L4M2 Chapter 2 Flashcards
What is a Market?
A Market is a place where goods are bought and sold
or
Where buyers meet sellers to trade products and services.
This can relate to a specific location or to the general economic environment
What is an Industry?
An industry is formed to service a market and is made up of segments which are groups of organisations that share common characterics requried by the buyer
What are the three (3) Industry classifications?
Primary activities (extractive e.g. mining)
Secondary activities (manufacturing)
Tertiary activities (services)
What are the three (3) generic strategies for competing in an industry
or
Michael Porter’s suggested Generic Strategies for competing in an industry
Cost leadership
Differentiation
Focus on a narrow niche segment
How can every company be competitive?
Low Cost = Cost leadership & Cost Focus
Differentiation = Pure differentiation & differentiation focus
What is the meaning of segment?
A group of products or services that provide specific but different value for a buyer
Example car company→ car for low-income buyers looking for value for money and luxury car for people who are willing to pay more for owning a certain brand
What is segmentation?
Grouping different needs together and aiming for a product or service that meets the exact needs of one or more than one groups
Most markets can be segmented and this allows organizations to target their products with greater precision, which can lead to greater profit
Example: sugar for household vs sugar for Bakery
What are the four (4) variables that can lead to segment?
Product or service segment
Price levels (discounts), Features, Design, Packing, Performance
New vs replacement - example → products sold together or bundled with ancillary services i.e. washing machine with insurance
Buyer segments
Strategy: quality product *Size: Annual purchase value (Kraljic matrix) *Ownership: Influence the motivation of that company * Financial strength: Frequency of purchases *Order patterns *Consumer markets influence segment for buyers by their Lifestyles (exercise clothing), Language (DVDs newspapers), Purchase occasion (birthday or anniversary)
Channel/Distribution segments
Direct sale retail vs distributors *Direct marketing vs retail - selling directly to customers e.g. Amazon *Exclusive vs non-exclusive outlets - can affect bargaining power and require different activities e.g. Rolex in watches BMW in cars
Geographical segments
Localities, regios or countries: water companies can serve locally only *Weather zones: different weather climate countries *Country groupings: countries packing or logistical infrastructure
What are the questions to ask when creating new segments?
What impact will this have on competitive advantage?
Can other technologies or product designs deliver buyer needs in a better way?
Can the product or service be enhanced to provide better value?
Can the needs of some buyers be better met by reducing the number of functions the product or service delivers at the same time as reducing the price?
Are there other bundles of products or services and ancillaries?
Are different channels available for reaching additional buyers or serving existing buyers more effectively?
Why are segments important in Procurement and supply analysis of a market?
They help shape and manage supply markets
They help identify specific market segments and find suppliers who have the best capabilities
Encourage new entrants who will create price pressure
List three ways of segmenting a market?
Grouping needs based on buying groups
Grouping needs based on distribution channels
Grouping needs based on geography
What is a value chain and the benefits of analyzing it for Procurement?
A value chain is a way of summarizing the major activities (both primary and secondary) of any organization
By analysing the value chain for key suppliers, a procurement professional can gain an important insight into how suppliers support the buyer’s business and also there might be cost reduction.
List the six (6) types of markets
Manufacturing
Construction
Retail
Finance
Agriculture
Services
What are the five (5) facotrs to analyze markets?
Objectives (achievement)
Drivers (key factors in objectives)
Governance (rules, structures to improve efficiency)
Ownership (desisicion-making power)
Commodity or Non-commodity (extent of the goods)
What is the meaning of manufacturing?
What are the key factors when analysing a manufacturing market?
Manufacturing is the transformation of raw materials and componets by mechnical, physical or chemical means into products that are sold to companies or to consumers
Objectives - Improve quality, Reduce costs, Increase flexibility
Drivers - Differentiated and intelligent products, Reduce time to market, Increase productivity, Reduce costs by doing more with less
Governance - Fragmented supply chains with suppliers forming collaborative networks
Ownernship - Predominantly shareholders
Commodity or non-commodity - Raw materials (commodity), Components and finished products (non-commodity)
What are the generic issues that affect manufacturing markets?
Require investment and access to skilled workforce, raw materials and components
High capital cost and time to build network of suppliers
Low profitability. Barriers to entry are high
No immediate substitutes (goods which can replace)
High switching costs
What are the two (2) main groups that manufacturing companies fall into?
Group 1 - Large oranisations whose bargaining power is high → provide raw materials e.g. steel
Group 2 - Fragmentd with smaller suppliers with little bargaining power → provide components
What are the two (2) largest segments of the construction market?
Residential - industrial and commercial buildings
Infrastructure - roads, bridges and railways
What are the key factors when analysing the construction market?
