mgt 3830- ch2

The non-recoverable costs of quitting or scaling down capacity in an industry are

Barriers to exit

Sometimes possible even by small firms, if the mix of drivers for change and existing structure make it susceptible to change is

Changing the industry structure

To forecast industry profitability consistently accurately, professional analysts have to:

Develop a deep understanding of how the industry creates value now and in the future, whether they use the tools described in the chapter or not

An industry's current profitability:

On its own tends to be a poor predictor of future profitability

"The market" and "the industry" are:

Related but not the same thing

A market's boundaries are defined by:

Substitutability on both the demand side and the supply side, combined with an element of judgment depending on context and purpose

In an industry, the profits earned by firms are determined by:

The value of the product for customers, the intensity of competition, and the relative bargaining powers of producers, their suppliers and their buyers

Suppose that an industry's profitability is zero or negative overall:

Then even so it's entirely possible that some firms are making very good profits

If top management understands the customers, suppliers, competitors and the general environment then:

This is a good basis for assessing the industry, but has little bearing on predicting the success of an individual company

"Consumer surplus" is the extra product consumers get through special offers and bulk discounts, when suppliers make surplus product to generate extra sales.

false

Formally scanning and analysing the external environment continuously is the best approach.

false

the environment that includes customers, competitors and suppliers

industry environment

The relative bargaining power of buyers depends on:

-The size and concentration of buyers relative to suppliers -A buyer's access to information about products and costs -The ability or threat to integrate vertically

The core of a firm's business environment is determined by:

Its relationships with customers, competitors, and suppliers

In practice, drawing the boundaries of industries and markets is:

Largely a matter of judgment and experience contingent on the purpose of the analysis

Somewhat flexible in scope depending on what aspect of business you are considering

Market and industry

The question "What do customers want?":

Must be asked by managers, and an accurate answer obtained and understood, since it's the driving force behind generating profit

For a manufacturer access to distribution is a barrier to entry because:

New entrants face a disadvantage from retailers who are reluctant to carry their new products

Economies of scale are a barrier to entry because:

New entrants face the cost and risk of creating large scale capacity to start with or a severe cost disadvantage if they enter on a smaller scale

Once value is created, it is, in general:

Not equally shared between customers and producers

The question "What does a firm need to survive competition?":

Requires an understanding of the current and future basis of competition specific to the industry

The overall bargaining power of buyers depends on:

The buyer's price sensitivity and the relative bargaining power between the seller and the buyer

Identify which forces are relatively more powerful, and to assess their impact on competition and industry profitability

The idea with Porter's 5 Forces

The value to managers of understanding key success factors is:

To help maintain a strategic perspective of what needs to be done to survive, and help them avoid degenerating into a fire fighting approach

Analysing key success factors leads one to ask the following two questions:

What do customers want which we could supply profitably and what should the firm do to survive competition?

Barriers to entry are effective:

Yes, because long-term empirical evidence shows that industries with high barriers to entry exhibit higher returns on investment on average

Anything that makes entry into an industry as a new competitor more difficult, more costly, slower or even impossible is

a barrier to entry

Economies of scale, absolute cost advantages, high capital start-up costs, and access to channels of distribution are all examples of "barriers to entry".

true

Even pure monopolies have substitutes.

true

Excess capacity often leads firms to cut prices to hold on to existing business for fear that competitors will do the same first, leaving them with a lower market share, and adverse average costs.

true

For a specific product or service, the existence of close substitutes means that customers could switch to these substitutes if prices, service levels or other factors make it in their interests to do so.

true

In a contestable market there does not always need to be actual competition to keep prices relatively low - just the threat of competitors entering the market.

true

Michael Porter's five sources model helps you identify and understand industry structure.

true

Retaliation against a new entrant may take the form of aggressive price-cutting, increased advertising, sales promotion, or vexatious litigation.

true

The level of profit in an industry is determined by three factors: the value of products to customers, the intensity of competition, and the relative bargaining power of producers and suppliers.

true

There is no single absolute definition of what an "Industry" is.

true

To understand the effect of the external environment, one must be able to rank the factors in order of importance.

true

A way to enable managers to position the firm where its particular capabilities can be deployed to best advantage is

understanding the competitive forces in an industry

The price that the customer is willing to pay for a product exceeds the firm's cost is when:

value is created

To understand the environment, the starting point of the analysis is

To identify the industry you are in; your customers, suppliers and competitors

Having high fixed costs makes it hard to make a profit in a recession, so is indicative of poor cost-control.

false

The total of all the differences between the price each customer actually pays and the maximum price they would have been willing to pay, all other things being equal

"consumer surplus"

The analytical tools described in the text:

Are simply that; just tools. Their value depends on the skill with which they are deployed

Firms in any industry can be said to operate in two major markets:

As a buyer in the supplier market, and as a seller in the customer market

If an industry earns a return on capital in excess of its cost of capital:

It is likely to attract the attention of firms looking to enter the industry, which may eventually lead to the return on capital falling

A 6th force - Complements - should arguably be added to Porter's 5 Forces Model because:

It's clear that since Porter devised his model, Complementers have evidently become more important

Industries such as pharmaceuticals earn very high returns on investment. Such industries:

Tend to have high entry barriers and differentiated products

-When the suppliers' industry is concentrated -When suppliers are supplying differentiated products -When "our" (the customer's) industry is relatively fragmented

The bargaining power of suppliers is likely to be high

The level of profitability within an industry is largely determined by the industry structure is

The basic premise of industry analysis

Understanding the external environment of a firm requires one ultimately to identify:

The opportunities to make profit in the industry

Bargaining power rests, ultimately, on:

The perceived or real threat for one party to refuse to deal with the other party

Given the plethora of external influences, understanding the external environment requires managers to:

Use a framework or a system that allows them to organize information and rank factors

Porter's 5 Forces model is intended to be:

Used in conjunction with PEST and other models

Porter's 5 Forces model was based on a static, stable view of industry which ignores dynamic forces:

Which can easily be dealt with by taking a dynamic perspective of the forces e.g. Innovation is a consequence of Rivalry

The bargaining power of one player in the industry relative to another player rests, ultimately, on a credible threat to refuse to deal with the other player.

false

We analyse industry structure because this is the primary factor in determining profitability.

false

the environment that matters to the extent that it affects the industry environment

general environment

A high Concentration Ratio is typical of Oligopolistic industries, dominated by a few large players.

true

Porter's 5 Forces model arguably has some deficiencies and does not answer all possible questions. But this is true of all models.

true

Understanding the structure of the industry helps managers to work out how to make a profit in future and to possibly identify ways to change the industry structure to their advantage.

true

Value is defined as the difference between the cost of supplying a product or service and the actual price paid by the customer for it, although not all value translates into profit.

true

When a firm dominates a specific segment in an industry, it is well-placed to earn a higher level of profit than the average.

true