LDP - 1.1 Industry and Economic Flashcards
The Bargaining Power of Customers - Customers are powerful when?
*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.
The Bargaining Power of Suppliers - Suppliers are powerful when:
*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.
The threat of new entrants is high when:
- 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.
The threat of substitute products is high when:
- 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.
The intensity of competitive rivalry is high when:
- 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
A business cycle has four stages:
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.
Early Expansion (also called recovery)
- 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.
Late Expansion (also known as boom)
- 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.
Early Contraction (slowdown)
- 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.
Late Contraction (recession)
- 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.
Industry Life Cycles Definition & Stages
- 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
Product Life Cycles Definition
- Product life cycles are a variant of the industry life cycle.
Inelastic Demand
A change in price results in a smaller change in demand
Elastic Demand
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.
Business Life Cycles Definition & Stages
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
