Tag Archives | planning

Threat of New Entrants (one of Porter’s Five Forces)

 

See also:
Porter’s Five Forces of Competition
Supplier Power
Buyer Bargaining Power
Threat of Substitutes
Intensity of Rivalry
Complementors (Sixth Force)

Threat of New Entrants Definition

In Porters five forces, threat of new entrants refers to the threat new competitors pose to existing competitors in an industry. Therefore, a profitable industry will attract more competitors looking to achieve profits. If it is easy for these new entrants to enter the market – if entry barriers are low – then this poses a threat to the firms already competing in that market. More competition – or increased production capacity without concurrent increase in consumer demand – means less profit to go around. According to Porter’s 5 forces, threat of new entrants is one of the forces that shape the competitive structure of an industry. Thus, Porters threat of new entrants definition revolutionized the way people look at competition in an industry.

Threat of New Entrants Explanation

The threat of new entrants Porter created affects the competitive environment for the existing competitors and influences the ability of existing firms to achieve profitability. For example, a high threat of entry means new competitors are likely to be attracted to the profits of the industry and can enter the industry with ease. New competitors entering the marketplace can either threaten or decrease the market share and profitability of existing competitors and may result in changes to existing product quality or price levels. An example of the threat of new entrants porter devised exists in the graphic design industry: there are very low barriers to entry.

As new competitors flood the marketplace, have a plan to react before it impacts your business. Download the External Analysis whitepaper to gain an advantage over competitors by overcoming obstacles and preparing to react to external forces, such as it being a buyer’s market. 

A high threat of new entrance can both make an industry more competitive and decrease profit potential for existing competitors. On the other hand, a low threat of entry makes an industry less competitive and increases profit potential for the existing firms. New entrants are deterred by barriers to entry.

Barriers to Entry

Several factors determine the degree of the threat of new entrants to an industry. Furthermore, many of these factors fall into the category of barriers to entry, or entry barriers. Barriers to entry are factors or conditions in the competitive environment of an industry that make it difficult for new businesses to begin operating in that market.

Examples of Barriers to Entry

A high production-profitability threshold requirement, or economy of scale, is an entry barrier that can lower the threat of entry. Highly differentiated products or well-known brand names are both barriers to entry that can lower the threat of new entrants. Significant upfront capital investments required to start a business can lower the threat of new entrants. Whereas, high consumer switching costs are a barrier to entry. When access to distribution channels is an entry barrier – if it is difficult to gain access to these channels, the threat of entry is low. Access to favorable locations, proprietary technology, or proprietary production material inputs also increase entry barriers and decrease the threat of entry.

And of course, if the opposite is true for any of these factors, barriers to entry are low and the threat of new entrants is high. For example, no required economies of scale, standardized or commoditized products, low initial capital investment requirements, low consumer switching costs, easy access to distribution channels, and no relevant advantages due to locale or proprietary assets all indicate that entry barriers are low and the threat of entry is high.

Other factors also influence the threat of new entrants. Expected retaliation of existing competitors and the existence of relevant government subsidies or policies can discourage new entrants. While no expected retaliation and the lack of relevant government subsidies or polices can encourage new entrants.

Threat of Entry Analysis

When analyzing a given industry, all of the aforementioned factors regarding the threat of new entrants may not apply. But some, if not many, certainly will. Of the factors that do apply, some may indicate a high threat of entry and some may indicate a low threat of entry. But, the results will not always be straightforward. Therefore it is necessary to consider the nuances of the analysis and the particular circumstances of the given firm and industry when using these data to evaluate the competitive structure and profit potential of a market.

High Threat of Entry of New Competitors When:

  • Profitability does not require economies of scale
  • Products are undifferentiated
  • Brand names are not well-known
  • Initial capital investment is low
  • Consumer switching costs are low
  • Accessing distribution channels is easy
  • Location is not an issue
  • Proprietary technology is not an issue
  • Proprietary materials is not an issue
  • Government policy is not an issue
  • Expected retaliation of existing firms is not an issue

Threat of New Entry is Low if:

  • Profitability requires economies of scale
  • Products are differentiated
  • Brand names are well-known
  • Initial capital investment is high
  • Consumer switching costs are high
  • Accessing distribution channels is difficult
  • Location is an issue
  • Proprietary technology is an issue
  • Proprietary materials is an issue
  • Government policy is an issue
  • Expected retaliation of existing firms is an issue

