Commonly Used Method Of Assessing Imdustries/Companies Flashcards
How long are economic cycles?
Typically economic cycles have a six to 12 year term. However it has also been suggested that there is a longer 49-50 year cycle called the Komdratiev wave, that is a function of technological changes and developments.
What are Porters 5 competitive forces or 5 key influence on industry structure at any point in time?
- new entrants
- industry competitors
- substitutes
- suppliers
- buyers
What do porters 5 competitive forces do?
The relative effect of each of the forces will change over time as the industry develops.
The five forces will affect the ability of a company to create value and capture this value for itself, rather than passing the value on to its customers through lower sales prices, or to its suppliers through higher input prices.
How to barriers to entry affect industries?
The inability to prevent new firms entering the market will see supernormal profits eroded.
A key driver of a firms profitability will be its ability to construct effective barriers to entry
What are some barriers to entry?
- Low prices relative to costs
- The need to invest in large amounts of financial resources to compete
- the availability of capital to invest in the market
- Economies of scale meaning new entrants will not be able to produce goods and services as cheaply as larger firms
- Distribution channels controlled by existing companies in the market
- High costs for customers to switch from one supplier to another
- Government policy and regulation
What does rivalry do and what are some examples?
The more intense the rivalry, the lower the potential for growth.
- the number of firms competing in the industry
- the relative size of competitive firms. Firms of equal size will be more serious rivals to each other
- the rate of sales growth. Slow rates of growth in industry sales means more competition for market share
- fixed costs. Companies with high fixed costs are more likely to compete aggressively for sales, since the revenue will flow straight through to profit
- the level of exit barriers. If it is hard to leave the industry, rivalry will be greater, since companies have no choice but to stay in the industry.
What is the impact of substitute goods on a industry?
It will put a ceiling on the price the industry can charge. The closer the substitute is in terms of performance, the greater the pressure
What are factors affecting the bargaining power of the industry versus its suppliers?
- the number of suppliers. If there are only a few, they have more power
- the importance of the good supplied to the industry
- the availability of substitute products for that currently being supplied
How do buyers impact on the industry? And what are factors affecting the bargaining power of buyers?
It depends if buyers can exploit the industry or if the industry can exploit the buyers
- the proportion of sales bought by one buyer
- the importance of the product to the buyer
- the proportion of the buyer’s total costs that the product represents. Products that are relatively minor to the buyer will be able to increase prices more easily than products that represent a major proportion of the buyer’s budget.
- the degree of cost pressure the buyer is suffering from its own customers
What is the product life cycle?
A cycle which expresses the pattern of
- Introduction phase
- Growth phase
- Maturity
- Decline
- Obsolescence
What is the introduction phase?
Start up phase or a product where sales are fairly low due to consumer uncertainty, high prices and other related factors. Profit margins are low due to high start up costs and low demand
What is the growth phase?
Rapid acceleration growth occurs as the market develops and demand expands substantially, giving high growth in sales. Profit margins are high due to lack of industry capacity. New entrants will have to work hard to develop their own niches and to differentiate their product from that of the pioneer in the market.
What does the maturity phase entail?
Mature growth - initial demand has been satisfied and growth levels I sales decline. Profit margins decline as competition continues to enter the market. Competition becomes based more on price rather than product differentiation
Market maturity - sales grow in line with the economy, profit margins move towards a normal level due to competition. The emphasis shifts away from product innovation toward cost efficiency due to price based competition becoming more important
What is the decline phase?
Deceleration of growth and decline - shifts of demand, growth in substitute products, etc cause demand to decline. Profit margins fall as companies compete for falling demand and capital moves to other more profitable areas of the company
What is the obsolescence phase?
Where the product has reached the end of its life due to technical or regulatory changes and developments with demand falling to 0 and profit potential being extinguished.
