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While one some- times hears executives complaining to the contrary, intense competition in an industry is neither coincidence nor bad luck.
Moreover, in the fight for market share, competition is not manifested only in the other players.
Rather, competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry. Customers, suppliers, potential entrants, and substitute products are all competitors that may be more or less prominent or active depending on the industry.
- The weaker the forces collectively, however, the greater the opportunity for superior performance. T-he strongest competitive force or forces determine the profitability of an industry and so are of greatest importance in strategy formulation.
There are six major sources of barriers to entry:
1. Economies of scale
—These economies deter entry by forcing the aspirant either to come in on a large scale or to accept a cost disadvantage.
2. Product differentiation
Brand identification creates a barrier by forcing entrants to spend heavily to overcome customer loyalty. —> e.g. Softdrink Company
3. Capital requirements
The need to invest large financial resources in order to compete creates a barrier to entry
4. Cost disadvantages independent of size
En- trenched companies may have cost advantages not available to potential rivals size and attainable economics of scale. These ad- vantages can stem from the effects of the learning curve (and of its first cousin^ the experience curve), proprietary technology etc.
5. Access to distribution channels
The new boy on the block must, of course, secure distribution of his product or service.The more limited the wholesale or retail channels are and the more that existing competitors have these tied up, obviously the tougher that entry into the industry will be.