L4M2- Chapter 2- Understand market management Flashcards
An industry is formed to service a market but what makes up industries?
Industries are made up of segments which are groups of organisations that share common characteristics
What is a market?
A market is where buyers meet sellers to trade products/ services.
What are the 6 industrial sectors?
Manufacturing
Construction
Financial
Agriculture
Retail
Service
They can also be divided into 3 groups primary, secondary and tertiary.
What is the difference between primary, secondary and tertiary sector?
Primary- Extract raw commodities
Secondary- Process raw commodities or manufacture
Tertiary- Service industry
They can be classified by SIC (standard industry classification)
What are the 3 generic strategies for competing in an industry?
Cost leadership
Differentiation
Niche Segments
What is a market?
What is an industry?
What is a segment?
A market is where buyers and sellers meet.
An industry is formed to service a market.
A segment is where individual organisations operate within. An organisation could play in multiple segments.
E.g. Coca Cola play in the Secondary area (manufacturing drinks) but are an organisation that sit in the grocery retail industry. They sit in different segments to service different customer needs- water, juices and carbonated drinks
What are some of the ways in which segments are segregated in a market?
A group of products or services that provide specific but different value for their buyers is called a segment.
1) Product/ Service- Could be about the size of product (large construction equipment for a quarry vs smaller for houses), could be the price levels, features, packaging, performance
2) Buyer segments- based on who is buying the product e.g. the age, income, size of household.
3) Distribution channel- Depending on how the and who you are selling to for example direct sale vs distributers, selling through retailers vs selling directly to customers (amazon)
4) Geography- Required attributes may differ based on location, routes, climate zones, country requirements etc
When analysing specific markets there are a number of factors that should be considered- what are they? (hint ODGOC)
Objectives- What is the goal to achieve
Drivers- which factors affect those objectives
Governance- rules/ structures that are in place
Ownership- who has decision making powers
Commodity/non commodity- are the goods/ services commodities
Summarise the manufacturing sector
Hint- think about objectives, drivers, governance, ownership, commodity, challenges and porters 5 forces (e.g. how hard is it for new entrants)
Manufacturing is the transformation of raw materials and components into products that are sold to consumers or companies.
Can be broadly split into 2 groups- large organisations with high bargaining power (e.g. Steel). Second group is more fragmented and tend to be smaller suppliers who provide components.
Very large and diverse market segment
Generic issues in the segment include: investment into machinery, requirement for a skilled workforce, high capital/upfront costs, low profitability, low substitutability and potential for high switching costs
Example would be the automotive industry
Summarise the construction sector
Hint- think about objectives, drivers, governance, ownership, commodity, challenges and porters 5 forces (e.g. how hard is it for new entrants)
The two largest segments within construction are the residential/industrial/commercial buildings and the heavy infrastructure of roads, bridges and railways.
Barriers to entry are experience and reputation. Both of which take time to acquire if you are new to the field.
For large requirements contracts there are few companies which have the capabilities which means the bargaining power of the supplier is much higher. BUT there is often competitive tendering for contracts which can lower prices.
There are some challenges to the industry including poor levels of productivity, requirement to improve project performance, shortage of skilled labour and challenges with sustainability.
Often architects, contractors, manufacturers
Summarise the retail sector
Hint- think about objectives, drivers, governance, ownership, commodity, challenges and porters 5 forces (e.g. how hard is it for new entrants)
Includes building materials, general merchandise, food stores, automobile (inc petrol service station), apparel, home furniture, restaurants and miscellaneous
New entrants depends on whether it is online (where website set up is required) or brick and mortar (which requires significant investment)
High substitutability. Buyers are normally individuals with choice
High competition- think about food retail
Summaries the financial sector
Hint- think about objectives, drivers, governance, ownership, commodity, challenges and porters 5 forces (e.g. how hard is it for new entrants)
Creation, liquidation or change of ownership of financial assets e.g. shares, bonds and derivatives.
Customers can be individuals, businesses, non profit organisations or the public sector
3 main segments:
1) Financial services- banks, building societies etc
2) Insurance and pensions- life/travel/health/property insurance, employee benefits, pensions, retirement plans
3) Auxiliary services- commodity and futures contracts, stock exchanges, brokerages
Given the diversity analysis into the sector has to be very specific e.g. looking at purely retail banking. Individual customers have little to no bargaining power with banks. Banks tend to have similar offers so rivalry is often based on reputation.
