Chapter 2.2 Flashcards
1
Q
What is the basic purpose of a market?
A
To provide products or services that deliver value to the buyer by meeting its needs
2
Q
Define industry
A
An industry is a set of organisations whose purpose is to satisfy the needs of a group of buyers who are collectively known as the market
3
Q
What does a market need to be sustainable in the long term?
A
It must be a profitable industry for the businesses competing in it, and those businesses must find ways to remain competitive
4
Q
How does Porters 5 forces help with industry analysis?
A
It helps to understand the attractiveness of the industry in question
5
Q
Name Porters 5 forces
A
- Rivalry among existing competitors
- Potential entrants
- Buyers
- Substitutes
- Suppliers
6
Q
What does porters 5 forces determine
A
The ability of organisations in the industry to earn a profit that gives an acceptable return on the financial investment made by each organisation
7
Q
A
8
Q
A
9
Q
A
10
Q
What does market analysis involve?
A
Gaining an understanding of how attractive an industry is to the businesses in the industry and a key way to do this is to use Porters Five Forces Model
10
Q
What’s the difference between a market and an industry
A
Markets meet the needs of one or more groups of buyers. Industries are collections of organisations whose business is to meet those needs at a profit
11
Q
When is a market likely to attract new entrants into the industry?
A
If it enables all organisations within it to make profits
12
Q
Name 4 barriers to a company entering a market
A
- Substitutes
- Buyer power
- Supplier power
- Rivalry
13
Q
What does rivalry between existing companies usually result in?
A
Taking positive action to try and take market share from each other, which in turn can mean increase profits for those that gain market share and lower profits for those that lose market share
14
Q
What is the effect of rivalry on profits?
A
Profits in the industry as a whole reduce due to the costs involved if market share is gained by reducing prices. This is because companies usually retaliate if action is taken by one organisation. A price reduction by one can turn into a price war
15
Q
Name 6 factors that determine the intensity of the rivalry
A
- Many or equal-size suppliers
- Slow industry growth
- High fixed costs
- Lack of differentiation and fixed costs
- Capacity is added in significant amounts
- High exit barriers
16
Q
Name 3 factors that create high barriers to exit
A
- Specialised assets
- Fixed costs of exit
- Social restrictions
17
Q
Define exit barriers
A
Obstacles that prevent a business from leaving an industry
18
Q
What does businesses need to do in order to stay in a market?
A
Make a profit
19
Q
What is how much profit an individual company makes largely down to?
A
The amount of rivalry in the market
20
Q
What’s more likely to happen with the larger degree of rivalry
A
That other companies retaliate if one organisation tries to win market share from them
21
Q
What can the cost of retaliation result in?
A
Lower profits for all companies competing in that market
22
Q
What happens to profit if supplier power is strong?
A
More of the profit available is captured by suppliers
23
Q
What is the bargaining power between buyers and suppliers reflected in?
A
The configuration of their value chains
24
What determines the sustainability of value chain configurations?
The threat of new entrants and the availability of substitutes
25
What is a major determinant of the structure of an industry and how much profit is available to organisations operating in that industry?
The bargaining strength of suppliers
26
Name 5 different types of supplier
1. Manufacturers sell products to wholesalers, distributers and retailers
2. Distributers and wholesalers purchase in large lot sizes and sell smaller quantities to their customers
3. Independent craftspeople and small businesses sell directly to retailers and individual customers
4. Importers and exporters buy products from manufacturers in different countries and distribute them to customers in others
5. For service firms, individuals are important suppliers of skills and capacity. This can be as people recruited as permanent employers or as contract workers
27
Name 7 reasons when supplier bargaining power is strong
1. There are no substitutes
2. Suppliers are larger than the organisations in the industry and more concentrated
3. The industry is not very important to the seller
4. The sellers product or service is an important part of the industry's value chain
5. The sellers product or service is differentiated
6. There are significant switching costs
7. Sellers pose a definite threat of forward integration
28
Name 7 reasons when supplier bargaining power is weak
1. Substitutes are available and easy to access
2. Suppliers are small and fragmented
3. The industry is important to the seller
4. The seller's product or service is not an important part of the industry's value chain
5. The sellers product or service is undifferentiated
6. There are no significant switching costs
7. There is no threat of forward integration
29
What can suppliers do if their bargaining strength is high?
