SECOND SEMESTER SESSION 2017/2018 (A172)

GFMA 3103 INTERNATIONAL BUSINESS POLICY

INDIVIDUAL ASSIGNMENT 1

GROUP: B

LECTURER: MOHAMAD SAFIAI BIN SAAD

SUBMISSION DATE: 25 MARCH 2018

PREPARED BY:

KUAN XIN YI 246096

 1. Why do price wars often erupt in certain industries (such as the
automobile industry), but less frequently in other industries (such
as the diamond industry)? What can firms do to discourage price
wars or be better prepared for price wars?

According to Oxford Dictionaries, price wars refer to the time of intense

competition where traders lower the prices in attempt to enhance their
market share. Price wars will erupt the industry because of product
differentiation, competition and the consumer perception on price.

Product Differentiation
Price wars will be easily taken place in the market if we cannot
differentiate our products and the only ways to fight for market share is
to lower the prices. For example, the diamond industry is high-end where
they priced their products based on the worth and branding. Unlike
automobile industry that has very little differentiation in terms of the
quality of their products.

Competition
In addition, price wars will erupt in a slow growing market such as
automobile industries as intense competition in the market will hinder the
firm to emerge as the top market player. In contrast, diamond industry
doesn’t compete among competitors as they are there to offer the nest of
the best.

Consumer Perception on Price

Price wars will also occur due to the consumer perception on price. If the
industry is over capacity and decided to reduce the price in order to get
rid of the stock because it will be expensive to hold idle products. Price
reduction won’t always seem to be better for certain industries. For
example, if we reduce the price of a car, consumers will always be happy
to buy it without considering the quality of the car while if we set the
diamond at a lower price, consumers will always change their perception
that diamond with low price is consider as being cheap.

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There are many different methods that a firm can do to discourage price
wars or be better prepared for price wars. The firm can differentiate
themselves by introducing new features and functions to their products. If
they do not want to choose to differentiate themselves, they should carry
out low cost strategy by outsourcing, cut product line, minimise product
variation or reduce promotion expenditures by selling through
distributors.

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2. Compare and contrast the five forces affecting the airline industry,
the fast food industry, the beauty products industry, and the
pharmaceutical industry (1) on a worldwide basis and (2) in your
country. Which industry holds more promise for earning higher
returns? Why?

Worldwide Basis In Malaysia

Bargaining Power of Suppliers
Airline Industry High. Labour is Low. Labour is weaker
powerful as they as they can’t bid away
always bid away all airline’s profit in a
airline’s profit in new labour contract or
contracts. enact stuffy work
rules.
Fast Food Industry Low. Large population Low. Large population
of providers reduce of providers reduce
the effect of individual the effect of individual
suppliers. suppliers.
Beauty Products Low. There are many Low. There are many
Industry market players and market players and
large supply for the large supply for the
products by both small products by both small
and large scales and large scales
producers. producers.
Pharmaceutical Low. Suppliers have Low. Suppliers have
Industry little power for little power for
negotiation. negotiation.
Pharmaceutical firms Pharmaceutical firms
will usually have will usually have
significant buying significant buying
power, so they can power, so they can
dictate the price. dictate the price.

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 Bargaining Power of Buyers
Airline Industry Moderate. Travel Low. There is not too
agents are weak and much choices for
consumers have many Malaysian travellers.
choices and can easily They may be able to
switch but not apply to switch but airlines
all routes. maybe dominant by
country such as Air
Asia and Malaysia
Airlines.
Fast Food Industry High. Low switching High. Low switching
costs enable buyers to costs enable buyers to
impose their demands. impose their demands.
Beauty Products High. There are many High. There are many
Industry producers for beauty producers for beauty
products, so products, so
consumers can force consumers can force
them to lower the them to lower the
price by purchasing price by purchasing
competitors’ products. competitors’ products.
Pharmaceutical Low. The medication is Low. The medication is
Industry prescribed by doctors prescribed by doctors
and if the patients and if the patients
need the drug, they need the drug, they
need to buy it at any need to buy it at any
given price. given price.
Threat of New Entrants
Airline Industry High. There are many Low. Malaysia has
secondary airports in many airports that are
developed countries almost all under
such as US are looking capacity. So, there is
for expansion and no significant
attracting passenger competition for new
aircraft to land. entrants.

