Page 17 - DMGT401Business Environment

Business Environment

Notes (g) Access to Distribution: The middlemen are reluctant to deal with a product that is new
to the market. This situation becomes more critical in industrial and international
markets as there are few middlemen because they usually prefer established products.
Here consider above example of CCC
(a) Is it easy to enter the market or are there economic or legal barriers to entry?

(b) Does it cost a lot to set up in competition? E.g. it's expensive to start a railroad, and
you need a license. For a CCC it's expensive to set up a nationwide network of
childcare centres - and they would need licenses/LA approval.
(c) Is it difficult to persuade consumers/users to switch from existing providers - because
of brand loyalty, cost of switching, or length of contract, E.g. competing against
Coca Cola or persuading people to switch from Windows to Macs is a challenge. If
the local authority has a 3 year contract with NSC - the existing charity supplier - to
provide support for 'difficult' children then CCC getting that contract from that
other charity could be very expensive and challenging.

(d) Do existing providers have a 'scale-independent' costs advantage? e.g. in a commercial
setting this is a unique advantage like a copyright like for Windows, or a broadcast
license like ITV which no n eels can have. In the case of CCC if they or their rivals
have an accredited training programme for care workers childcare workers, or the
ability to use funds from their general fundraising to support local childcare, then
these would be similar advantages.

3. Threat of Substitutes: This refers to the market attempts of companies in other industries
to win customers over to their own substitute products.

Example: A producer of scooters will compete with motorcycle makers, newspapers
compete with television operators, tea competes with coffee, CD players compete with DVD
players, Aspirin manufacturers compete with the makers of Acetaminophen, Brufen and other
pain relievers. Makers of eyeglasses compete with the makers of contact lenses, road transport
services compete with the railways.
Strong competitive pressure from substitute products depends upon three factors:

(a) Whether attractively priced substitutes are available?
(b) Whether the buyers view the substitutes as being satisfactory in terms of quality,
performance, and other relevant attributes?

(c) Whether buyers can switch to substitutes easily?
The presence of readily available and attractively priced substitutes creates competitive
pressure by placing a ceiling on the prices an industry can charge for its product without
giving customers a reason to switch to substitute and thus risk sales erosion. How readily
available and cost comparable are substitutes? In the mobile phone industry the big
providers are all very similar and the cost of switching very small - except for the contract!
For our childcare charity this might be more of a challenge if, for example, the local
authority was comparing fostering as an alternative proposition - or even giving out
Ritalin to kids in schools
4. Bargaining Power of Suppliers: Suppliers have little or no bargaining power when there
are many suppliers and supply exceeds demand. Suppliers compete with each other to
grab orders. On the other hand, bargaining power is high when it comes to high technology

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