Threat of New Entry of competitors Interpretation

When conducting Porter’s 5 forces industry analysis, a low threat of new entrants makes an industry more attractive and increases profit potential for the firms already competing within that industry, while a high threat of new entrants makes an industry less attractive and decreases profit potential for the firms already competing within that industry. The threat of new entrants porter’s 5 forces explained is one of the factors to consider when analyzing the structural environment of an industry. To continue to expand your analysis, download the free External Analysis whitepaper by clicking here .

threat of new entrants

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SWOT Analysis

See Also:
Porter’s 5 Forces of Competition
Core Competencies
How to Write an Action Plan
How to Turnaround a Company

SWOT Analysis

The SWOT Analysis – an acronym standing for Strengths, Weaknesses, Opportunities, and Threats – assesses a company’s competition in the desired field or market. This analysis serves as an excellent tool for decision-making, either for personal use or from a business standpoint.

Business SWOT Analysis: Planning, Performance, and Evaluation

The purpose of a SWOT analysis, from a business point-of-view, is to organize a proper business strategy around the internal and external factors that affect one’s business. Existing or older businesses may use a SWOT analysis to predict or proactively adapt to the environmental changes pertaining to their business. New or starting businesses may use this analysis to plan ahead before their actual business plans to assess potential road bumps or advantages they can use.

How to Complete a SWOT Analysis

When mapping out a business strategy with a SWOT analysis, you first look at the four elements in your company: Strengths, Weaknesses, Opportunities, and ThreatsStrength and Weaknesses are considered internal factors that might affect a company. These are characteristics, rather than physical elements surrounding the business, such as profitability or shortages. The Opportunities and Threats are considered external factors. These are the physical elements such as network or competition.

SWOT Analysis

Benefits of a SWOT Analysis

With the SWOT Analysis you can:

  1. Analyze the current situation of a company.

    SWOT shows the leaders of a company how realistic their situation is. With the simple grid system, people can visualize and organize their thoughts. This list may be pages long, but with the SWOT Analysis, you can easily distribute and interpret the information easily.

  2. Provide different perspectives when executing a decision.

    When completing a SWOT analysis, a leader of a company is forced to consider all different types of potential aspects that affect the company, not only what they see on a regular basis.

  3. Simplify; SWOT does not require extensive technology or payment during completion.

    You can do this method on a computer, piece of paper, or dry-erase board. And it’s free – straight from your mind.

Limitations of a SWOT Analysis

In comparison to many other types of business analysis, SWOT may not be as ideal because:

  1. The method is not as detailed.

    The SWOT analysis only has four factors, compared to other types of analysis which have seven or eight different factors. The method is useful with analyzing an idea or small maintenance in business planning. But you may need other methods to be paired with this analysis in order to get a full, detailed plan.

  2. You have to make a new SWOT every time you make a change.

    When updating a plan or making  a new decision, you have to consider all four factors in the SWOT analysis that might alter your previous factors. We recommend updating your SWOT analysis at the end of every financial year to project future losses, or when you don’t meet your goals.

  3. Subjectivity.

    In any decision-making process, the data collected must be reliable and un-biased. It is easy to misinterpret or over-represent your own strengths and opportunities versus weaknesses and threats when not done in a group setting.

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Revocable Trust

See Also:
Pension Plans
Keogh Plan
Credit Life Insurance
401k
Individual Retirement Account (IRA)

Revocable Trust Definition

A revocable trust is an agreement between a grantor and trustee where it transfers profit generating assets to the trustee. However, the grantor is still able to generate income from the assets. The grantor is also able to change the terms of the agreement at any point during his/her lifetime. This last point is the difference between a revocable trust and an irrevocable trust.

Revocable Trust Meaning

Many use revocable trust estate planning to pass on a family company or perhaps some other part of the grantor’s estate to a revocable trust beneficiary. Beneficiaries are usually the grantor’s immediate family, but it can be anyone established within the contract. The main benefit is that the assets will be transferred to who the grantor desires. The grantor can still generate cash flow from the assets as well. Another primary benefit is that the grantor can change the terms at anytime to accommodate the grantor’s changing needs.