Keep the price of their product or service high and so retain more of the available profit
30
Define the bargaining strength of buyers
The ability of buyers to drive down prices and take more of the available profit for themselves. It also means that strong buyers are able to make more demands on suppliers in respect of factors such as quality and functionality
31
What happens to the supplier if the buyer has high bargaining strength
Increases supplier costs and reduces their profitability
32
Name 8 factors that determine buyer strength
1. Buyer concentration
2. Size of account
3. Undifferentiated product
4. Switching cost
5. Threat of integration
6. Information
7. Price sensitivity
8. Availability of substitutes
33
Name 9 circumstances where buyer bargaining power is strong
1. Buyers are more concentrated than sellers
2. Buyer switching costs are low
3. Threat of backward integration is high
4. Buyers are price sensitive
5. Buyers are well informed about the product or service
6. The product or service is undifferentiated
7. Buyers purchase in large volumes
8. Substitutes for the product or service are available
9. The amount purchased by the buyer is a significant proportion of the seller's sales
34
Name 9 circumstances where buyer bargaining power is weak
1. Sellers are more concentrated than buyers
2. Buyer switching costs are high
3. Threat of backward integration is low
4. Buyers are not price sensitive
5. Buyers are not well informed about the product or service
6. The product or service is differentiated
7. Buyers purchase in small volumes
8. There are no substitutes for the product or service
9. The amount purchased by the buyer is not a significant proportion of the sellers sales
35
What is it useful to understand before analysing buyer bargaining strength?
Where the products or services are in their life-cycle and the different types of buying groups associated with that cycle
36
Define buyer bargaining power
The ability of one or more groups of buyers to keep prices low and so take more of the profit that is available
37
When do buyers tend to be more powerful?
If just a few of them dominate the market, they are knowledgeable about the products and their prices, they buy in large volumes and they are able to use other products or services if they have to
38
Name the 4 stages of the product life-cycle
1. Introduction
2. Growth
3. Maturity
4. Decline
39
Explain the introduction stage of the product life-cycle
Covers the research and development of a product or service to meet an identified need and then all of the activities associated with launching the product or service
40
Explain the growth stage of the product life-cycle
Sales grow faster than at any other time in the life-cycle
41
Explain the maturity stage of the product life-cycle
Sales are still near their peak but the growth in sales starts to slow down
42
Explain the decline stage of the product life-cycle
Final stage in the product life-cycle and it is the point at which sales fall to such a low level that the product or service is withdrawn from the market
43
Why is the product life-cycle important for procurement and supply?
The life-cycle is a major determinant of a suppliers pricing policy. Knowledge of this is useful in deciding a target price when tendering or negotiating
44
Name the 4 stages of the Boston Consulting Group Matrix
1. Question mark
2. Star
3. Cash cow
5. Dog
45
What is the product life-cycle closely aligned with?
The Boston Consulting Group Matrix
46
What does the Boston Consulting Group Matrix do?
Expands the life of a product, service or market into four distinct phases
47
What may be slow in the introduction phase?
Sales
48
What happens if sales are slow in the introduction phase?
It means this stage can last for months, if not years. Marketing effort is aimed at innovators
49
Define innovators
People who like to be the first to try new ideas, goods and services
50
Why do profits tend to be low in the introduction phase
The cost of marketing to establish product awareness plus distribution costs can be far higher than the revenue received from sales
51
How can you off-set low profits in the introduction phase?
By 'skimming' prices in the very early stages
52
Explain what skimming a price means
Where a business charges the highest price that it thinks the market will bear initially until product recognition brings in other buyers and then the price drops
53
Who is sales growth fuelled by?
Early adopters
54
Define early adopters
A group of consumers who are the first after the innovators to buy or use a new product or technology
55
How does a businesses focus change when moving from the introduction to the growth stage?
It no longer has to focus on getting buyers to try the product but on creating brand loyalty through differentiation
56
Whats the main objective for all organisations in a market during the growth stage?
To build market share - this comes at a price
57
When do you know if a product has entered the maturity stage?
The sales of the product start to slow down because there are fewer new buyers
58
What are new buyers in the maturity stage known as?
The middle majority
59
Define the middle majority
A group of consumers who buy or use a new product or technology after seeing it used successfully by innovators and early adopters
60
What is likely to happen during the maturity stage?
Price competition sets in as more and more supply capacity has been added by new entrants. The focus turns to maintaining market share through many small improvements to meet emerging buyer needs
61
What happens to sales in the decline stage of the product life-cycle
Sales decline rapidly to the point where it is uneconomic to continue supply and so the product or service is withdrawn from the market
62
Name 2 reasons why a product or service may decline
1. Changes in technology
2. Changes in consumer fashions and tastes
63
What would you call people who buy a product in its decline phase?
Laggards
64
Define laggards
The last group of consumers who buy or use a new product or technology
65
Why may profits in the decline stage stay reasonable?
