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THE FIVE FORCES OF COMPETITION MODEL ● The five forces model of competition expands the arena for competitive analysis. Historically, firms concentrated only on direct competitors.

● Today, firms must study many industries, as competitors are defined more broadly. For example, the communications industry now encompasses media companies, telecoms, entertainment companies, and smartphone producers.

1/5 THREAT OF NEW ENTRANTS: BARRIERS TO ENTRY

● Can threaten market share of existing competitors ● May stimulate additional production capacity ● New competitors may force existing firms to be more efficient and to learn how to compete on new dimensions ● Entry barriers make it difficult for new firms to enter an industry and often place them at a competitive disadvantage even when they are able to enter

● High entry barriers tend to increase the returns for existing firms in the industry and may allow some firms to dominate the industry

● Industry incumbents want to maintain high

entry barriers in order to discourage potential competitors from entering the industry

FUNCTION OF TWO FACTORS 1 BARRIERS TO ENTRY

● Economies of scale ● Product differentiation ● Capital requirements ● Switching costs

● Access to distribution channels ● Cost disadvantages independent of scale ● Government policy 2 EXPECTED RETALIATION

ECONOMIES OF SCALE ● Marginal improvements in efficiency that a firm experiences as it incrementally increases its size ● Economies of scale can be developed in most business functions, such as marketing, manufacturing, research and development, and purchasing

ECONOMIES OF SCALE (cont’d) FACTORS (advantages/disadvantages) related to large-­‐ and small-­‐scale entry ● Flexibility in pricing and market share ● Costs related to scale economies ● Competitor retaliation ● Flexible manufacturing systems diminishes the effectiveness of economies scale to act as a barrier

PRODUCT DIFFERENTIATION ● Unique products ● Customer loyalty ● New entrants frequently offer products at lower prices

CAPITAL REQUIREMENTS ● Differ according to industry ● Availability of capital ● Physical facilities/Inventories/Marketing activities ● Knowledge requirements

SWITCHING COSTS One-­‐time costs customers incur when they buy from a different supplier ■ New equipment ■ Retraining employees ■ Psychological costs of ending a supplier relationship

ACCESS TO DISTRIBUTION CHANNELS ● Stocking or shelf space ● Price breaks/Cooperative advertising allowances ● Less of a barrier for products that can be sold on the Internet

COST DISADVANTAGES INDEPENDENT OF SCALE ● Proprietary product technology ● Favorable access to raw materials ● Desirable locations

GOVERNMENT POLICY ● Licensing and permit requirements ● Regulation/Deregulation of industries ● Antitrust violations resulting from industry dominance

EXPECTED RETALIATION Vigorous retaliation can be expected when the existing firm has a major stake in the industry.

■ It has fixed assets with few, if any, alternative uses

■ It has substantial resources

■ When industry growth is slow or constrained

● Locating market niches not being served by incumbents allows the new entrant to avoid entry barriers

● Small entrepreneurial firms are generally best suited for identifying and serving neglected market segments

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