Revocable Trust Example

For example, Bob owns a bicycle shop chain named Pedal Bikes Co., which is a Sole Proprietorship. He has two sons and would like them to take over the company whenever he has passed away. Bob talked to his lawyer. The lawyer advised Bob that he should start up a revocable trust. The assets are then transferred to the newly formed Pedal Bikes Partnership under the revocable trust agreement. The two sons start running the chain while Bob comes into help them every now and then and provide oversight. Bob also receives payments from the company under the trust agreement.

When Bob passes away, the assets are then considered permanently transferred and are completely absorbed into the newly formed partnership. However, if one of Bob’s sons or both of them do not want to run the chain then Bob has the ability to change the terms of the contract to one of the sons or another party. This also insures that Bob receive payments in his later years and that his legacy lives on through his bike store chain.

revocable trust

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Red Herring Definition

Red Herring Definition

The red herring definition, or preliminary prospectus, is a legal document that must be submitted to the SEC for approval prior to an initial public offering (IPO). It is prepared by the company that is planning to go public in conjunction with the investment bank syndicate that is underwriting the IPO.

Red Herring Document

Furthermore, the document includes details about the company. It includes an explanation of the company’s operations and competitive position as well as copies of its financial statements. The document also includes the details of the IPO, including the type of security (common stock, preferred stock, etc.) offered, the number of shares offered, and the anticipated share price.

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red herring definition

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red herring definition

 

See Also:
Ten In-House Secrets for Reducing Your Company’s Legal Costs
Board of Directors
Benefits of an Advisory Board
How to Form an Advisory Board
Why is Intellectual Property Risk Everybody’s Problem

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Remuneration Definition

See Also:
Pension Plans
Cafeteria Plan
How to compensate sales staff
Passive Income
Electronic Funds Transfer (EFT)

Remuneration Definition

We can define remunerations as compensation for employment services. Remuneration can include hourly wages, fringe benefits, salary compensations, and other forms of compensation such as stock options and cash bonuses. Strategies differ across industries and companies.

Remuneration Strategies

A company’s remuneration strategy, or compensation strategy, serves as the basis for planning and addressing compensation issues throughout the organization. Compensation strategies vary across industries and even within companies, depending on the nature of the work and the level of the employee in the hierarchy. Remuneration strategies should include both long-term and short-term incentives, and should include both monetary and non-monetary compensation.

For instance, a remuneration strategy should entail a mixture of long-term and short-term incentives, and a mixture of monetary and non-monetary compensation. Lower level employees should receive more short-term monetary incentives, and to a lesser degree long-term non-monetary compensation. Whereas senior employees should receive a greater proportion of long-term non-monetary compensation, and to a lesser degree short-term monetary compensation.

Basic Remuneration

The most basic type of remuneration is periodic compensation. Under this type of pay plan, compensate workers for spending time at work. Pay rates can differ due to skill, seniority, or education level. With this type of remuneration, there is no direct connection between performance and compensation. Motivate the workers with the prospects of being promoted to a higher pay rate, and avoid demotion and dismissal.

Performance Based Incentives

In certain work environments, it is more appropriate to evaluate and compensate employees based on performance and results. Examples of performance based incentives include merit pay, contingent pay, and piece rate pay.

Merit pay is an incremental pay increase achieved after reaching a certain performance level. For example, merit pay is a pay raise. Contingent pay refers to pay received after achieving a specific objective. Contingent pay may complement a base-salary or wage. An example of contingent pay is a bonus received for hitting a certain sales target. Piece rate pay refers to a flat rate earned for completion of individual units of production or work. For example, a seamstress in a shoe factory might earn a certain monetary amount per shoe. That is piece rate pay.

Another form of incentive based on performance is commission. Employees working on commission earn income based on sales of company products. For a more detailed look at issues regarding commission, see the section below entitled Sales Commission Structures.

Profit Sharing Policy

A profit sharing policy at a company encourages the employees to consider the overall goals and performance of the organization. Profit sharing may be earned as cash, shares of company stock, stock options, or stock appreciation rights. It may be earned in the current period or it may be deferred to a later period. Allocate profit shares among employees based on seniority or other criteria. The idea is to incentivize employees to strive towards success and performance not only at their own individual level but for the company as a whole.