Objectives - Encourage investment, Reduce regulatory risks, Improve timeliness and quality, Encourage innovation
Drivers - Stage of economic cycle, Access to commodities, Quality of the supply chain (tier 2&3 subcontractors), Availabiltiy of skilled staff, Energy and resource efficient materials (sustainability)
Governance - Architects, contractors and manufacurers. Client led
Ownernship - Partnerships, Shareholders
Commodity or non-commodity - Materials (commodity), Services (non-commodity)
What are the generic issues that affect construction markets?
High barriers to new entrants - experience and reputation
No immediate substitutes (goods which can replace) although there are substitues for materials and components, there are no substitues for construction itself
Low switching costs - bargaining power of suppliers is low
Small contracts - high buyer bargaining power
Large contracts - low buyer bargaining power
Infrastructure construction (roads, bridges and railways) - *poor levels of productivity *project performance *skilled labour *Going green (sustainability)
What are the eight SIC subdivisions covering the retail industry?
Buidling materials
General merchandise
Food stores
Automible sales and gasoline service stations
Apparel and accessories
Home furniture, furnishings and equipment stores
Eating and drinking places
Miscellaneous retail
What are the key factors when analysing the retail market?
Objectives -Grow market share, Increase brand awareness, Enhance customer relationships, Introduce new products
Drivers - Economic growth, Identify customer needs, Rise in social media shifting power to consumers
Governance - Lagre retail groups using a global network of smaller suppliers
Ownernship - Franchises, Sole traders, Shareholders
Commodity or non-commodity - Food (mix of commodity and non-commodity), Other retailers (non-commodity)
What are the generic issues that affect retail markets?
Barriers to entry is high - threat of new entrants depend on whether segment requires physical presence or online
Substitues are high - several alternatives open to buyer
High supplier bargaining power - Large and global firms can determine the price they charge and also where to place their product on retail shelves
Limited price increases - buyers have significant choice and can choose from the many alternative sources for the same or similar products
Intense competition
What are the three (3) main segments in the financial service industry?
Financial services - banks, building societies, savings banks and credit unions
Insurance, re-insurance and pension funding - life insurance, travel insurance, health insurance, property insurance, tranpsort insurance and liability insurance. It also includes employee benefits, pensions and retirement plans
Auxiliary activities - financial markets such as commodity and futures contracts and stock exchanges, brokerages, insurance agents and insurance loss adjustment
What are the key factors when analysing the financial market?
Objectives -Maintain stability, Increase efficiency, maintain standards of consumer protection, encourage investment and savings
Drivers - Availability of capital, Monetary policies, Level of merger and acquisition activity, Earnings growth, Emergence of new markets
Governance - Regulated by government but large institutions are increasly dominant as they merge products
Ownernship - Partnerships, Shareholders
Commodity or non-commodity - Insurance (commodity), specialised services (non-commodity)
What are the generic issues that affect the financial service industry?
Barrieris are high - Threat of new entrants is low
Low level of substitue - but can change *Bitcoin
Bargaining power of suppliers is low
Bargaining power of customers is low
Rivalry is high
Services market can be considered to include what activities?
Information and communication
Professional, scientific and technical activities
Administrative and support service activities
Other service activities
What are the key factors when analysing the services market?
Objectives - Achieve high customer service, Build customer relationships, Continuously improve processes, Empower staff
Drivers - Availability of high quality staff, Increasing linkages, Differentiton
Governance - Largely people-based businesses
Ownernship - Franchises, Sole traders, Partnerships, Shareholders
Commodity - Largely non-commodity
Variability People (rather than parts/ products) Improve customer expenses Output How to measure Clear specifications Create loyalty quality & time bound Low start up costs
What are the generic issues that affect service markets?
Barrieris are low - Threat of new entrants is high
Low level of substitue
Bargaining power of suppliers is high
Bargaining power of buyers is low
Rivalry is high, switching costs are low
What are the five (5) main SIC subdivisions for agriculture?
Agricultural production - crops → Farms, orchards, greenhouses and nurseries
Agricultural production - livestock → Farms, dairies and production facilities that raise livestock for sale
Agricultural services → Soil preparation, crop services, veterinary services and management services
Forestry → Tree farms, nurseries and rea-forestation
Fishing, hunting and trapping → Commercial fishing and the operation of fish and game preserves
What are the key factors when analysing the agricultural market?
Objectives - Increase production, Support food security, Maintain high levels of food safety, grow food sustainable
Drivers - Climate change, Changes in world population, The need to improve crop yields globally, Ethical procurement, Food standards on public health
Governance - Lagre global food retailers
Ownernship - Sole traders, Co-operatives, Shareholders
Commodity - Largely commodity
What are the generic issues that affect agricultural markets?
Barrieris are high- Threat of new entrants is low
There can be substitues for product
Bargaining power of suppliers is high
Bargaining power of buyers of large company is high but low in small industries
Rivalry is high
What is the role of procurement in analyzing markets?
