Page 298 - DMGT408DMGT203_Marketing Management

Unit 13: Creating Competitive Advantage

investment required in fixed and working capital is high to produce sales, or exit barriers are Notes
high. This is likely to precipitate price and promotional wars. Competitors operate at or near
capacity as much as possible. Rivalry is also high when there are many small firms in the
industry without a dominant player. Competition also intensifies if there is little or no product
differentiation, as is the case with TV sets, or car and two-wheeler tyres.

13.1.2 Threat of New Entrants

New entrants can become a source of competition, particularly when they are bigger. Michael
Porter is of the opinion that the degree of attractiveness of an industry varies according to its
entry and exit barriers. For new entrants it takes time to obtain the volume and learning required
to accomplish a low relative cost per unit. The entry becomes even more expensive, posing the
problem of cost disadvantage if the companies already present in the industry are vertically
integrated, or the existing firms share their output with their other related businesses.

The most attractive industry would be, where the entry barriers are high and it is easy to exit
without incurring heavy costs. The situation is more complicated in industries where both entry
and exit barriers are high, profit potential is high, but even low-performing companies are
compelled to stay and try to fight it out. The situation does not entail any serious risk when both
entry and exit barriers are low and returns are low but stable. The worst situation is when entry
barrier in an industry is low but exit barriers are high (Figure 13.2). Barring aside favourable
market conditions when firms enter the industry, during bad times there is severe overcapacity
and every player has to contend with depressed returns.

13.1.3 Bargaining Power of Suppliers

Generally suppliers exercise bargaining power through higher prices, or reduced supply. The
effect could be quite significant, particularly when the number of suppliers in the industry is
limited, when the supplied product is an important input, switching costs and prices of substitutes
are high, or when the suppliers are organised and can realistically threaten forward integration.
The bargaining power is changing in many industries with the development of just-in-time
relationship with suppliers. Such relationship with suppliers has turned into a cooperative
partnership, leading to lower transaction and inventory costs, and improved quality.

In case the bargaining power of key suppliers in an industry is very high, the overall attractiveness
of the industry is viewed as low.

Figure 13.2: Entry and Exit Barriers
Entry Barriers
High Low

Returns
High Returns

High but Risky Low and Risky

Exit
Returns Returns
Barriers
Low High and Stable Low but Stable

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