Page 60 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Strategic Management

Notes (v) Established brand identities
(vi) Cumulative experience
New entrants may not have these advantages.
(g) Government policy: Historically, government regulations have constituted a major
entry barrier into many industries. The government can limit or even foreclose
entry into industries, with such controls as license requirements and limits on access
to raw materials. The liberalization policy of the Indian government relating to
deregulation, delicensing and decontrol of prices opened up the economy to many
new entrepreneurs.

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Caution Even if entry barriers are very high, new firms may still enter an industry if they
perceive that the benefits outweigh the substantial costs of entry. Such a situation creates
excess capacity in the industry and sparks off intense price competition that might depress
the returns for all players – new entrants as well as established companies.

So, the strategist must be mindful of the creative ways newcomers might find to circumvent
apparent barriers.
3. Expected Retaliation: How new entrants believe that the existing companies may react
will also influence their decision to enter or stay out of an industry. If reaction is vigorous
and protracted enough, the profit potential in the industry can fall below the cost of capital
for all participants. Existing companies often use public statements to send massages to
new entrants about their commitment to defending market share.

New entrants are likely to fear expected retaliation if:
(a) Existing companies have previously responded vigorously to new entrants
(b) Existing companies possess substantial resources to fight back
(c) Existing companies seem likely to cut prices to protect their market share
(d) Industry growth is slow, so newcomers can gain volume only by taking the market
share from existing companies.
An analysis of entry barriers and expected retaliation is obviously crucial for any company
contemplating entry into a new industry. The challenge is to find ways to surmount the
entry barriers without nullifying the profitability of the industry.

4. Intensity of Rivalry among Competitors: The second of Porter’s Five-Forces model is the
intensity of rivalry among established companies within an industry. Rivalry means the
competitive struggle between companies in an industry to gain market share from each
other. Firms use tactics like price discounting, advertising campaigns, new product
introductions and increased customer service or warranties. Intense rivalry lowers prices
and raises costs. It squeezes profits out of an industry. Thus, intense rivalry among
established companies constitutes a strong threat to profitability. Alternatively, if rivalry
is less intense, companies may have the opportunity to raise prices or reduce spending on
advertising etc. which leads to higher level of industry profits.
The intensity of rivalry is greatest under the following conditions:
(a) Numerous competitors or equally powerful competitors: When there are many competitors
in an industry or if the competitors are roughly of equal size and power, the intensity
of rivalry will be more. Any move by one firm is matched by an equal countermove.
In such situations rivals find it hard to avoid poaching business.

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