CIPS L4M2 Chapter 2 (2.2)

Question 1

What needs do market meet?

Answer 1

The needs of one or more groups of buyers

Question 2

What is the definition of an industry?

Answer 2

Industries are collections of organisations whose bussines is to meet needs at a profit

Question 3

What does market analysis involve?

Answer 3

It invloves gaining an understanding of how attractive an industry is to the business and a key way to do this is to use Porter’s Five Forces model

Question 4

What are Porter’s five (5) competitive forces when analysing an industry?

Answer 4

• Potential entrants - threat of new entrants
• Rivalry - among existing competitors
• Suppliers - Bargaining power of suppliers
• Buyers - Bargaining power of buyers
• Substitutes - Threat of substitue products or services

Question 5

What are the factors that determine the intensity of rivalry?

Answer 5

• Many or equal-size suppliers
• Slow industry growth
• High fixed costs
• Lack of differentiation and switching costs
• Capacity is added in significant amounts
• High exit barriers - e.g. specialised assets, fixed cost of exit and social restriction such as unemployement

Question 6

How does rivalry affect a business?

Answer 6

The cost of retaliation results in lower profits for all companies. Businesses need to make a profit in order to be able to stay in a market. How much profit is made depends on the amount of rivalry in the market. The greater the rivalry the more other companines will retaliate and try to win market share.

Question 7

What is buyer power?

Answer 7

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

Buyers are more powerful when they are few and dominate the market, they know the product and its prices, they buy in large volumes and are able to use other products or service.

Question 8

What are the four (4) stages in the product life cycle?

Answer 8

• Introduction - Research and development
• Growth - increase sales
• Maturity - sales at peak but starts to slow down
• Decline - sales decline to low level - withdraw from market

Question 9

Why is it essential to understand buyers?

Answer 9

To understamd their bargaining power. Buyer’s motives can change during the life of a product

Question 10

What factors contribute to supplier’s bargaining power?

Answer 10

• There are no substitues
• They are larger than the organisations in the industry
• The product or service is an important part of the value chain
• The product or service is differentiated
• Significant switching cost

Question 11

What is an important role of substitue products and services?

Answer 11

To limit the price charged. The higher the price, orgainsations will look for a substitue that can meet needs at a lower price.

Question 12

What are the three (3) factors when considering a substitution?

Answer 12

• Relative value-to-price ratio - value of product or service provided in comparison to its prcie
• Switching costs - all costs involved from switching from one supplier to another
• Organisation’s willingness to to switch

Question 13

What are the differing inclinations that cause buyers to make different decisions about switching?

Answer 13

• Resources - i.e. Finance
• Risk profile
• Technological understanding
• Previous substitutions
• Intensity of rivalry
• Buying orgainisation’s strategy - low cost, differentiation

Question 14

What effect does new entrants have on an industry?

and

What are the barriers to a new entrant?

Answer 14

New entrants reduce the profitability of existing companies in the industry

Barriers are: •Economies of scale •Product differentiation •Brand identity •Capital requirements •Access to distribution •Cost advantages