Case Study for Pc Industry

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Question 1.1 Barriers to entry in the PC industry. Support your response with relevant theory and extracts from the case. The personal computer industry has undergone major changes in its market structure. The industry has grown substantially from its beginnings in January 1975, when the first microcomputer, the Altair 8800, was introduced. During its early development, the industry was dominated by a few small-scale companies, mainly hobbyist-run. Entry into the market was determined by technological innovation and the availability of system-compatible software. Companies tended to design their own software, with little compatibility among systems. IBM introduced its personal computers in 1981 and dominated the market for several years. Gradually producers of software and hardware began separating, with less vertical integration and more compatibility among products. The 1980s brought a large number of smaller firms into the market, making the industry more competitive. By the end of the 1980s, substantial product differentiation had occurred, with most firms offering several models, often with several versions each. Throughout the period, new product development was the engine of the industry's rapid growth. Porter (1979) defines barriers to entry as unique industry characteristics that define the industry. Barriers reduce the rate of entry of new firms, thus maintaining the level of profits for those already in the industry. From a strategic perspective, barriers can be created or exploited to enhance a firm’s competitive advantage. Barriers to entry arise from several sources such as government regulations, economic factors, and marketing conditions. The Five Forces Model of Competition by Porter outlines that the state of competition in an industry is a composite of competitive pressures operating in five areas of the overall market of which competitive pressures associated with the threat of new entrants into the market is one of them.

Figure 1. Porter’s Five Forces - A Model for Industry Analysis


Degree of Rivalry
Exit barriers
Industry concentration
Industry growth
Product differences
Switching costs
Brand identity
Diversity of Rivals
Corporate stake

Thompson et al (2007:62) outlines the several sources of barriers to entry in an industry: Restrictive regulatory policies: states that although the principal role of the government in a market is to preserve competition through anti-trust actions, the government also restricts competition through the granting of monopolies in the form of patents and through regulation. The case study states that Microsoft in order to protect its valuable windows monopoly against potential competitive threats may have engaged in a series of anti competitive activities. Microsoft’s conduct includes agreements tying other Microsoft software products to Microsoft’s windows operating system; exclusionary agreements precluding companies from distributing, promoting, buying or using products of Microsoft software on competitors and exclusionary agreements restricting the right of companies to provide services or resources to Microsoft’s software competitors or potential competitors. Microsoft was fined for such anticompetitive behavior. Patents offer a 20-year barrier to entry for any new product disclosed to the government. Once a product is patented, no other person or company can profit from the idea. Inventors can use their barrier to entry as a competitive advantage, therefore receiving payment for innovation. High capital requirements: the larger the total dollar investment needed to enter the market successfully, the more limited the pool of new entrants. These relate to manufacturing facilities and equipment, introductory advertising and working capital to finance inventories and all start up costs. Strong brand preference and high degree customer...
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