QUESTION: 49

Which of the following factors are likely to be direct barriers to a new entrant in a supply market?

Threat of forward integration
Value to price
Brand identity
Availability of substitutes
Cost advantages

Answer(s): C,E

Explanation:

There are many types of barriers to entry into a market. Some of these include:
- Economies of Scale: When manufacturing or selling at a large scale, companies are able to avail cost advantages because per unit costs of the product fall. So the more the company produces in quantity the more the benefit.
When existing companies have this advantage, it can act as a barrier to entry because a new entrant will have to try to match the scale to achieve the same cost ad-vantage as the existing company. This may not be possible at the initial stage.
- A Differentiated Product: If the product being sold by the existing company or companies is highly differentiated or enjoys strong brand loyalty, then this can act as a strong barrier to entry. The new entrant will have to invest in creating a product with newer and unique features and bene-fits that surpass those offered by the old company. In addition, there will need to be strong efforts to break existing brand loyalties and shift them to a new untested company.
- High Capital Costs: If an industry requires huge capital investments at the onset, then this will act as a barrier to entry for many of the potential entrants. Only those will attempt to enter the competitive fray who have the resources to make this high initial investment.
- Other Cost Advantages: Apart from those cost benefits that come from economies of scale, there are other advantages that an existing firm may enjoy. These include access to the best suppliers, an understanding of existing materials and knowledge of their quality, possession of any necessary and important patents, and proprietary information and technological knowledge. There are also learning advantages, achieved over years of business and experience.
- Cost of Switching: The cost associated with a consumer's move from one company or product or another is called the switching cost. If there are significant switching costs, then a new entrant may not be able to create means of removing these. Or, they may have to offer significant advantage to counter these switching costs at their own expense.
- Distribution Network: Often, distribution relationships are well established and may prove to be a strong barrier to entry for a new company. A new entrant will obviously need access to these dis- tribution channels but will need to invest extra in order to engage distributors who have established relations with existing competitors.
- Suppliers: As with distributors, suppliers may be vital to the operations of a new business. Exist-ing suppliers may have contracts or loyalties with existing companies and may prove to be difficult to form relationships with.
- Legal and Government Created Barriers: Government and regulatory requirements such as permits and licenses may be a strong barrier to entry. There may also be laws governing ways to conduct business that may conflict with a company's practices in other countries.
- Barriers to Exit: Interestingly, barriers to exit may act as a deterrent to entry by new companies. If a company is unable to easily leave a competitive environment in case business does not work out, then it will have to stay and compete even if that is a detrimental business practice. In this case, the company may choose to not enter the market in the first place.

Reference:

CIPS study guide page 96
LO 2, AC 2.2

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QUESTION: 50

Due to increasing demand, a local restaurant is requesting its fish vendor to supply larger quantity. The restaurant manager also asks the vendor whether it is possible to reduce the total price by 5%.

This is known as...?

Straight rebuy
Capital purchase
Modified rebuy
New purchase

Answer(s): C

Explanation:

There are three major types of buying situations, which are new purchase, modified rebuy and straight rebuy. Three factors make the buying situations be different from the others, customers may face different problems in these situations.
A new purchase is a situation requiring the purchase of a product for the very first time. A straight rebuy is when a company places a second order with a supplier that is identical to the first purchase it made.
A modified rebuy is when a company orders again from a supplier, but wants to change some as-pect of the order, such as the quantity, packaging, product features, or delivery times. The scenario above is an example of modified rebuy.

Reference:

- What is a straight rebuy example?
- CIPS study guide page 3-4

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QUESTION: 51

Which of the following are the fair and reasonable comparators in price analysis? Select 2 that apply:

Pricing formula
Price indices
Strike price
Cost driver
Competitive bidding

Answer(s): A,B

Explanation:

Price Analysis is the process of deciding if the asking price for a product or service is fair and rea- sonable, without examining the specific cost and profit calculations the vendor used in arriving at the price. It is basically a process of comparing the price with known indicators of reasonableness.
When adequate price competition does not exist, some other form of analysis is required. Some reasons that could affect adequate price competition are: specifications are not definitive, tolerances are restrictive, or production capacity limits those eligible to bid. Examples of other forms of price analysis information include:
- Analysis of previous prices paid
- Comparison of vendor's price with the in-house estimate
- Comparison of quotations or published price lists from multiple vendors
- Comparisons with government agencies (such as GSA in the US) published prices

A strike price is the set price at which a derivative contract can be bought or sold when it is exercised. For call options, the strike price is where the security can be bought by the option holder; for put options, the strike price is the price at which the security can be sold. Strike price is also known as the exercise price.
A cost driver is the direct cause of a cost and its effect is on the total cost incurred. For example, if you are to determine the amount of electricity consumed in a particular period, the number of units consumed determines the total bill for electricity. In such a scenario, the number of units of electricity consumed is a cost driver.

Reference:

CIPS study guide page 35
LO 1, AC 1.2

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QUESTION: 52

Facing fiercer competition at home and abroad, IKEA, the leading furniture retailer, needs to im- prove its competitiveness. In order to do this, IKEA must decrease operating costs and improve quality of current and new retail stores. The company establishes a project team. The job of the team is to collect data on performance from multiple stores in several countries, then select the best performing one. The team will work closely with best performing store and study its processes. After the research, the team will recommend best practices to other retail stores. IKEA management can also apply these practices to new stores in the future.
Which of the following correctly describe the process undertaken by IKEA project team?

Internal benchmarking
Competitive benchmarking
Internal audit
Site visit

Answer(s): A

Explanation:

Basically, IKEA project team is undertaking the following process:

This is a typical benchmarking process. Benchmarking is defined as the process of measuring products, services, and processes against those of organizations known to be leaders in one or more aspects of their operations. Benchmarking provides necessary insights to help you understand how your organization compares with similar organizations, even if they are in a different business or have a different group of customers.
In the scenario, benchmarking process is undertaken within subsidiaries of IKEA, thus it is internal.

Reference:

- CIPS study guide page 49-51
- What is Benchmarking? Technical & Competitive Benchmarking Process | ASQ
- Internal Benchmarking at IKEA
LO 1, AC 1.3

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