https://b-ok.cc/book/1170280/b8d822 pg 54 pg57
the returns for existing firms in the industry and may allow some firms to dominate the that it is "... stronger, greener, and more technologically advanced than those other industry." Thus, firms competing successfully in an industry want to maintain high guys." If successful with these efforts, Ford hopes those buying its cars to day will gener- entry barriers in order to discourage potential competitors from deciding to enter the ate the type of loyalty that results in repeat purchases. industry. Companies such as Procter & Gamble (P&G) and Colgate Palmolive spend a great deal of money on advertising and product development to convince potential custom- Barriers to Entry Part 1: Strategic Management Inpus ers of their products' distinctiveness and of the value buying their brands provides." Firms competing in an industry (and especially those earning above-average returns) try Customers valuing a product's uniqueness tend to become loyal to both the product and to develop entry barriers to thwart potential competitors. For example, the server market the company producing it. In turn, customer loyalty is an entry barrier for firms thinking hypercompetitive and dominated by IBM. Hewlett-packard, and Dell Historically, the of an entering an industry and competing against the likes of P&G and Colgate. To com- scale economies these firms have developed by operating efficiently and effectively have pete against firms offering differentiated products to individuals who have become loyal created significant entry barriers, causing potential competitors to think very carefully customers, new entrants often allocate many resources to overcome existing customer about entering the server market to compete against them. Recently though, Oracle paid loyalties. To combat the perception of uniqueness, new entrants frequently offer prod- $7.4 billion to acquire Sun Microsystems, which is primarily a computer hardware com- ucts at lower prices. This decision, however, may result in lower profits or even losses. puny. Early evidence suggests that Oracle intends to "... focus Sun's server business on a small but promising segment of the market: computer appliances preloaded with Oracle Chapter 2 The External Environment Opportunites, Threats, Industry Competition, and Comp es tor Analysis Capital Requirements Competing in a new industry requires a firm to have resources software."" The degree of success Oracle will achieve as a result of its decision to enter to invest. In addition to physical facilities, capital is needed for inventories, marketing the server market via an acquisition remains uncertain. activities, and other critical business functions. Even when a new industry is attractive, Several kinds of potentially significant entry barriers may discourage competitors the capital required for successful market entry may not be available to pursue the mar- from entering a market. ket opportunity. For example, defense industries are difficult to enter because of the substantial resource investments required to be competitive. In addition, because of the Economies of Scale Economies of scale are derived from incremental efficiency high knowledge requirements of the defense industry, a firm might acquire an existing improvements through experience as a firm grows larger. Therefore, the cost of pro- company as a means of entering this industry. But it must have access to the capital nec- ducing each unit declines as the quantity of a product produced during a given period essary to do it. Obviously, Oracle had the capital required to acquire Sun Microsystems increases. This is the case for IBM. Hewlett-Packard, and Dell in the server market, as as a foundation for entering the server market. previously described. Economies of scale can be developed in most business functions, such as marketing. Switching Costs Switching costs are the one-time costs customers incur when manufacturing, research and development, and purchasing" Increasing economies of they buy from a different supplier. The costs of buying new ancillary equipment and scale enhances a firm's flexibility. For example, a firm may choose to reduce its price of retraining employees, and even the psychic costs of ending a relationship, may be and capture a greater share of the market. Alternatively, it may keep its price constant to incurred in switching to a new supplier. In some cases, switching costs are low, such as increase profits. In so doing, it likely will increase its free cash flow, which is very helpful when the consumer switches to a different soft drink or when a smoker switches from during financially challenging times a Philip Morris International cigarette to one produced by competitor Japan Tobacco New entrants face a dilemma when confronting current competitors' scale economies. International Switching costs can vary as a function of time. For example, in terms of Small-scale entry places them at a cost disadvantage. Given the size of Sun Microsystems credit hours to ward graduation, the cost to a student to transfer from one university to relative to the three major competitors in the server market, Oracle may be at least ini- another as a freshman is much lower than it is when the student is entering the senior tially be at a disadvantage in competing