LDP - 1.1 Industry and Economic Flashcards

1
Q

The Bargaining Power of Customers - Customers are powerful when?

A

*Customers in an industry have high bargaining power when they can impose pressure on the sellers’ or the company’s margins.

  • There are few, but large-volume buyers
  • Products are undifferentiated - products in the industry are easily replaced with a substitute product without incurring a large expense
  • The supply companies have high fixed costs
  • Customers could produce the product themselves
  • The product is not strategically important to customers

Example: the department of defense has buyer power with defense contractors.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

The Bargaining Power of Suppliers - Suppliers are powerful when:

A

*Suppliers in an industry have high bargaining power when they exercise control over the price or availability of the products that their customers need.

  • There are few, very large suppliers
  • Customers for the suppliers’ products are many small players
  • There are no substitutes for the product
  • It is expensive to switch from one supplier to another
  • Suppliers could take the customer’s role in the industry product chain

Example: relationship drug companies have with hospitals.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

The threat of new entrants is high when:

A
  • Requirements for scale economies are minimal -
  • Customers are not influenced by brand
  • There are no legal barriers to competing
  • Vital resources are not scarce
  • Customers can cheaply and easily switch to new providers
  • There are no regulatory impediments to entry

*Government creates barriers to entry in the utilities, cable and banking industries.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

The threat of substitute products is high when:

A
  • Customers have no brand loyalties
  • Changing to another product saves money without sacrificing performance
  • It is simple and inexpensive to change to another product
  • Makers of substitute products can easily attract buyers with price reductions

Example: price of aluminum beverage cans is constrained by the price of glass bottles, steel cans and plastic containers. These containers are substitute, yet they are not rivals in the aluminum can industry.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

The intensity of competitive rivalry is high when:

A
  • There are many players of about the same size
  • There is little to distinguish competitors and their products
  • The industry is in a mature or declining life cycle stage
  • Barriers to exit are high
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

A business cycle has four stages:

A
early expansion (recovery) 
late expansion (boom) 
early contraction (slowdown) 
late contraction (recession) 

A business cycle is a recurring but irregular long-term period of alternating growth and decline in the economy. The official peaks and troughs of the U.S. cycle are determined by the National Bureau of Economic Research, or NBER. These peaks and troughs are identified by assessing factors such as gross domestic product, or GDP, and employment growth.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Early Expansion (also called recovery)

A
  • Interest rates are low
  • credit is plentiful
  • sales & profits increase
  • Companies expand physical plants, build inventories
  • Companies are optimistic
  • They might add employees, start new business lines, or introduce new products. Consumers have high levels of disposable income, partly from secure jobs and increasing wages and partly from available credit.

Why borrow? During recovery, companies need funds in order to support sales growth and working capital. They borrow to pay for additional inventory and to cover additional funds tied up in accounts receivable. Companies also need funds to finance capital expenditures.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Late Expansion (also known as boom)

A
  • demand for credit increases. driving interests up
  • prices for goods and services stabilize
  • Capacity utilization climbs and the price of goods and services stabilizes.
  • The higher cost of credit and of goods and services begins to slow consumer spending and business expansion.

Why borrow? companies need funds in order to support continued sales growth and to finance capital expenditures that add to their capacity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Early Contraction (slowdown)

A
  • Companies are less optimistic
  • fewer new projects are begun
  • demand for credit decreases to reduce reliance on debt and become more liquid.
  • Companies may also relax credit standards to generate new sales and growth

Why borrow? companies need funds in order to cover the lengthening of collections if they relax their terms, and companies reduce inventory to generate funds.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Late Contraction (recession)

A
  • Unemployment increases.
  • Interest rates gradually fall
  • Credit is available only to the most creditworthy borrowers
  • Supplies of goods and services shrink to the point that businesses begin to see new opportunities for growth.

Why borrow? companies need funds in order to cover fixed outlays such as lease and loan payments and also to offset slower collections from weak credit customers. Also, companies generate some funds by inventory liquidation and trade credit.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Industry Life Cycles Definition & Stages

A
  • An industry consists of firms that engage in like activities. An industry develops a pattern that follows the evolution of demand for the industry’s products.

1) Introductory Stage: Few competitors, question about viability of the industry
2) Growth Stage: Product gains acceptance, sales build rapidly
3) Mature Stage: Demand decelerates to growth of overall economy
4) Declining Stage: Demand wanes, sales decline

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Product Life Cycles Definition

A
  • Product life cycles are a variant of the industry life cycle.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Inelastic Demand

A

A change in price results in a smaller change in demand

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Elastic Demand

A

A change in price results in a larger change in demand

Note: As products mature, they become more price-sensitive or demand becomes more elastic.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Business Life Cycles Definition & Stages

A

Businesses life cycles are influenced by industry and product life cycles.

  • Introductory Stage: Companies need capital for product development
  • Growth Stage: Companies sales growth and profitability
  • Mature Stage: Companies have lower margins, but strong cash flow
  • Declining Stage: Companies are in decline
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Michael Porter’s 5 Competitive Forces

A

1) The Bargaining Power of Customers
2) The Bargaining Power of Suppliers
3) The threat of new entrants
4) The threat of substitute products
5) The intensity of competitive rivalry

Sixth force? This force is the influence that noncompetitors or stakeholders exert over a company’s ability to succeed in an industry.

17
Q

Introductory Stage

A
  • Companies need capital for product development
  • financial characteristics are moderate sales growth, high costs (if the company is an innovator) or lower costs (if the company is an imitator), and losses (if the company is an innovator) or some profit (if the company is an imitator).
  • Companies need funds for research and development, plant and equipment, marketing, and inventory and accounts receivable.
18
Q

Growth Stage

A
  • Companies sales growth and profitability
  • financial characteristics are high sales growth, stabilized profits, and tight cash flow because high growth diverts funds into growing inventory and receivables
  • Companies need funds for sales growth, inventory, and accounts receivable; product development; marketing; and plant and equipment.
19
Q

Mature Stage

A
  • Companies have lower margins, but strong cash flow
  • financial characteristics are low sales growth, often at the rate of inflation; stable profits; and strong cash flow as investments in inventory and receivables slow.
  • Companies need funds for dividends, marketing, a base level of inventory and accounts receivable, and equipment that adds efficiency.
20
Q

Decline Stage

A
  • financial characteristics are eroding profits as sales volumes drop, creating expensive excess capacity, and a stable cash flow as collections outpace reinvestment in inventory and accounts receivables
  • Companies need funds for dividends, marketing, restructuring expenses, and equipment that adds efficiency.
21
Q

Industries highly susceptible to contractions

A

Many of the industries that provide products and services that consumers and businesses can postpone purchasing during a recession.

22
Q

Industries less susceptible to contractions

A
  • industries that provide necessities or public goods for which demand remains strong throughout the business cycle
  • ie. professional sports and museums, illustrate that demand for entertainment is resilient. Similarly, many economists have observed that sin industries, such as tobacco and liquor, are recession-resistant. Beverages