Summarise the agriculture sector
Hint- think about objectives, drivers, governance, ownership, commodity, challenges and porters 5 forces (e.g. how hard is it for new entrants)
Includes crops, livestock, agricultural services (e.g. veterinary services), forestry and fishing
Often difficult barrier to entry due to significant investment in land/machinery and margins are often low.
Buyers are often large e.g. food retail stores, who will have a high level of bargaining power.
Summarise the services sector
Hint- think about objectives, drivers, governance, ownership, commodity, challenges and porters 5 forces (e.g. how hard is it for new entrants)
Most diverse of all the sectors and covers info/comms, professional/scientific/technical services, admin/support and ‘other’ services.
Main barrier to entry is the level of knowledge/skill required as the set up costs are low.
It can be hard to directly attribute costs to a service so buyers often just pay the going rate
Often high levels of competition as there will be many suppliers and switching costs are low
What are the 5 competitive forces in a market?
(hint- porters 5 competitive forces)
1) new entrants
2) Bargaining power of buyers
3) Threat of substitute products/services
4) Bargaining power of suppliers
5) Rivalry amongst existing suppliers
The buying power of the supplier is a major determinant of profit in the industry. What are some examples of where supplier bargaining power is strong?
No substitutes
Suppliers are larger than the buying organisation (e.g. think coca cola vs ocado)
The industry is not very important to the seller/supplier
The seller/suppliers product is important to the value chain of the industry or is differentiated produce
Switching supplier costs are high
Sellers pose a threat of forward integration
What are the stages of the product life cycle? Also how does the boston consulting matrix overlay?
1) introduction
2) Growth
3) Maturity
4) decline
Boston=
1) Question mark
2) Star
3) Cash cow
4) Dog
Give some examples of information sources that can be used to estimate cost and price breakdowns
Company annual reports
market data
technical data
RFI
Site visits
Discount lists
What is an evidence based negotiation?
When you have a thorough understanding of the cost build up of an item that an organisation buys/makes and can therefore identify ways to reduce cost without reducing quality
Example could be a project at ORL that looks at sourcing/ logistic/ operational efficiencies which do not undermine quality
OWNIT is a process for collecting and analysing data, what does it stand for?
Outline- What is there to be researched? be specific, understand what is already known, create the outline of what you want and define any gaps
Wide search- Often uses google, but about finding available information
Narrow search- study guide refers to this as skim reading the sources and making mind maps
Increase stockpile of info- Identify relevant information and store centrally from the wide and narrow. Can also include interviewing experts based on the searches.
Transform into new info- Organise the info in a meaningful way and discover new insights.
What is relative value to price?
The value to price ratio is the value that a product or service brings vs its purchase price.
This is often related to substituting a product and you therefore need to consider other factors before switching e.g. will the substitute require higher usage rates, what are installation costs, are there financial results, what is availability of the supplier like etc
what are the barriers to the threat of new entrants?
- Economies of scale
- Product differentiation
- Brand identity
- Capital requirements
- Access (e..g to distribution or tech)
- Access to market relationships
What will influence a buyer when faced with the option to substitute?
Relative value to price
Switching costs
Buyer inclination (e.g. to risk, the organisation strategy, resources)
What is the difference between fixed, variable, direct and indirect costs?
Fixed- Prices that do no change with output
Variable- change based on output
Direct- Can be specifically attributed to a project
Indirect- Cannot be specifically applied to a project
What sources of information are there to understand the value chain?
Annual reports
Market data
Technical data
RFI
Plant visits
Discount lists
What is SIC?
Standard Industry Classification is widely used coding system to define different industry
For example retail trade has SIC codes 5200-5999.
What is porters competitive forces used for?
It is a way doing industry analysis. It helps to understand the attractiveness of an industry.
The 5 forces together determine the ability of an organisation to make a profit in an industry. This is because the forces influence the prices that will be paid and the required costs
What is forward and reverse integration?
What is vertical integration?
Forward integration: cutting out the middleman, where a supplier buys the buyer. Or for example where a farmer sells their own products
Reverse integration: When a company buys the supplier
Vertical integration: Taking control/ownership of stages of production rather than relying on external contractors. Companies can achieve vertical integration by acquiring or establishing their own suppliers, manufacturers, distributors, or retail locations rather than outsourcing them