Non-Financial Remuneration

Employees also benefit from and appreciate non-financial forms of compensation. Examples of nonfinancial remuneration include awards for recognition, a pleasant work environment, opportunities for advancement, employee buy-in in decision-making processes, perks, and fringe benefits.

Sales Commission Structures

Offer employees performance based incentives as part of their compensation. For example, many salespeople work on commission. These sales people earn a certain percentage of each sale and therefore motivates them to sell more. But there are some issues to consider when establish the sales commission structure of employee compensation.

Many companies offer salespeople commission as a percentage of the selling price of the product being sold. This essentially motivates the salesperson to focus on selling the most expensive products so as to earn the highest amount of commission. However, this may not always be the best thing for the company as a whole since the most expensive products may not be the most profitable items.

One way to effectively incentivize sales employees in a way that maximizes the company’s profitability is to pay commission based on a percentage of the product’s contribution margin. Define contribution margin as selling price minus variable production cost. A product with a higher contribution margin is more profitable than a product with a lower contribution margin. Incentivizing sales employees to sell the products with the highest contribution margins – regardless of the selling price – can align the goals of the salespeople with the overall goals of the company.

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Remuneration Definition

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Remuneration Definition

Source:

Barfield, Jesse T., Michael R. Kinney, Cecily A. Raiborn. “Cost Accounting Traditions and Innovations,” West Publishing Company, St. Paul, MN, 1994.

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Margin vs Markup

See Also:
Gross Profit Margin Analysis
Retail Markup
Chart of Accounts (COA)
Margin Percentage Calculation
Markup Percentage Calculation

Margin vs Markup Differences

Is there a difference between margin vs markup? Absolutely. More and more in today’s environment, these two terms are being used interchangeably to mean gross margin, but that misunderstanding may be the menace of the bottom line. Markup and profit are not the same! Also, the accounting for margin vs markup are different! A clear understanding and application of the two within a pricing model can have a drastic impact on the bottom line. Terminology speaking, markup percentage is the percentage difference between the actual cost and the selling price, while gross margin percentage is the percentage difference between the selling price and the profit.

Effective Ways to Optimize Profitability

So, who rules when seeking effective ways to optimize profitability?. Many mistakenly believe that if a product or service is marked up, say 25%, the result will be a 25% gross margin on the income statement. However, a 25% markup rate produces a gross margin percentage of only 20%.


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Markup vs Gross Margin: Which is Preferable?

Though markup is often used by operations or sales departments to set prices it often overstates the profitability of the transaction. Mathematically, markup is always a larger number when compared to the gross margin. Consequently, non-financial individuals think they are obtaining a larger profit than is often the case. By calculating sales prices in gross margin terms they can compare the profitability of that transaction to the economics of the financial statements.

(Try the calculators at the bottom of the page to discover for yourself which is better!)

Steps to Minimize Markup vs Margin Mistakes

Terminology and calculations aside, it is very important to remember that there are more factors that affect the selling price than merely cost. What the market will bear, or what the customer is willing to pay, will ultimately impact the selling price. The key is to find the price that optimizes profits while maintaining a competitive advantage. Below are steps you can take to avoid confusion when working with markup rates vs margin rates:

Establish a Price

Still deciding whether to use margin or markup to establish a price? Easily discover if your company has a pricing problem and fix it with either margin or markup. Download the free Pricing for Profit Inspection Guide to learn how to price profitably.

margin vs markup, Effective Ways to Optimize Profitability

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margin vs markup, Effective Ways to Optimize Profitability

Margin vs Markup Chart

15% Markup = 13.0% Gross Profit
20% Markup = 16.7% Gross Profit
25% Markup = 20.0% Gross Profit
30% Markup = 23.0% Gross Profit
33.3% Markup = 25.0% Gross Profit
40% Markup = 28.6% Gross Profit
43% Markup = 30.0% Gross Profit
50% Markup = 33.0% Gross Profit
75% Markup = 42.9% Gross Profit
100% Markup = 50.0% Gross Profit

Margin Calculator

Markup Calculator

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Intensity of Rivalry (one of Porter’s Five Forces)

See also:
Porter’s Five Forces of Competition
Threat of New Entrants
Supplier Power
Buyer Bargaining Power
Threat of Substitutes
Complementors (Sixth Force)

Porter’s Intensity of Rivalry Definition

The intensity of rivalry among competitors in an industry refers to the extent to which firms within an industry put pressure on one another and limit each other’s profit potential. If rivalry is fierce, then competitors are trying to steal profit and market share from one another. As a result, this reduces profit potential for all firms within the industry. According to Porter’s 5 forces framework, the intensity of rivalry among firms is one of the main forces that shape the competitive structure of an industry.

