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Is there strong brand identity is access to

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Unformatted text preview: example, switching costs of Apple users are extremely high. This is because songs, movies, books and apps downloaded on the iTunes store can only be used on computers and iPods/iPhones. If a user wants to switch to another music player, or phone they will potentially lose all their purchases on iTunes since it cannot be used with different players from competing companies. Is there strong brand identity? Is access to distribution channels hard? If most of the answers to the above are yes, then it is considered hard for potential entrants to start a business in the industry and gain good profits. Management Accounting 2 – Semester 2 2010 4 The External Environment Substitutes Substitutes are products or services that a buyer can use instead of the current product or service the business has. For example, a bus company may be driving a route that follows the general path of a train line. A substitute product would be a train service since both do essentially the same thing – get the user to the destination. A substitute product can be considered a threat if it is cheaper, has higher quality and when switching costs are low for the buyer. Suppliers and Buyers When looking at suppliers and buyers, we usually look at how many there are. If there is only a very limited, or even one, supplier and/or buyer, the business has not much choice in deciding who to sell the product to or buy supplies from; they either sell/buy or do not. In this sense, the smaller the amount of suppliers and/or buyers, the more bargaining power the supplier and/or buyer has. The threat of forward integration by suppliers and backward integration (collectively known as vertical integration) by buyers is also an issue. Forward and backward integration can be explained simply if you think of levels as in the below diagram: Level 1 Supplier Level 2 Business Level 3 Buyer For example, if the business is a buyer of raw materials who then makes car engines and sells them to a car manufacturer like Honda. In this case, the supplier of raw materials may decide to enter the car engine manufacturing industry themselves by forward integration (Level 1 to Level 2). If this happens, then the supplier will obviously stop selling raw materials to the engine manufacturer, who is now a competitor. The car engine manufacturer’s supply chain will be crippled if the supplier is a large one. Likewise, Honda could backward integrate (Level 3 to Level 2) and make their own car engines. In this case, the car engine manufacturer would lose all business selling the product since Honda no longer needs their product. Hence, we can see that forward and backward integration can have detrimental effects on a business. Rivalry within the Industry Intense rivalry between competitors within the industry leads to industries with very low profit potentials. This is because competitors will continually undercut each other in order to beat the others. Rivalry is usually strong in industries with low product differentiation, high exit costs and numerous firms who are of equal or similar size. Management Accounting 2 – Semester 2 2010 5 The External Environment One good example is the domestic airline industry in Australia. Rivalry is fierce and any new entrant into the industry, such as Tiger Airways, is usually met with harsh responses from the existing businesses (Qantas, Jetstar and Virgin Blue). Interpreting an Industry Analysis By looking at the five forces model, you should get a general understanding of the profit potential of an industry. Entry Barriers Supplier and Buyer Positions Threat of Substitutes Rivalry Profit Potential Low Strong Strong Strong Low High Weak Weak Weak High You will not always get situations that match with the two described above. In this case, we check which side the characteristics lean to more. Strategic Groups Strategic groups are groups of companies that use similar strategies to target a similar market. Competition between these firms in the same strategic group are much greater than between one that is in the group and one that is not. An interesting effect of strategic groups is that some are quite impervious to “attacks” by those outside the group. We can use these strategic groups to identify different groups and their SWOT. Manage...
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