique

name, logo, design and slogan.

For example,
✓ Nike.
✓ McDonalds.
✓ KFC

Question 20

DEFINE Product delivery with examples?

Answer 20

Products might also be differentiated by the way in which they are delivered to customers.

For example,
✓ Internet service
✓home-delivery meal

Question 21

Competition analysis 5?

Answer 21

1 Analyzing competition is an important part of strategic position analysis.
2 It is also important to assess the strength of competition in a market, and try to understand what makes the competition weak or strong.
3 A company should also monitor each of its major competitors, because in order to obtain a competitive advantage, it is essential to know about what competitors are doing.
4 Five Forces model provides a framework for analyzing strength of competition in a market, and try to understand what factors makes the competition strong or weak.
5 It is **not used **to assess why some firms perform better than others.

Question 22

Profitability and competition

Answer 22

It can also be used to explain why some industries are more profitable than others

Question 23

HOW MANY FACTORS PORTER ARGUED?

Answer 23

Porter argued that** two factors** affect the profitability of a company:
1 Industry structure and competition in the industry,
and
2 Sustainable competitive advantage

Question 24

Michael Porter (‘Competitive Strategy”) identified how many factors or forces’ that determine the strength and nature of competition in an industry or market?

Answer 24

Michael Porter (‘Competitive Strategy”) identified five factors or forces’ that determine the strength and nature of competition in an industry or market.

These forces are:

1threats from potential (new) entrants
2. threats from substitute products or services
3 the bargaining power of suppliers
4the bargaining power of customers
5competitive rivalry within the industry or market.

Question 25

When competition in an industry or market is strong then? 4

Answer 25

1 firms must supply products or services at a competitive price, and cannot charge excessive prices and make supernormal profits.

2 If they do not charge the lowest prices, firms must compete by offering products that provide extra value to customers, such as higher quality or faster delivery.
3. When any of the five forces are strong, competition in the market is likely to be strong and profitability will therefore be low.
4 Analyzing the **five forces **in a market might therefore **help **strategic managers to choose the markets and industries for their firm to operate in.

Question 26

Threat from potential entrants? 5

Answer 26

Threat from potential entrants

1 New competitors will enter the market and will add to the **competition.
2 New entrants** might be attracted by the high profits earned by existing competitors into the market, or by the potential for making high profits.
3 The significance of this threat **depends on how easy or how difficult it would be for new competitors to enter the market.
4 In some markets, the cost **of entering a new market can be high, with new entrants having to invest in assets and establish production facilities and distribution facilities.

5 In other markets, the cost of entering the market can be
** fairly low.
6 The costs and practical difficulties of entering a market by the new businesses are called barriers to entry**.

Question 27

Low barriers to entry? 4

Answer 27

1 New firms can easily enter into market.
2 Existing firms have to keep their prices low and meet customers’ need effectively
3 Competition will be strong
4 **No **opportunities for high profit margins.

Question 28

High barriers to entry? 4

Answer 28

1 New firms face difficulties to enter into the market.

2 Existing firms sell their products at high prices due to low pressure to cut their costs
3** Competition** will be low
4 **High profit margins **exist in market

Question 29

Factors serve as high barriers to entry? 7

Answer 29

1 Economies of scale
2 Capital investment requirements
3 Access to distribution channels
4 Time to become established
5 Technical Know-how
6 Switching costs
7Government regulation

Question 30

1 Economies of scale?

Answer 30

1 Economies of scale are** reductions in average costs **that are achieved by
producing and **selling **an item in larger quantities.
2 In an industry where economies of scale are large, and the biggest firms can achieve substantially lower costs than smaller producers, it is much more difficult for a new firm to enter the market.
3 This is because it will not be big enough at first to achieve the economies of scale, and its average costs will therefore be higher than those of the existing large-scale producers.

Question 31

Capital investment requirements?

Answer 31

If a new entrant to the market will have to make a **large investment **in assets, this will act as a barrier to entry, and deter firms from entering the market when they **do not want **the investment risk.

Question 32

Access to distribution channels? 2

Answer 32

1 In some markets, there are only a limited-number-of-distribution outlets or distribution channels.
2 If a new entrant will have difficulty in gaining access to any of these distribution channels, the barriers to entry will be high.

Question 33

Time to become established?2

Answer 33

1 In industries where customers attach great importance to branding, such as the fashion industry, it can take a long time for a new entrant to **become well established **in the market.

2. When it takes time to become established, the costs of entry are high.

Question 34

Technical Know-how (EXPERIENCE)?

Answer 34

This can be
time-consuming
and
expensive
for a new entrant
to acquire

Question 35

Switching costs?4

Answer 35

1 **Switching costs **are the **costs **that a buyer has to incur in **switching from **one supplier to a new supplier.
2 In some industries, switching costs might be high.

3 For example, the costs for a **company **of switching from **one audit firm to another **might be **quite high, and deter a company **
from wanting to change its auditor

4** When switching costs are high, it can be difficult for new entrants to break into a market.**

Question 36

Goverment regulation with example ?

Answer 36

1 Regulations within an industry, or the granting of rights, can make it difficult for new entrants to break into a market.

For example, it might be** necessary to obtain a license** to operate, or to become registered in order to operate within an industry.