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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.

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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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Sukuk

Sukuk Definition

A Sukuk is the islamic world’s version of a bond. It is also referred to as an islamic bond. Because Islamic people do not believe in charging or paying interest, they have been forced to maneuver their way around interest by renting certain assets or by taking ownership in a project.

Sukuk Meaning

A Sukuk structure is slightly different, but the principle is the same as a western bond. When a bank invests in a Sukuk or islamic bond, it is considered to be an investment in a certain project or asset that a company is working on. As the project or asset is complete or purchased, the company must then pay the bank rent expense from the cash flows of that asset or project. Overtime, the islamic bond is paid off in rent using fixed payments over a certain amount of time. Then the par value of the the islamic bond is purchased at a future date.

Sukuk Example

For example, Osman is looking to start a new production line in his business that will require the equivalent of $1 million dollars. Because Osman is building this line in Saudi Arabia, he plans on financing the costs using this islamic bond. He then goes and obtains the financing he needs from an islamic bank. The bank invests in the project. They decide that Osman will owe the bank rent of $80,000 per year and the final par value of the Sukuk, ($1 million) 10 years after the project is done. Notice that this is the same set up as a regular bond where the rent expense of $80,000 is equal to an 8% interest rate. And the par value of the bond is due at the end of the term like a bond.

sukuk

See Also:
Coupon Rate Bond
Interest Rate
What is a Bond?
Nominal Interest Rate
Outstanding Debt

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Service Department

See Also:
Administration Expenses
Outsource Definition
Advantages of PEO Services for the Business Owner
Sunk Costs
Joint Costs

Service Department Definition

Many companies require support activities as well as core activities to produce their goods and/or services. Support services, or a service department, do not contribute directly to the production of goods or the providing of services, but they are necessary for the company to operate. In addition, consider service departments, support services, or administrative services support activities.

The costs associated with these support services must be treated in accordance with accepted accounting practices. They also may be allocated to the cost of goods and services produced by the company and/or allocated to other departments within the company. Furthermore, support services costs often comprise a large portion of overhead costs.

Because these activities are not the core activities of the business, managers often must decide whether to keep support service activities in-house or to outsource them. Often an outside organization that specializes in the particular support service in question can perform the activities in a more cost-efficient way. As a result, it may benefit the company to outsource that particular activity.

Service Department Cost Allocation Methods

In accounting, there are several methods for allocating the costs associated with service departments to the products produced by the company and also to the internal departments that benefit from the support services. These cost allocation methods include the following:

Support Services – Examples

Some examples of support service departments that you may commonly find in a company include the following:

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service department, Service Department Definition, Service Department Cost Allocation Methods

Source:

Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.

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Separation Of Duties

Separation of Duties Definition

Some circles refer to separation of duties as segregation of duties. It refers to a concept that leads to greater internal control within a company. The accounting separation of duties definition is a theory that the job of an employee should provide a reasonable evaluation for the job of another employee. In layman’s terms, no one person has too many responsibilities rested on him/her. What this does is prevent mistakes and fraud which could bring detrimental consequences upon the company as a whole as well as the individual.

Separation of Duties Example

A separation of duties example could be the relationship that exists between an accountant and a cashier. This policy maintains that the accountant should not update the cash balance on the cash as well as keep track of the cash on his person. Contrarily, the cashier should not have both those responsibilities either. It upholds that the accountant should keep track of the cash books while the cashier accepts responsibility for the cash that’s on hand. At the same time, separation of duties works for constructs other than business types. Our government has Legislative, Judicial, and Executive branches. The “duty” of running an efficient and successful government is spread over three entities.

Accounting Separation of Duties

While it is intelligent for there to be some sort of accounting separation of duties when it comes to jobs in general, it is paramount to efficiency and success. In fact, keep accounting completely separate from the rest of the operations divisions in the company. This remains constant for all aspects of production and financing. Therefore, there should be no individuals in the work-in-progress section that are keeping track of products in the finished goods section.

Why Is Separation Of Duties Important?

Obviously, as said before, duties maintains an efficient balance of work that ensure the accuracy and correctness of jobs. The work of one man, in turn, checks the work of another. Overall, this keeps a company or organization running as smoothly as possible. In addition, it produces accurate product and financial information. Separation of duties also creates jobs for more individuals. If one person was expected to be responsible for multiple jobs, then there would most certainly be fewer jobs for others. This spreading of responsibility allows for a more manageable workload. In addition, it allows for more available responsibilities for others to take.

separation of duties, Accounting Separation of Duties

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Standard Costing System

See Also:
Standard Costing Example
Process Costing
Activity Based Costing vs Traditional Costing
Absorption vs Variable Costing
Implementing Activity Based Costing
Cost Driver
Budgeting 101: Creating Successful Budgets
Analyzing Your Return on Investment (ROI)
Product Pricing Strategies

Standard Costing System

In accounting, a standard costing system is a tool for planning budgets, managing and controlling costs, and evaluating cost management performance.

A standard costing system involves estimating the required costs of a production process. But before the start of the accounting period, determine the standards and set regarding the amount and cost of direct materials required for the production process and the amount and pay rate of direct labor required for the production process. In addition, these standards are used to plan a budget for the production process.

At the end of the accounting period, use the actual amounts and costs of direct material. Then utilize the actual amounts and pay rates of direct labor to compare it to the previously set standards. When you compare the actual costs to the standard costs and examine the variances between them, it allows managers to look for ways to improve cost control, cost management, and operational efficiency.

