Page 59 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Unit 4: External Assessment

A further risk is that the increased supply of products will depress prices and results Notes
in vigorous retaliation by established companies. For these reasons, the threat of
new entrants is reduced when established companies have economies of scale.

Example: In microprocessors, existing companies such as Intel are protected by
economies of scale in research, chip fabrication and consumer marketing.
(b) Product differentiation: Brand loyalty is buyer’s preference for the differentiated
products of any established company. Strong brand loyalty makes it difficult for
new entrants to take market share away from established companies.
It reduces threat of entry because the task of breaking down well-established customer
preferences is too costly for them.
(c) Capital requirements: The need to invest large financial resources in order to compete
can deter new entrants. Capital may be necessary not only for fixed assets, but also
to extend customer credit, build inventories and fund start-up losses. The barrier is
particularly great if the capital is required for unrecoverable expenditure, such as
up-front advertising or research and development. While major corporations have
the financial resources to invade almost any industry, the capital requirements in
certain fields limit the pool of likely entrants.

It is important not to overstate the degree to which capital requirements alone deter
entry; if industry returns are attractive and are expected to remain so, and if capital
markets are efficient, investors will provide new entrants with the funds they need.
For example, in airlines industry, financing is available to purchase expensive aircrafts
because of their resale value, and that is why there have been a number of new
airlines in almost every region.
(d) Switching costs: Switching costs are the one-time costs that a customer has to bear to
switch from one product to another. When switching costs are high, customers can
be locked up in the existing product, even if new entrants offer a better product.
Thus, the higher the switching costs are, the higher is the barrier to entry. Enterprise
Resource Planning (ERP) software is an example of a product with very high switching
costs. Once a company has installed SAP’s ERP system, the cost of moving to a new
vendor are astronomical.

(e) Access to distribution channels: The new entrant’s need to secure distribution channel
for the product can create a barrier to entry. The established companies have already
tied up with distribution channels. For example, a new food item may have to
displace others from the supermarket shelf via price breaks, promotions, intense
selling efforts or some other means. The more limited the wholesale or retail channels
are, tougher will be the entry into an industry. Sometimes, if the barrier is so high,
a new entrant must create its own distribution channels as Timex did in the watch
industry in the 1950s.
(f) Cost disadvantages independent of size: Some existing companies may have advantages
other than size or economies of scale. These are derived from:
(i) Proprietary technology
(ii) Preferential access to raw material sources

(iii) Government subsidies
(iv) Favorable geographical locations

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