People Innovation Excellence

Strategic Management: Threat of New Entrants

New entrants to an industry typically bring to it new capacity, a desire to gain market share, and potentially substantial resources. They are, therefore, threats to an established corporation. The threat of entry depends on the presence of entry barriers and the reaction that can be expected from existing competitors. An entry barrier is an obstruction that makes it difficult for a company to enter an industry. For example, no new, full-line domestic automobile companies have been successfully established in the United States since the 1930s (although Tesla is now growing its line of vehicles) because of the high capital requirements to build production facilities and to develop a dealer distribution network. Some of the possible barriers to entry are:
■ Economies of scale: Scale economies in the production and sale of microprocessors, for example, gave Intel a significant cost advantage over any new rival.
■ Product differentiation: Corporations such as Procter & Gamble and General Mills, which manufacture products such as Tide and Cheerios, create high entry barriers through their high levels of advertising and promotion.
■ Capital requirements: The need to invest huge financial resources in manufacturing facilities in order to produce large commercial airplanes creates a significant barrier to entry to any competitor for Boeing and Airbus.
■ Switching costs: Once a software program such as Excel or Word becomes established in an office, office managers are very reluctant to switch to a new program because of the high training costs.
■ Access to distribution channels: Smaller new firms often have difficulty obtaining supermarket shelf space for their goods because large retailers charge for space on their shelves and give priority to the established firms who can pay for the advertising needed to generate high customer demand.
■ Cost disadvantages independent of size: Once a new product earns sufficient market share to be accepted as the standard for that type of product, the maker has a key advantage. Microsoft’s development of the first widely adopted operating system (MS-DOS) for the IBM-type personal computer gave it a significant competitive advantage over potential competitors. Its introduction of Windows helped to cement that advantage so that the Microsoft operating system is now on more than 90% of personal computers worldwide.
■ Government policy: Governments can limit entry into an industry through licensing requirements by restricting access to raw materials, such as oil-drilling sites in protected areas.

Source:

Strategic Management and Business Policy: Globalization, Innovation, and Sustainability, 15th Edition, ISBN 978-0-13-452205-0 by Thomas L. Wheelen, David Hunger, Alan N. Hoffman, and Charles E. Bamford, published by Pearson Education © 2018.


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