Topic 3 : Firms' External Environment Flashcards
What are the 4 sections that is found in a firm’s environment?
Macro-environment, industry (sector), competitors and market
Define macro-environment and its components.
Everything that is outside and has an affect on the business.
Politics, economy, social, technology, environment and legal
What is included in the specific environment of a business?
Industry (sector), competitors and market
What is the purpose of the Porter’s five forces? What does it analyse?
Helps business asses direct and indirect competitors based on their strength, enables an accurate market analysis so new companies can make informed decisions about the targeted audience.
Threat of new entry, threat of substitues, competitive rivalry, bargaining power of consumers, bargaining power of suppliers
What is the threat of new entry and its effects?
Likelihood of another firm to cater the industry.
Price could go down, present cost invrease and abnormal profits decrease.
What can businesses do to protect themselves from the threat of new entry?
Increasing production and lowering costs (economies of scale), product differentiation, capital requirements, cost advantages and government policies
What is the threat of substitues and its effects?
Another firm offering substitute products to fill the same customer needs.
That creates price ceiling (consumer switch to substitute if price rise)
What is the competitive rivalry and its effect?
Competition within the industry.
High rivalry means vigurous competition and limits the entry in the market.
What is the bargaining power of suppliers and its effects.
Suppliers are source of resources.
Powerful one can raise prices and lower quality. It results in lower profit.
How can a supplier become powerful?
Controls the supply of the industry, highly differentiated product, lack of close substitutes, supplier could integrate forward and the buyer is insignificant customer.
What is the threat of bargaining power of buyers and its effects?
Customers determine the demand of the product.
Buyers can force down prices, bargaining can result in higher quality or more services and sometimes compete also with each other.
How can a buyer become powerful?
Large volume purchasing, low profit products, undifferentiated products
What can a business do to be satisfied in the global economy?
Specialize and trade with others.
What is absolute advantage in production cost?
Comparison among producers accordong to their productivity.
Producer with smaller quantity of inputs has absolute advantage ro produce the good.
What is comparative advantage in production cost?
Compares according to the opportunity cost.
Producer with smaller opportunity cost has a comparable advantage to produce the good.