against them. Altematively, large-scale entry, in year. Occasionally, a decision made by manufacturers to produce a new, innovative prod- which the new entrant manufactures large volumes of a product to gain economies of uct creates high switching costs for the final consumer. Customer loyalty programs, such scale, risks strong competitive retaliation. as airlines' frequent flyer miles, are intended to increase the customer's switching costs. Some competitive conditions reduce the ability of economies of scale to create an If switching costs are high, a new entrant must offer either a substantially lower price entry barrier. Many companies now customize their products for large numbers of small or a much better product to attract buyers. Usually, the more established the relation- customer groups. Customized products are not manufactured in the volumes necessary ships between parties, the greater are switching costs. to achieve economies of scale. Customization is made possible by flexible manufacturing systems (this point is discussed further in Chapter 4). In fact, the new manufacturing Access to Distribution Channels Over time, industry participants typically technology facilitated by advanced information systems has allowed the development of develop effective means of distributing products. Once a relationship with its distribu- mass customization in an increasing number of industries. Although it is not appropriate tors has been built a firm will nurture it, thus creating switching costs for the distributors. for all products and implementing it can be challenging, mass customization has become Access to distribution channels can be a strong entry barrier for new entrants, particu- increasingly common in manufacturing products." In fact, online ordering has enhanced larly in consumer nondurable goods industries (e.g., in grocery stores where shelf space the ability of customers to obtain customized products. They are often referred to as is limited) and in international markets. New entrants have to persuade distributors to "markets of one.""Companies manufacturing customized products learn how to respond carry their products, either in addition to or in place of those currently distributed. Price quickly to customers' needs in lieu of developing scale economies. breaks and cooperative advertising allowances may be used for this purpose, however, those practices reduce the new entrant's profit potential. Product Differentiation Over time, customers may come to believe that a firm's product is unique. This belief can result from the firm's service to the customer, effective Cost Disadvantages Independent of Scale Sometimes, established competitors advertising campaigns, or being the first to market a good or service. Currently, Ford have cost advantages that new entrants cannot duplicate. Proprietary product technology. Motor Company is seeking to differentiate its products from competitors on the basis favorable access to raw materials, desirable locations, and government subsidies are examples.Intensity of Rivalry Among Competitors individual firms. Firms th develop and sustain a differentiated product that cannot be Because an industry's firms are mutually dependent, actions taken by one company easily imitated by competitors often earn higher returns. However, when buyers view usually invite competitive responses. In many industries, firms actively compete against products as commodities (i.e., as products with few differentiated features or capabilities). one another. Competitive rivalry intensifies when a firm is challenged by a competitor's rivalry intensifies. In these instances, buyers' purchasing decisions are based primarily actions or when a company recognizes an opportunity to improve its market position on price and, to a lesser degree, service. Personal computers are a commodity product. Part 1: Strategic Management Inpus Firms within industries are rarely homogeneous; they differ in resources and capa- Thus, the rivalry between Dell, Hewlett-Packard, and other computer manufacturers is bilities and seek to differentiate themselves from competitors." Typically, firms seek to strong and these companies are always trying to find ways to differentiate their offerings differentiate their products from competitors' offerings in ways that customers value and (Hewlett-Packard now pursues product design as a means of differentiation.) in which the firms have a competitive advantage. Common dimensions on which rivalry is based include price, service after the sale, and innovation. High Strategic Stakes Next, we discuss the most prominent factors that experience shows to affect the Competitive rivalry is likely to be high when it is important for several of the competi- intensity of firms' rivalries. tors to perform well in the market. For example, although it is diversified and is a market leader in other businesses, Samsung has targeted market leadership in the consumer Numerous or Equally Balanced Competitors electronics market and is doing quite well. This market is quite important to Sony and Chapter 2 The External Environment Opportunities, Threats, Industry Competition, and Comp es tor Analysis Intense rivalries are common in industries with many companies. With multiple com- other major competitors, such as Hitachi, Matsushita, NEC, and