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Advantages and Disadvantages of Standard Costing

There are both advantages and disadvantages to using a standard costing system. The primary advantages to using a standard costing system are that it can be used for product costing, for controlling costs, and for decision-making purposes.

Whereas the disadvantages include that implementing a standard costing system can be time consuming, labor intensive, and expensive. If the cost structure of the production process changes, then update the standards.

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standard costing system

Source:

Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.

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Standard Costing Example

See Also:
Standard Costing System

Standard Costing Example

Here is a simple standard costing example. Let’s take a company that makes widgets. Based on historical data, a cost analyst determines that producing one widget typically requires 1 pound of raw material costing $2 dollars and 1 hour of labor costing $20 dollars. These are the standard amounts and costs for material and labor.

The company expects to produce 1,000 widgets in the upcoming quarter. Based on this sales forecast, and using the standards determined by the cost analyst, the company can plan a budget for the production costs required for the upcoming quarter. The budget includes 1,000 pounds of raw material costing $2,000 dollars and 1,000 hours of labor costing a total of $20,000 dollars. So the total production costs for the upcoming quarter are expected to be $22,000 dollars.

At the end of the quarter, the company analyzes the production process to see how well they stuck to the budget. As it turns out, the company produced 1,000 widgets at a total cost of $35,000 dollars. Clearly, the production process turned out to be more expensive than they had planned. The cost analyst can then compare the standard budgeted costs to the actual costs to see what the differences were and then the managers can analyze the production process to find out why the differences occurred.

Conclusion

Let’s say, as it turns out, the company actually used 1,000 pounds of raw material costing $2,000 dollars and 1,000 hours of labor costing $33,000 dollars. Clearly the variance occurred in the pay rate. For some reason, the labor ended up costing $13,000 dollars more than they had planned. Maybe this is because the original estimates were off. Or maybe some of the workers were working on overtime. Or maybe somebody made a mistake. By comparing the standard cost and the actual costs the company can analyze the situation. Then they can dig deeper to find out what went wrong.

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Sales Order

See Also:
Credit Sales
Daily Sales Outstanding (DSO)
How to compensate sales staff
Economic Order Quantity (EOQ)
Economic Income

Sales Order Definition

A sales order definition is an internal document which lists buyer and sales quantity for a given purchase. It is also a valuable document for operations. A sales order form generally indicates that no additional production effort will be applied to the product. Exceptions to this occur, as with the making of custom products.

Sales Order Explanation

A sales order, explained as the internal document which explains the sale, conveys important information to staff. Sales orders fully document the needs of a customer. When a sale first occurs, sales staff take valuable information about what the customer wants. After taking this information, it is added to either a document or database so that the customer’s needs can be fully addressed. This is the sales order.

2 Reasons Why A Sales Order Is Valuable

A sales order is valuable for 2 main reasons. First, it fully documents what the customer wants to buy. This is a valuable record to the sales staff because it can be reviewed later to gain information about the customer and their needs. At times additional information will be added to a sales order, such as amount of product delivered as compared to amount of product desired. All of the internal information regarding a sale is kept in the sales order, so it is extremely useful upon review. This is the value of a sales order vs invoice. An invoice merely includes the details, cost, and unpaid balance of the sale.

A sales order is also valuable for operational staff. Due to the fact that this document fully explains the demand of the customer, it contains valuable information for those preparing the delivery. This staff needs a sales order; processing products requires a full understanding of the order which is being processed. In this way a sales order vs purchase order is very different; the sales order includes internal information which is not important to the customer and thus not included in their purchase order.

Sales orders, traditionally, were a paper document. In modern times, the whole sales order book is kept in a single database. This way, staff can access the information quickly. In times where one piece of information is needed, staff can simply look into the database and answer their question. In times where the full information is needed, a printout or electronic copy can make this information accessible as well.

Sales Order Example

For example, Doug is the manager of a distribution plant of a major company. His job is vital to the company because it ensures that product leaves the warehouse in perfect condition to be delivered to the computer. Timeliness and attention to detail are Doug’s strengths. He will need to use them today.

Doug needs to prepare a large order. Since the company has recently signed this customer, a high paying account, Doug must make sure there are no problems with the order.

Doug receives the initial sales order from sales staff. They have fully laid out the needs of the customer. So, Doug will share this with the rest of his department.

Doug then passes this sales order processing off to his warehouse team. They carefully pull the items they plan to sell from the warehouse. They place them together on a palate and sent the items to the packaging department.

The packaging department assures that the items will not be destroyed in transit. They carefully place the product in sealed and shock-resistant boxes to prevent any issues. As an additional part of their efforts, they include any marketing materials in the package. This shows the value in this division: it is as much a function of marketing as it is a function of delivery.

Then, they place the product back on to palates. They place these palates next to the loading dock. Tomorrow, they will ship them.

At the last minute, sales staff receive an amendment to the purchase. Luckily, Doug’s branch uses electronic documents. He sends the document through the channels listed above. Then the rest of the order is processed and placed on the palate.

Conclusion

Finally, they load the product on the delivery truck. It will be sent to the offices of the customer. The delivery staff is well trained to assure professional distribution of the product and act as a good face for the company.

Doug is proud of how he processed the order. His department has done a good job. For their efforts, Doug will highlight and reward the delivery team at the next company meeting. Doug values this because is is an important morale builder. He does not need a morale builder, successful delivery of the product is motivational enough to Doug.

sales order, Sales Order Example, Sales Order Definition

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