- 2. Potential entrants – the potential entry of new competitors and barriers to entry.
// in evaluating the potential threat of entry. Management must look at:
\ (1) how formidable the entry difficulties are for each type of potential entrant:
\ (2) how attractive the profit prospects are for new entrants since high profits act as a magnet to firms outside the industry. Motivating potential competitors.
// economies of scale – force potential competitors wither to enter a large scale or to accept a cost disadvantage and consequently lower profitability.
// learning and experience curve effects – when lower unit costs are partly or mostly a result of experience in producing the product and other leaning curve benefits. New entrants face a potentially significant cost disadvantage competing against existing firms with more accumulated know- how.
// existing firms may have cost and resource advantages not available to potential entrants – theses advantages can include partnerships with the best and cheapest suppliers. Possession of patents and proprietary technology. Existing plants built and equipped years earlier at lower costs. Favorable locations. Lower borrowing costs.
// ability to match the technology and specialized know- how of firms already in the industry- successful entry may require technological capability not readily available to a newcomer or skills/know- how not easily learned by a newcomer.
// capital requirements – the larger the money investment needed to enter the market successfully. The more limited the pool of potential entrants. The most obvious capital requirements are manufacturing plants and equipment working capital to finance inventories and customer credit. Introductory advertising and sales promotion to establish a customer. And cash reserves to cover start- up losses.
// brand preferences and customer loyalty – high brand loyalty means that a potential entrant must commit to building a network of distributors and dealers. And then be prepared to spend enough money on advertising and sales promotion to overcome customer loyalties and build its own customers.
// in addition. If it is difficult or costly for a customer to swithch to a new brand. A new entrant must persuade buyers that its brand is worth the witching costs.
// switching costs include the cost of additional equipment. The time and cost in testing the quality and reliability of the substitute. The psychic costs of severing old supplier relationships. And establishing new ones. Payments for technical help in making the changeover. And employee retraining costs.
// access to distribution channels – wholesale distributors may be reluctant to take on a product that lacks buyer recognition. Retailers have to be convinced to give a new brand enough display space and adequate trial period. The more existing producers tie up current distribution channels. The tougher entry will be.
// regulatory policies – through franchise. Licenses. Safety regulations. Product standards and environmental pollution standards.
// tariff and international trade restrictions (e.g. quota, local content requirements, antidumping duty, countervailing duty).