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Fast Food Industry Moderate. It needs Moderate. It needs
moderate capital to moderate capital to
start up a new start up a new
restaurant make it restaurant make it
easy for newbie to easy for newbie to
enter this industry. enter this industry.
Beauty Products Low. Developing Low. Developing
Industry special beauty special beauty
products requires a lot products requires a lot
of capital for R&D and of capital for R&D and
actual manufacturing actual manufacturing
process. process.
Pharmaceutical Low. The firm need to Low. The firm need to
Industry invest lot of capital for invest lot of capital for
research and research and
development to development to
engage in this engage in this
industry. industry.
Threat of Substitutes
Airline Industry Low to moderate. Low. Unless they have
Some substitutes are time to travel by ship,
possible on short otherwise, they will be
routes. There are stuck with flying. The
some plans for high fare sometimes is
speed regional trains higher and it took
but it will not be built longer time to travel
in the near time. with bus.
Fast Food Industry High. There are many High. There are many
substitutes for this substitutes for this
industry. Consumers industry. Consumers
can cook at home, buy can cook at home, buy
food from bakeries or food from bakeries or
artisanal food artisanal food

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 producers. producers.
Beauty Products High. There are many High. There are many
Industry competitors provide competitors provide
similar products that similar products that
satisfy market needs satisfy market needs
at lower price with at lower price with
higher quality. higher quality.
Pharmaceutical Moderate. Possess High. Threat from
Industry threat from generic alternative medicines
competition once and treatments such
patents run out. as traditional Chinese
treatment.
Competition of Rivalry
Airline Industry High. There is many Low. There is still have
airline providers that market craving up in
provide route to same collaboration with the
destination with lower government.
fare and better
services.
Fast Food Industry High. There are many High. There are many
global and local firms global and local firms
that compete in the that compete in the
market and promote market and promote
their products their products
aggressively. aggressively.
Beauty Products High. There is many High. There are many
Industry competitors with a foreign and local
wider range of competitors that
collection for provide same products
consumers. with better promotion.
Pharmaceutical High. Small company High. Private sectors
Industry usually goes bankrupt in this industry are
if they don’t possess increasing day by day.
potential “blockbuster”

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 in future pipeline.

Based on Porter’s model, low to medium forces possess in pharmaceutical

industry make it a strong player. This industry is attractive to investors
mostly due to the strong credit profiles of existing firms, purchasing and
pricing power, and high-barriers to entry. All of these attractiveness make
pharmaceutical industry holds more promise for higher returns.

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 3. ON ETHICS: As a manager, is it ethical to threaten your suppliers?
Your buyers?

As a manager, it is not ethical to threaten both our suppliers and buyers.

The impact of unethical acts towards suppliers is depend on the
bargaining power of suppliers, if suppliers have higher bargaining power,
they can give pressure on a company by increasing the prices, controlling
product availability or revising product quality.

Increased Price
If we threaten our suppliers and they are strong enough, they can
increase our costs. The supplier who knows that they cannot be kicked
out may dictate on raising prices for their raw materials. If the company
has no choice but to conform with these prices, it will increase in total
cost that will absorb by the company or spread it to the consumer. If
company’s profit margin does not allow it to absorb this situation, it will
result in higher prices in the market. The target market may not accept
this change and sales may decrease. The company may also loss their
customers to a competing product or substitute.

Product Availability
A supplier may be unwilling or incapable to meet targets quantity, then
the company may have to endure the situation that demand outweighs
supply. This can happen if the company try to increase sales or during
peak seasons, for example, holidays or special occasions when people
tend to buy more of these products. The large supplier may also push the
company out of the industry if supplier chooses to supply to only certain
companies. For these cases, the company will become helpless and
incapable to save itself.

Quality Issues
The supplier may decide to compromise on the quality of the product in
order to lower the costs. If these issues are great enough to affect user
experience, it will affect the company’s product offering and may establish

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negative impact on the end consumer directly. Complaints, returns and
exchanges may be increased and in the worst cases, customers may have
entire switchover to another product.

Apart from suppliers, it is unethical for a manager to threaten their

buyers. This is because when there is a strong group of buyers in the
market, they can crucially impact a company’s products and decisions.
The power that buyers can impose is reducing the attractiveness of the
industry by lowering the profitability. Unethical acts toward buyers may
also harm a company’s public relations.

Lowering the Profitability

If the price sensitivity of the buyers is high, they will be willing to change
from one supplier to another to obtain lower price if the product is
important to the buyer because the product indicates a high proportion of
costs but there is a little difference between the products. They know that
the product can be found from somewhere at lower price. In addition,
some buyers will insist on getting some extra service at no cost such as
next day delivery or a favourable financial arrangement which will
increase the costs and makes that company less profitable.

Damaging Public Relations

The direct reaction to unethical acts is that it will be harming for the
company’s public relations if those acts are spread among public. It is
true because in this globalization era which the world is becoming more
interconnected where information and communication can be exchanged
easily and faster, bad news can disseminate rapidly. Consumers have
considerable power in the form of, forums, networks and associations.
They know how to utilize that power to penalize companies and
organisations they consider as offenders. Punishments can comprise
boycotting a company’s products and services or voting governments out
of power.