Mitsubishi, suggesting petitors, it is common for a few firms to believe they can act without eliciting a response that rivalry among these competitors will remain strong. However, evidence suggests that other firms generally are aware of competitors' actions, High strategic stakes can also exist in terms of geographic locations For example, often choosing to respond to them. At the other extreme, industries with only a few Japanese automobile manufacturers are committed to a significant presence in the U.S. firms of equivalent size and power abo tend to have strong rivalries The large and often marketplace because it is the world's largest single market for automobiles and trucks. similar-sized resource bases of these firms permit vigorous actions and responses. The Because of the stakes involved in this country for Japanese and U.S. manufacturers, competitive battles between Airbus and Boeing exemplify intense rivalry between rela- rivalry among firms in the U.S. and the global automobile industry is intense. With the tively equal competitors, and almost certainly will be so as the companies bid for the excess capacity in this industry we mentioned earlier in this chapter, there is every rea- order to produce wide-body planes for United Airlines. son to believe that the rivalry among global automobile manufacturers will become even more intense, certainly in the foreseeable future. Slow Industry Growth When a market is growing, firms try to effectively use resources to serve an expand- High Exit Barriers ing customer base. Growing markets reduce the pressure to take customers from com- Sometimes companies continue competing in an industry even though the returns on petitors. However, rivalry in no-growth or slow-growth markets (slow change) becomes their invested capital are low or negative. Firms making this choice likely face high exit more intense as firms battle to increase their market shares by attracting competitors' barriers, which include economic, strategic, and emotional factors causing them to customers. remain in an industry when the profitability of doing so is questionable. Exit barriers are Typically, battles to protect market share are fierce. Certainly, this has been the case especially high in the airline industry. Although earning even average returns is difficult in the airline industry and in the fast-food industry as Mcdonald's, Wendy's, and Burger for these firms, they face substantial exit barriers, such as their ownership of specialized King try to win each other's customers. The instability in the market that results from assets (e.g., large aircraft). " Common exit barriers include the following these competitive engagements may reduce the profitability for all firms engaging in such Specialized assets (assets with values linked to a particular business or location) competitive battles. Fixed costs of exit (such as labor agreements) Strategic interrelationships (relationships of mutual dependence, such as those High Fixed Costs or High Storage Costs between one business and other parts of a company's operations, including shared When fixed costs account for a large part of total costs, companies try to maximize the facilities and access to financial markets) use of their productive capacity. Doing so allows the firm to spread costs across a larger Emotional barriers (aversion to economically justified business decisions because of volume of output. However, when many firms attempt to maximize their productive fear for one's own career, loyalty to employees, and so forth) capacity, excess capacity is created on an industry-wide basis. To then reduce invento- Government and social restrictions (often based on government concerns for job ries, individual companies typically cut the price of their product and offer rebates and losses and regional economic effects; more common outside the United States). other special discounts to customers. However, these practices, common in the automo- bile manufacturing industry in the recent past, often intensify competition. The pattern of excess capacity at the industry level followed by intense rivalry at the firm level is observed frequently in industries with high storage costs. Perishable products, for exam- Interpreting Industry Analyses ple, lose their value rapidly with the passage of time. As their inventories grow, producers Effective industry analyses are products of careful study and interpretation of data of perishable goods often use pricing strategies to sell products quickly. and information from multiple sources. A wealth of industry-specific data is avail- able to be analyzed. Because of globalization, international markets and rivalries must Lack of Differentiation or Low Switching Costs be included in the firm's analyses. In fact, research shows that in some industries, When buyers find a differentiated product that satisfies their needs, they frequently pur- international variables are more important than domestic ones as determinants of chase the product loyally over time. Industries with many companies that have success- strategic competitiveness. Furthermore, because of the development of global mar- fully differentiated their products have less rivalry, resulting in lower competition for kets, a country's borders no longer restrict industry structures. In fact, movement into
