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Chapter11 - MANAGERIAL ECONOMICS An Analysis of Business...

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1 MANAGERIAL ECONOMICS An Analysis of Business Issues Howard Davies and Pun-Lee Lam Published by FT Prentice Hall
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2 Chapter 11: The ‘Five Forces’ Approach to Market Structure Objectives: After studying this topic you should be able to carry out a ‘5-forces’ analysis of an industry. You should be able to identify the key factors determining competition in an individual industry
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3 What Is Porter’s 5-Forces Model? What Does It Help Us to Do? An attempt to extend the formal models Use the insights from the formal models to develop a way of describing the competitive structure of real-life industries Identify the factors which determine each of the 5-forces Allow (loose) predictions on the “attractiveness” of an industry (how profitable is it for incumbent firms) Allow executives to identify the key features of their industry, which they may seek to change, or influence, or respond to
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4 Porter’s 5-Forces Model Power of Suppliers Power of Buyers Threat of Entry Threat of Substitute s Intensity of Rivalry Amongst Incumbents
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5 How Do Each of The Following Determine Intensity of Rivalry Amongst Incumbents? Industry Growth - does more growth lead to more or less rivalry? Fixed Costs as % of Total Costs - if fixed costs are a high % of total will rivalry be high or low? Over-capacity - does over-capacity raise or lower rivalry? Differentiated Products - ??? Brand Identity - ???? Switching Costs for Customers -??? Corporate Stakes -??
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6 How Do Each of The Following Determine Intensity of Rivalry Amongst Incumbents? Industry Growth - rapid industry growth reduces intensity of rivalry - Fixed Costs as % of Total Costs - if fixed costs are a large % of the total, firms cannot afford to have reduced sales or lose sales to rivals. They will respond aggressively if sales are threatened Intermittent Over-capacity - if the industry has over-capacity, rivalry will be more intense as losses are threatened in those times Differentiated Products -
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