Essay About New Entrant And Competitive Threats

Rules of Competition
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Class #5The Role Of CompetitionCompetition what is it Competition is often thought of in a narrow sense (rivalry) but it is for more comprehensive than thatCompetition is any force that makes it difficult for a company to achieve its financial and market goalTo understand competitive threats we must determine the source of the threatAfter identifying the competitive threat, a company’s policies usually take on an offensive or defensive. Michael Porter 5 force model.[pic 1]A new entrant comes to an existing market with new capacity and a desire to gain market share. New Entrant = New Competitor Example: ICE to Coke and Pepsi When new entrants pose a high threat, incumbents must fold down their prices or boost investment to hold off the competitors It is the threat of entry- not whether the actual threat occurs-that holds down profitability The threat of new entry is difficult because new entrants must address barriers to entry in the industry. But, it can be done. Barriers to entry is any condition that makes it difficult to come into an existing market The threat of new entrants is low and highBarriers of entryEconomies of scale Economies of scale occur when a company produces larger volumes that drive down costs per unit because the company can spread fixed cons over more units, use more efficient technology or command better terms from suppliersSo, new entrants either have to enter on a large scale or accept a con. Disadvantage. Typically new entrants come in on a small scale. The bigger you are you can drive down per unit costsNetwork EffectsNetwork Effects relate to the number and intensity of buyers and tell others of their buying decisions Put another way, a buyers willingness to pay for a company’s products increases with the number of other buyersStrong brand loyalty and lots of loyal buyers can serve as a barrier to entry for newcomers Switching CostsSwitching costs are those buyers face when they change suppliers. The larger the switching cost, the stronger it serves as a barrier to entrySwitching Costs (hard dollar and soft dollar) exist for both business and consumers. Examples: re-training costs, adaptations to existing systems and processes, disruption to existing work flows, and of course “pain in the neck” costsSwitching generates risk since the new vendors or technologies may be unproven Capital RequirementsNew markets Incumbency AdvantageIndependent of SizeIntellectual property, established brands, cumulative experience, and access to the best raw material and geographic locations are incumbent advantages. Might not be available to new entrants Distribution ChannelsEven the best new products must move through a distribution channel from factory to truck/ship to warehouses to retail shelves. Establishing infrastructure take time and capital  Government policyOn the one hand, government can subsidize new entrants making it easier for them to enter a market. Governments might do this for reasons of national security, anti-trust or to protect declining industries.On the other hand governments can enact regulations (safety, licensing) Substitutes A substitute looks to provide the same or similar utility as another( the original ) industry or productHigh substitute threat reduces industry profitability by placing a ceiling on prices. The industry has to invest in added product performance or marketing to stand apart from substitutesCharacteristics of SubstitutesThey are credible alternative to the incumbents productThey offer an attractive price-performance trade-off to the industry’s product. The better the relatives value of the substitute the bigger the threat to the incumbentThe buyers cost of switching to the substitute is lowThe underlying industry is changing through technological or production shifts. Substitutes aren’t always clearly labeled as substitutes In the same industry,RivalryRivalry among existing companies is a familiar way to look at comparison Rivalry drives down an industry’s profit potential depending on how intense the competition is Rivalry is intense when:Competitors are numerous or roughly equal in sixe and powerIndustry growth is slow thus leading to intense market share warsThere are no or Few switching costsThere is lack of differentiation Exit Barriers are high (specialized assets, managements desire to stay in a business. Rivalry are deeply committed to the businessSolution to Rivalry Price wars-no body winsProduct Differentiation Better distributionNetwork effectCarved nichesGeneric policies to address RivalsOffensive policy Offensive polices seek to take market share away from competitors. This is used when:Industry growth is slow so competitors can only grow by taking away from each otherIncumbent firms have a clear point of weakness such as a ‘product leakage” or an un-served market areaIncumbents are experiencing negative publicity (product recalls) for ExampleDefensive PoliciesDefensive Policies seek to protect market position from competitors. This used whenCompetitors have a unique value propositionIncumbent firms have a clear advantage over competitors Supplies Suppliers provide critical inputs to the production of goods. They can exert competitive pressure when they capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to the industry. It is more concentrated than the industry it sells to (few suppliers) The supplier group does not depend heavily on the industry for its revenueIndustry participants face switching costs in changing suppliersSuppliers offer products that are differentiated The supplier group can credibly integrate forward into the industry [pic 2][pic 3]How would Cotton king become a supplier threat to Hanes?Why doesn’t Cotton king integrate forward?Can Hanes become a threat to cotton king?How do you rate the intensity of supplier competition given:BuyersPowerful customers can force down prices, demand better quality or more service (thus drive up costs) and play industry participants against one anotherA buyer group is powerful whenThere are few buyers or when they are large volume buyers of a single supplierThe industry’s products are standardized or undifferentiated Buyers face few switching costs in changing vendorsThe buyer group can credibly integrate backward into the industry (produce themselves)