Threats of New Entrants

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Threat of New Entrants: Barriers to Entry

Economies of scale

Product differentiation

Capital requirements

Switching costs

Access to distribution channels

Cost disadvantages independent of scale

Government policy

Expected retaliation

Barriers to Entry

Economies of Scale

Marginal improvements in efficiency that a firm experiences as it incrementally increases its size

Factors (advantages and disadvantages) related to large- and small-scale entry

Flexibility in pricing and market share

Costs related to scale economies

Competitor retaliation

Barriers to Entry (cont’d)

Product differentiation

Unique products

Customer loyalty

Products at competitive prices

Capital Requirements

Physical facilities


Marketing activities

Availability of capital

Switching Costs

One-time costs customers incur when they buy from a different supplier

New equipment

Retraining employees

Psychic costs of ending a relationship

Access to Distribution Channels

Stocking or shelf space

Price breaks

Cooperative advertising allowances

Barriers to Entry (cont’d)

Cost Disadvantages Independent of Scale

Proprietary product technology

Favorable access to raw materials

Desirable locations

Government policy

Licensing and permit requirements

Deregulation of industries

Expected retaliation

Responses by existing competitors may depend on a firm’s present stake in the industry (available business options)

Bargaining Power of Suppliers

Supplier power increases when:

Suppliers are large and few in number.

Suitable substitute products are not available.

Individual buyers are not large customers of suppliers and there are many of them.

Suppliers’ goods are critical to the buyers’ marketplace success.

Suppliers’ products create high switching costs.

Suppliers pose a threat to integrate forward into buyers’ industry.

Bargaining Power of Buyers

Buyer power increases when:

Buyers are large and few in number.

Buyers purchase a large portion of an industry’s total output.

Buyers’ purchases are a significant portion of a supplier’s annual revenues.

Buyers’ switching costs are low.

Buyers can pose threat to integrate backward into the sellers’ industry.

Threat of Substitute Products

The threat of substitute products increases when:

Buyers face few switching costs.

The substitute product’s price is lower.

Substitute product’s quality and performance are equal to or greater than the existing product.

Differentiated industry products that are valued by customers reduce this threat.

Intensity of Rivalry Among Competitors

Industry rivalry increases when:

There are numerous or equally balanced competitors.

Industry growth slows or declines.

There are high fixed costs or high storage costs.

There is a lack of differentiation opportunities or low switching costs.

When the strategic stakes are high.

When high exit barriers prevent competitors from leaving the industry.

Interpreting Industry Analyses

Interpreting Industry Analyses (cont’d)

Strategic Groups

Strategic Group Defined

A set of firms emphasizing similar strategic dimensions and using similar strategies

Internal competition between strategic group firms is greater than between firms outside that strategic group.

There is more heterogeneity in the performance of firms within strategic groups.

Similar market positions

Similar products

Similar strategic actions

Strategic Groups

Strategic Dimensions

Extent of technological leadership

Product quality

Pricing Policies

Distribution channels

Customer service

Competitor Analysis

Competitor Intelligence

The ethical...
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