Page 16 - DMGT401Business Environment

Unit 1: Indian Business Environment

stronger companies outside the industry acquire weak firms in the industry and launch Notes
aggressive, well-funded moves to transform their newly acquired competitors into major
market contenders.
Rivalry is weak when most competitors in the industry are relatively well satisfied with
their sales growth and market shares. Such companies rarely make concerted attempts to
steal customers away from one another, and have comparatively attractive earning and
returns on investment.
(a) Is it difficult to compare competitors? In a way it's more difficult if competitors are very
different. For example you could agree that trains compete with buses in terms of
getting from A to B. But actually they are very different I terms of who uses them
and why. Equally for our charity if a competitor came along who said disruptive
child behaviour is a medical problem - i.e. that the children should stay at home and
be given medicine that would change this from a social care challenge to a medical
one. If the competition changes this makes it difficult for the childcare charity to
decide what to do. (Back to Ritalin?)

(b) Is there very high 'exit barriers'? 'Exit barriers' mean that it is difficult - economically,
emotionally and legally - to leave the market. In a commercial example there may
be a contract or the redundancy costs may be high. For our childcare charity these
concerns may also exist - but many charities also have a high emotional commitment
to their work. This may exist long after that work has ceased to be relevant.
2. Threat of New Entrants: A new entrant in an industry represents a competitive threat to
established firms, sometimes called the incumbents. The entrant adds new production
capacity and brings substantial resources that were not previously required for success in
the industry. But there are various barriers to entry that the new player has to face. These
barriers are a challenge for the new entrant and a protective shield for the established
player and include:
(a) Economies of Scale: Existing large firms enjoy lower costs per unit. They have enough
room to reduce prices as they may enjoy higher profits. Also, they could be selling
products at such a low price that new player may not able to produce the same
output.

(b) Cost Disadvantage Independent of Scale: Besides economies of scale, existing firms have
other many cost advantages such as proprietary product knowledge, patents,
favorable access to raw material, favourable location, lower borrowing cost and
government subsidies.
(c) Learning and Experience Curve: Established companies have the advantage of learning
curve. Because of this learning curve established firms are in a better position as
they have skilled and trained human resource.

(d) Product Differentiation: Differences in physical or perceived characteristics make an
incumbent's product unique in the eyes of the consumer.
(e) Capital Requirement: It is said the offender must have three times the power than that
of the defender. Thus, an offender requires capital not only to establish a new business
but also to compete with established firms. Even the, cost of capital is higher for a
new firm as lenders hesitate to provide capital to new entrant.
(f) Switching Costs: Sometimes, the costs (physical, psychological and financial) incurred
in switching from one supplier to another also resists the customer from going for
a new vendor.

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