Market Influences
2 ways of of using cost leadership
1 - build market share through volume (by lower costs, getting more customers, securing large part of customer base) 2 - match price of rivals - margins, can match and still have overall lower costs
2 ways of differentiation as an advantage
1 Build market share - can still lower price below cost of premium for its uniqueness and differentiation, catching more customers covering premium and attaining profitability 2 Increase price - influence customers that product is better and worth the price
Oligopoly Characteristics
1) Number of firms in industry: Few firms in market 2) Size relative to industry: Large firms relative to industry 3) Differentiation of product: Differentiation 4) Firm's control over price and quantity: Control over both quantity and price (price maker) 5) Barriers to entry: High, difficult to enter 6) Elasticity of demand: Inelastic 7) Long-run profitability: Positive economic growth 8)Strategy - maintain market share, allocate resources to advertising, research, and marketing, and adapt to price changes and changes in production volume.
Perfect Competition Characteristics
1) Number of firms in industry: Many firms in market thus highly competitive 2) Size relative to industry: Small firms relative to industry 3) Differentiation of product: Homogenous products (No differentiation) 4) Firm's control over price and quantity: No market power/Price-taker. Only control is quantity produced 5) Barriers to entry: No barriers to entry so easy to enter 6) Elasticity of demand: Perfectly elastic (readily substitutes available) 7) Long-run profitability: Zero economic growth 8)Strategy - respond to price changes and market conditions and maintain market share
Monopolistic Competition Characteristics
1) Number of firms in industry: Many firms in market thus highly competitive 2) Size relative to industry: Small firms relative to industry 3) Differentiation of product: Some differentiation 4) Firm's control over price and quantity: No market power/Price-taker. Only control is quantity produced (some influence on price) 5) Barriers to entry: Some barriers to entry so still easy to enter 6) Elasticity of demand: Highly elastic (readily substitutes available) 7) Long-run profitability: Zero economic growth 8)Strategy - maintain market share and allocate resources to advertising, research, and marketing
Monopoly Characteristics
1) Number of firms in industry: One firm 2) Size relative to industry: 100% of industry 3) Differentiation of product: None since only one product 4) Firm's control over price and quantity: Control over both quantity and price 5) Barriers to entry: Impossible to enter 6) Elasticity of demand: Inelastic 7) Long-run profitability: Positive economic growth 8)Strategy - Focus on profit maximization by focusing on profitability from production levels
Strategic plan process
1) define the company mission and vision 2) setting company objectives and goals 3) designing the business portfolio/creation of strategic plan 4) planning and marketing/functional strategies
Market competitiveness factors
1. Ability of rival firms to respond to change 2. Alliance of rivals and suppliers 3. Research and development 4. Advertising of rival firms
Four major factors that impact global competitive advantage
1. Conditions of factors of productions (strong set of factors of production = fare better with global competitive advantage) 2. Conditions of domestic demand - if nation domestic demand for product is high, fare better with global competitive advantage 3. Related and supporting industries - if suppliers of material inputs exist within nation, fare better with global competitive advantage 4. Firm strategy, structure, and rivalry - practices of nation, companies are managed and organized, laws of nation that regulate
Existence of Substitute Products
1. Elasticity > 1, thus substitutes are available 2. Cost of switching for customers is low 3. When prices go down, customers will switch to that product 4. If there is a close substitute, customer will have a max amount willing to pay
3 Major forms of Value chain analysis
1. Internal Cost Analysis 2. Internal Differentiation Analysis 3. Vertical Linkage Analysis
Other market competitiveness factors
1. Not a fast growing market 2. When customers do not have strong brand preferences 3. cost of exiting > cost of continuing 4. Several equal-sized firms
Process of value chain
1. Suppliers who provide the raw materials for production process 2. Strategic plan for creating value for customers 3. Ends with disposal and recycling of materials
4 Steps in Value Chain Analysis
1.Identify Value Activities 2. Identify Cost Drivers associated with each activity 3. Develop competitive advantage by reducing cost or adding value 4. Exploit linkages among activities in value chain - (synergies/connections that can be used to create greater efficiencies or greater value)
Complementary inputs
