Market Influences on Business Pt. 2 Flashcards
T/F: firms use SWOT analysis to assist in developing their appropriate strategic plans
True; any strategy must consider these factors in development
What are Porter’s 5 forces?
they have a significant effect on the competitive environment and profitability of the firm
barriers to entry, market competitiveness (intensity of competition), existence of substitute products, bargaining power of customers, and bargaining power of the suppliers
Barriers to entry
the firm faces the threat of new firms entering the market in which it operates
rival firms face barriers to entry in the form of government regulation, supplier access, high up-front capital requirements, pre-existing customer preferences and loyalties, economies of scale, learning curve issues, and other up-front competitive cost disadvantages including patents, trade barriers, and other restrictions
new companies will attempt to enter the competition when barriers to entry are low, potential high profits exist in the market, and retaliation by other firms is low
Market competitiveness (intensity of competition)
the existence of competition from rival firms is often the most significant of the five forces of competition
ability of rival firms to respond to change - this can be done in various components affecting business (regulation, costs, technology changes, etc.)
advertising of rival firms - firms that spend large amounts of money on advertising aimed at changing customer preferences and creating loyalty
research and development of rival firms - firms that spend large amounts of money on R&D to improve their products or create innovations in technology
alliances of rival firms and suppliers - rival firms that develop strong alliances with suppliers affect other’s ability to obtain their inputs to the production process at advantageous prices and thus reduce their competitive advantage
other factors increasing competition - competition is stronger when the market is not growing fast, several equal-sized firms exist in the market, customers do not have strong brand preferences, the cost of exiting the market exceeds the cost of continuing to operate, some firms profit from making certain moves to increase market share, and the various firms employ different types of strategic plans
Existence of substitute products
if the firm faces heavy competition from substitute products, the ability of a firm to sustain profits is significantly affected by the maximum amount that buyers are willing to pay for a product; this is especially true if the substitutes are readily available to consumers, have equal performance, and are priced at or below the price of the firm’s product; the effect is further intensified when the costs of the buyer switching to the substitute product are low
if few substitutes exist, buyers have little choice of products and may be willing to pay a higher price for the products that are available; if close substitutes exist, buyers may have a limit on the maximum price that they are wiling to pay, and this has a direct effect on the profits of the firm
Bargaining power of the customers
if buyers are in the position to bargain with suppliers on the conditions of service, price, and quality, they are a strong force in the competitive market
buyers may be quite price sensitive and change products solely based on price, or they may have such brand loyalty and strong preferences that they will stay with a product regardless of price
if one group of customers makes up a large volume of the firm’s business, the bargaining power of the customer will significantly affect the competitive environment of the firm, and the strategy of firms should focus on pleasing this group of customers
the more info that is available to the buyer, the more the buyer will be able to compare and contrast features of a product and choose one over the other
if the costs of switching from one product to another are low, the impact on the competitive environment from buyers is increased; this result is intensified if the firm cannot easily change production without incurring high costs to begin producing another product
when many suppliers exists to serve the customers, the bargaining power of the buyer is increased
Bargaining power of the suppliers
when the bargaining power of the suppliers of inputs to the production process is high, suppliers can take profits away from a firm simply by increasing the cost of the inputs to the firm’s production process
Fact: building a successful competitive strategy requires being able to attain some sort of competitive advantage while still holding customer loyalty and having value for the customer
the overall competitive advantage stems from the fact that the buyers of the product are better off because the firm as been able to produce and sell its product for less than its rivals; if the total costs of the firm are less than those of rival firms, the firm has a competitive market advantage; this advantage may be used by the firm in one of two ways:
cost leadership advantage - the buyers of the product are better off because the firm has been able to produce and sell its product for less than its rivals; it can use this competitive market advantage to build market share or match the price of rivals
differentiation advantage - buyers are better off because the customer perceives the firm’s product to be superior in some way to those of its rivals; therefore, they are willing to pay a higher price for its uniqueness; it can use this competitive market advantage to build market share or increase price
What are the 5 basic types of competitive strategies that firms can employ?
cost leadership focused on a broad range of buyers
cost leadership focused on a narrow range (niche) of buyers
differentiation focused on a broad range of buyers
differentiation focused on a narrow range (niche) of buyers
best cost provider
Fact: the best cost strategy combines the cost leadership strategy with the differentiation strategy to give customers higher value for their purchase price
if a firm is able to achieve the lowest cost among its closest competitors while matching them on features desired by consumers, it will succeed