Analyse
Assess
Find ways to maximise value
When analysing large markets what is the best thing to do?
Segment the market into buying groups with similar needs and organisations whose products meet those needs.
When analysing markets what determines who gets the biggest share of the available profit?
The relative bargaining power of buyers and suppliers
When analysing a market what determines the structure of that market?
The threat of new entrants and the availability of substitue products or services
*High barriers → implication for procurement and supply is that there is no pressure on existing companies to reduce their prices
What is the Karljic Matrix?
A tool for analyzing the diversity of markets
- a four-box matrix that reflects the segmentation of spend based on an assessment of the value of the spend relative of a category to the complexity/supplier risk to acquire it.
The Karlijic definition of a category’s importance - is the profit impact of the category
What are the Kralijic’s Matrix four (4) generic strategies
Strategic:
High importance & High complexity/ supply risk - Ciritical to own products or services, High complexity, Seek partnerships
Leverage:
High importance & Low complexity/supply risk - Many suppliers, risk of failure is low, use competition to drive down prices
Critical:
High complexity/supply risk & Low importance - Specialist items, capacity constrained, seek continuity of supply
Tactical:
Low complexity/supply risk & Low importance - Non-core items, simplify procurement process, aim to bundle items into larger contracts
What are the factors that influence the importance of spend?
Value of spend: 80/20 rule - does it make up 80% or more
Importance
Universality- is it used in many components
Quality Impact
Volume
Company growth impact
What are the activities of an organisation?
Primary activities
e.g. fast food outlet’s primary activity is to prepare ingredients and cook food
Support activities
e.g. fast food outlet’s support activites managing staff
What needs do market meet?
The needs of one or more groups of buyers
What is the definition of an industry?
Industries are collections of organisations whose bussines is to meet needs at a profit
What does market analysis involve?
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
What are Porter’s five (5) competitive forces when analysing an industry?
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
What are the factors that determine the intensity of rivalry?
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
How does rivalry affect a business?
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.
What is buyer power?
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.
What are the four (4) stages in the product life cycle?
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
Why is it essential to understand buyers?
To understamd their bargaining power. Buyer’s motives can change during the life of a product
What factors contribute to supplier’s bargaining power?
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
What is an important role of substitue products and services?
To limit the price charged. The higher the price, orgainsations will look for a substitue that can meet needs at a lower price.
What are the three (3) factors when considering a substitution?
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
What are the differing inclinations that cause buyers to make different decisions about switching?
Resources - i.e. Finance
Risk profile
Technological understanding
Previous substitutions
Intensity of rivalry
Buying orgainisation’s strategy - low cost, differentiation
What effect does new entrants have on an industry?
and
What are the barriers to a new entrant?
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
What are direct and indirect cost?
Direct Cost - cost of activities involved in making a product or delivering a service together with any materials or components used (can be fixed and variable cost)
Indirect Cost - cost of any support activities (can be fixed and variable cost)
What are the types of information sources that can be used to estimate the breakdown of direct and indirect costs?
Company annual reports - Break even analysis sales, fixed cost, variable cost
Market data - primary research and financial analysis
Technical data - cost synthesis or should-cost analysis (procurement staff working with operations colleagues)
Request for information (RFI) - asking suppliers for information on direct and indirect costs
Plant visits - can show → how well the company is doing, how old the equipment is, the work practices, how efficient is the supplier’s buying, are the building modern and pleasant
Discount lists - discounts once break-even point is reached
Why is a purchasing budget important?
The purchasing budget is important because it controls an organisation’s cost.
An important and essential input to preparing a budget is an understanding of the direct and indirect costs of the supplied item
What is the difference between data and information?
Data is raw material
Information is raw material processed to create a product useful to the user
Example: useful information supplier’s break-even point, data required would be cost of production for differenct levels of output
Name one process for collecting and analysing data and information?
OWN-IT
Outline - Be specific *Define what is already known (mind map) *Create the outline *Define any gaps
Wide search - Google
Narrow search - Skim read books (introduction and conclusion, diagrams, pictures, graphs, note main headings, mind map)
Increase your stockpile of information - store useful information in one place *Interviews
Transform your stock pile into new knowlege - ‘theme it’
What is a mind map?
An effective way of getting information down on paper and then finding relationships between the pieces of information
What is purchase price analysis?
and
List the questions that may be answered from the analysis?
Information to help answer key questions that determine the cost of what an orgainisation buys
Which cost are both necessary and legitimate?
Are the values for these cost items reasonable?
Is the overhead allocation subsidising another item?
Is the basis for allocating overheads reasonable?
Has the supplier included allowances for contingencies?
Are the profits sufficient to keep the supplier motivated and interested?