Porter’s intensity of rivalry in an industry affects the competitive environment and influences the ability of existing firms to achieve profitability. For example, high intensity of rivalry means competitors are aggressively targeting each other’s markets and aggressively pricing products. This represents potential costs to all competitors within the industry.

High intensity of competitive rivalry can make an industry more competitive and thus decrease profit potential for the existing firms. In comparison, low intensity of competitive rivalry makes an industry less competitive. It also increases profit potential for the existing firms.


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Porter’s Intensity of Rivalry Determining Factors

Several factors determine the intensity of competitive rivalry in an industry, whether it increases or decrease it.

Porter’s Rivalry Intensity Increased

If the industry consists of numerous competitors, then Porter rivalry will be more intense. Whereas if the competitors are of equal size or market share, then the intensity of rivalry will increase. The intensity of rivalry will be high if industry growth is slow. If the industry’s fixed costs are high, then competitive rivalry will be intense. Additionally, rivalry will be intense if the industry’s products are undifferentiated or are commodities. If brand loyalty is insignificant and consumer switching costs are low, then this will intensify industry rivalry. Industry rivalry will be intense if competitors are strategically diverse – which means that they position themselves differently from other competitors. Then an industry with excess production capacity will have greater rivalry among competitors. And finally, high exit barriers – costs or losses incurred as a result of ceasing operations – will cause intensity of rivalry among industry firms to increase.

Porter’s Rivalry Intensity Decreased

And of course, if the opposite is true for any of these factors, the intensity of Porter rivalry among competitors will be low. For example, the following indicates that the Porter intensity of rivalry among existing firms is low:

Porter’s Intensity of Rivalry Analysis

When analyzing a given industry, all of the aforementioned factors regarding the intensity of competitive rivalry Porter placed among existing competitors may not apply. But some, if not many, then certainly will. And of the factors that do apply, some may indicate high intensity of rivalry and some may indicate low intensity of rivalry; however, the results will not always be straightforward. As a result, consider the nuances of the analysis and the particular circumstances of the given firm and industry when using the data to evaluate the competitive structure and profit potential of a market.

Intensity of Rivalry is High if…

If any of the following occurs, then intensity of rivalry is high.

  • Competitors are numerous
  • Industry growth is slow
  • Fixed costs are high
  • Competitors have equal size
  • Products are undifferentiated
  • Brand loyalty is insignificant
  • Consumer switching costs are low
  • Competitors have equal market share
  • Competitors are strategically diverse
  • There is excess production capacity
  • Exit barriers are high

Intensity of Rivalry is Low if…

If any of the following occurs, then it may indicate that the intensity of rivalry is low.

  • Competitors are few
  • Unequal size among competitors
  • Competitors have unequal market share
  • Industry growth is fast
  • Fixed costs are low
  • Products are differentiated
  • Brand loyalty is significant
  • Consumer switching costs are high
  • Competitors are not strategically diverse
  • There is no excess production capacity
  • Exit barriers are low

Porter’s Intensity of Rivalry Interpretation

When conducting Porter’s 5 forces industry analysis, low intensity of rivalry makes an industry more attractive and increases profit potential for the firms already competing within that industry. In comparison, high intensity of rivalry makes an industry less attractive and decreases profit potential for the firms already competing within that industry. The intensity of rivalry among existing firms is one of the factors to consider when analyzing the structural environment of an industry using Porter’s 5 forces framework.

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Intensity of rivalry

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Intensity of rivalry

Sources on Porter’s Intensity of Rivalry

Harrison, Jeffrey S., Michael A. Hitt, Robert E. Hoskisson, R. Duane Ireland. (2008) “Competing for Advantage”, Thomson South-Western, United States, 2008.

Porter, M.E. (1979) “How competitive forces shape strategy”, Harvard Business Review, March/April 1979.

Porter, M.E. (1980) “Competitive Strategy”, The Free Press, New York, 1980.

Porter, M.E. (1985) “Competitive Advantage”, The Free Press, New York, 1985.

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