1. THREAT OF ENTRY
New entrants to an industry bring new capacity and a desire to gain market share that puts pressure on prices, costs, and the rate of investment necessary to compete.
When the threat is high, incumbents must hold down their prices or boost investment to deter new competitors.
The threat of entry in an industry depends on the height of entry barriers that are present and on the reaction entrants can expect from incumbents. If entry barriers are low and newcomers expect little retaliation from the entrenched competitors, the threat of entry is high and industry profitability is moderated.
Barriers to entry. Entry barriers are advantages that incumbents have relative to new entrants. There are seven major sources:
Supply-side economies of scale. These economies arise when fi rms that produce at larger volumes enjoy lower costs per unit because they can spread fi xed costs over more units, employ more effi cient technology, or command better terms from suppliers.
Demand-side benefi ts of scale. These benefi ts, also known s network effects, arise in industries where a buyer’s willingness to pay for a company’s product increases with the number of other buyers who also patronize the company. (online auction participants are attracted to eBay because it offers the most potential trading partners)
Customer switching costs. Switching costs are fixed costs that buyers face when they change suppliers. Such costs may arise because a buyer who switches vendors must, for ex-ample, alter product specifi cations, retrain employees to use a new product, or modify processes or information systems. (SAP ERPs systems)
Capital requirements. The need to invest large financial resources in order to compete can deter new entrants.
Incumbency advantages independent of size. These advantages can stem from such sources as proprietary technology, preferential access to the best raw material sources, preemption of the