Laggards may still pay a premium price and costs of promotion and distribution are low
66
Why is it essential to understand buyers?
So you can understand what bargaining powers they have
67
What two things create additional competition?
1. New entrants
2. Threat of substitute products and services
68
What are substitutes?
Alternative ways for a buyer to meet its needs and so all businesses at some time or other face the threat of substitutes
69
Whats a problem with substitutes existing?
They put a ceiling on the prices that can be charged and in turn the amount of profit that can be made. this is because higher prices for existing products or services make substitutes from other suppliers more attractive to the buyer
70
What is the simplest form of substitution?
A different product or service which performs the same function as the existing one such as the use of oil or gas
71
What can make the decision to switch to a substitute more complex?
Situations where the substitute performs a different range of functions
72
What wider alternatives should be considered when thinking about substitution? (4)
1. It takes place if a buyer decides to purchase nothing rather than the product or service
2. Another option open to a buyer is to reduce the usage rate.
3. Instead of the regular product, a buyer may be able to choose recycled or reconditioned product. Recycled paper is a common form of this
4. The buying organisation may also choose to perform the function of the purchased item itself - a form of backward integration
73
When may the buying organisation choose to perform the function of a purchased item themselves?
This could happen if a company decides to self-insure rather than take out insurance. The occasional cost from loss could be lower than the sum of the insurance premiums over the same time period
74
Name one important role of substitute products and services
Limit the price that can be charged. The higher the price the more likely it is that organisations will look for a substitute that can meet needs but at a lower price
75
Name a key factor when considering a substitution
The economics of substitution
76
Name three aspects of the economics of substitution
1. The relative value-to-price ratio between the existing product and the substitution
2. The switching costs involved in moving from the existing product or service to the substitute
3. The inclination of the buying organisation to make the switch to the substitute
77
What is value-to-price ratio
The value that a product or service provides in meeting a buyer's needs compared to its purchase price
78
Name 7 factors that you need to consider before switching to a substitution
1. Are the usage rates needed to perform the function the same?
2. Are there any significant delivery or installation costs?
3. Are any significant financing costs involved?
4. How stable are the supplier's costs?
5. Are there any availability issues?
6. Are there any significant direct costs of use?
7. Are there any indirect costs to take into account?
79
When may a substitute affect indirect costs?
If it results in lower productivity of other activities outside of those that use the substitute
80
What should be considered carefully when considering relative value-to-price?
The number and nature of additional functions that the substitute provides
81
Define switching costs
All of the costs for the buying organisation in moving from one product or service to another or from one supplier to another
82
Name 5 examples of possible switching costs
1.The redesign of the buyers product in order to accept the substitute
2. The costs of retraining and relearning
3. A possible change to the role of the user
4. A perceived or actual risk of failure
5. The cost of switching back to the former product or service if the new one fails or the relative value-to-price changes
83
Why may buyers in the same industry and with the same understanding of relative value and price still make different decisions about whether to switch?
Due to differing inclinations or propensities to change
84
Name 6 examples of buyer inclination
1. Resources such as access to finance
2. Risk profile
3. Technological understanding
4. Previous substitutions
5. Intensity of rivalry
6. Buying organisations strategy
85
When will companies use a substitute product or service?
If the economics of doing so are favourable
86
Name three things the economics being favourable are dependent on
1. The relationship between the value the organisation gets from the product and the price it has to pay
2. How costly the change would be
3. The inclination of the buyer to make a change
87
What do new entrants into an industry reduce?
The profitability of existing companies in that industry
88
Name 8 examples of barriers to entry
1. Economies of scale
2. Product differentiation
3. Brand identity
4. Capital requirements
5. Access to distribution
6. Access to technology
7. Cost advantages
8. Access to market relationships or associations
89
When do economies of scale occur?
When one or more existing competitors have such a dominant position in the industry that the volume of goods and services that they produce results in a lower unit cost than a new entrant would be able to achieve
90
Name 6 factors that determine whether the threat of new entrants is high
1. Many companies in the industry with no dominant companies
2. No proprietary differentiation of products or services
3. No brand recognition in the industry and/or brand loyalty is low
4. Low or no capital requirements to enter the industry
5. Easy access to distribution channels and suppliers
6. No threat of retaliation from existing companies in the industry
91
Name 6 factors that determine whether the threat of new entrants is low
1. Few companies with one or more dominant companies
2. One or more companies have proprietary differentiation of products and services
3. Existing brands are well known and/or brand loyalty is high
4. Major capital investment needed to compete in this industry
5. Little or no access to distribution channels and suppliers
6. Threat of major retaliation is high