An increase in the usage of one input results in an increase in the usage of the other input Opens two factories (capital asset), need more workers (labor)
Porter's Five forces
Buyer bargaining power Supplier bargaining power Existence of substitute products or services Barriers to market entry Market Competitiveness
Cost strategies work well if:
Buyers have high bargaining power and low switching cost
Types of competitive strategies
Cost leadership (lower cost) - producing and selling at a lower cost Differentiation (better product) - producing and selling a superior product (customer perceived) at a higher price Focus
5 types of competitive strategies
Cost leadership - broader market Cost leadership - niche Differentiation - broader market Differentiation - niche Best cost provider - combo of both, high quality product at reasonable price
Internal Differentiation Analysis
Create value through differentiation
Differentiation strategies work well if:
Customers see value in products, different products appeal to different people for different reasons
When the minimum wage is set above the equilibrium market wage,
Demand of labor decreases while supply of labor increase causing surplus
Differentiation strategies fail if:
Does not create value for customer or care more about lower prices
A natural monopoly exists because:
Economic and technical conditions permit only one efficient supplier
Best Cost Strategy/provider work well if:
Generic products are not acceptable, but buyer still sensitive to price (reasonable price)
which market structures have a horizontal demand curve?
Horizontal demand curve is when firm is price taker, market determines the price so perfectly competitive markets
best-cost provider strategy fail if:
If other firms are focused on cost leadership or some are focused on differentiation and we are in the middle
Focus/niche strategy fail if:
If other firms see firm is successful then will attempt to enter market Consumers may switch to broader market if prefer features of overall market Firm is not flexible to change
Factors of production are
Inputs into the production process such as labor, capital asset, land
Focus/niche strategy work well if:
Niche has large enough demand to create profit Proper resources to adequately serve needs of group Few firms are focused on area
Business functions in value chain
R&D, Customer Service, Marketing
internal cost analysis
Sources of profit and costs of internal activities (cost leadership)
Value Chain Analysis
Strategic tool assisting firm in determining how important value is (as perceived by buyers) with respect to market in which firm operates
Cost strategies fail if:
Technological advances that help lower costs that rivals implemented or that customers aren't sensitive to prices and rather have improvements
Bargaining power of customers/buyers
The higher the power, the lower the profit Volume of business - if the buyer is a whole chunk of the business then the buyer has power Information (availability) - if buyer has more information, can compare pros and cons of products Switching costs are low Alternative suppliers - buyer can choose = higher power
which market structures have a downward sloping demand curve?
Those that can set the price
Bargaining power of suppliers
Unable to change supplier - few suppliers or can only get input from them Reputation of supplier - high quality or if there is a strategic alliance with another supplier
barriers to market entry
What are the two types of barriers to entry 1. when barriers are high - regulations, capital up-front requirements, customer loyalty, patents, economies of scale (more production, more cost savings) 2. when new companies attempt to enter - if barriers are low, risk of retaliation is low, and profits exist. Firms will enter driving the long run profitability to zero economic growth
When do firms operate the best?
When marginal revenue = marginal cost
Competitive advantage
a set of unique features of a company and its products that are perceived by the target market as significant and superior to those of the competition When value offer > cost of creating value
Substitute inputs
an increase in the usage of one input results in a decrease in the usage of the other input Use automation (capital), need less employees
What are external factors of the SWOT analysis?
opportunities and threats
Oligopoly - kinked demand curve
raise price - others do not follow: lose sales and market share lower price - others follow: lose profits
What are the internal factors in the SWOT analysis
strengths and weaknesses
Derived demand
the demand for factors of production by firms, which depends on consumers' demands If consumer demand of product goes up, factors of production go up
Vertical Linkage Analysis
understanding the activities of the suppliers and buyers of the product and determining where value can be created external to the firm's operations
Focus/niche strategy
use cost leadership or differentiation strategies on select, small group of consumers - niche
