Threat Of Entry Analysis PDF

**THREAT OF ENTRY II** *[Why are some industries more attractive than others?]* Some industries are more appealing than others because the industry itself plays a big role in how much money a business can make. We\'re focusing on the industry as a whole, not just one company. The industry a compan...

**THREAT OF ENTRY II** *[Why are some industries more attractive than others?]* Some industries are more appealing than others because the industry itself plays a big role in how much money a business can make. We\'re focusing on the industry as a whole, not just one company. The industry a company is in can impact its ability to make profits, and some industries tend to be more profitable than others. *[Differences]* Immagine che contiene testo, schermata, Carattere, numero Il contenuto generato dall\'IA potrebbe non essere corretto. *[Whether and why?]* - Whether: This means asking if an industry or company is profitable. To answer, you check facts like industry statistics or company reports. - Example: Is Starbucks profitable? Check their reports. - Why: This is asking why a company or industry is profitable. - Example: Why is Starbucks so profitable? Use the VRIO model to understand. - Example: Why is the coffee shop industry profitable? Use Porter\'s Five Forces to figure it out. *[Why is an industry attractive or unattractive?]* - Porter\'s Five Forces helps explain if an industry is attractive (more profitable) or not. - An industry is attractive if the 5 forces are weak. - By analyzing which forces are strong or weak, you can figure out why the industry is profitable or not. *[Threat of entry (Force 1) Logic:]* - Attractive industries: Profitable industries attract new companies, whether they are new or established. - Effect of new companies: Even the threat of new companies entering the industry can lower prices, making it less profitable for everyone. - Why profits fall: If many new companies enter the market, there will be more competition for customers, which leads to lower profits. - Barriers to entry: Some industries have barriers that make it hard for new companies to enter, helping protect profits from falling. *[What does entering the coffee shop industry mean?]* - In the coffee shop industry, you don\'t need to be as big as Starbucks to compete. You can start small, even with just one shop. - For example, a coffee truck can also be part of this industry and compete with bigger players like Starbucks, attracting some of their customers. *[Threat of entry: factors determining its strengths]* - Barriers to entry: Barriers are the challenges or disadvantages new companies face when entering an industry. Established companies already have advantages that make it harder for new companies to compete. - To fully understand how strong the threat of new companies is, you need to consider 5 factors. Each of these factors may have smaller, detailed parts (sub-factors) that affect how easy or difficult it is for new companies to enter the industry. By examining these factors and sub-factors, you can assess whether new companies will likely enter the industry or if they'll be discouraged from doing so. 1. Economies of scale - Economies of Scale mean that larger, established companies can produce goods or services at a lower cost than smaller, new companies. - Why: Established companies have already grown large and benefit from reduced costs as they produce more. In contrast, new companies start small and face higher costs. - Effect on Entry: - If economies of scale are strong, it\'s harder for new companies to compete because they can\'t match the lower costs of larger, established companies. - This makes it less attractive for new companies to enter the market, meaning fewer new companies will try to enter, leading to less competition. - Outcome: - With fewer new companies entering, the industry remains more profitable for the established firms. - A more profitable industry is more attractive to companies that are already in it. *[Quantity discount]*: Happen when buying larger amounts of something (like coffee beans or milk) allows you to pay less per unit. - Example: If you buy a lot of coffee beans, you might get a 10% discount. This reduces the cost of the beans, which lowers the overall cost of making coffee. - Example with Coffee Beans: - Regular price of coffee beans: 0.24 CHF. - With a 10% discount: The cost of beans drops by 0.044 CHF per unit. - For a larger purchase (like 50% off), your cappuccino will cost 4 cents less to make. - Does this Drive Starbucks' Success? - The discount on coffee beans might help lower Starbucks\' costs, but it's not the main reason behind their success. - While lower costs help, Starbucks\' success comes from other factors, like their brand, location, and customer experience. - What About Discounts on Other Costs (Labor & Rent)? - In many businesses, the main costs aren't just the ingredients (like coffee beans). Labor (workers) and rent (for the shop space) are often bigger cost factors. - So, when discussing economies of scale, we usually focus on the overall savings from things like labor and rent rather than just discounts on ingredients. *[Economies of scale and quantity discounts]* - Economies of scale go beyond just ingredient discounts. For most businesses, rent and labor costs are much more significant. - Economies of scale mean that the more you produce, the cheaper it gets to produce each item. - Important Note: When discussing economies of scale, we typically ignore ingredient discounts, like on coffee beans, and focus more on how businesses save on things like rent and labor costs. *[Economies of scale: recap session]*  *[Economies of scale and scaling up]* - Scaling Up means growing a business by increasing its production or size. - When businesses scale up, they don't just rely on quantity discounts to succeed. - Quantity discounts (like discounts on coffee beans) might help, but they are not the main reason why companies become successful. - Key Point: The real reason some companies succeed through scaling up is because of economies of scale. This means that as a company gets bigger, it can lower its costs per unit of production, making it more efficient and profitable. *[The 3 sub-drivers of economies of scale:]* 1. Technical Input-Output Relationships: - This refers to how technology and production methods work more efficiently at larger scales. As a company produces more, it can use better equipment or more efficient processes that reduce the cost per unit. - Example: A factory that makes 1000 coffee machines can use a faster, more efficient production line compared to one making just 10. 2. Indivisibilities: - Some costs, like machinery or large factories, are fixed and can\'t be easily divided into smaller parts. These are more cost-effective when spread over large-scale production. - Example: A large factory might have a huge, expensive machine that can\'t be used at a smaller scale. But if the factory produces a lot, the cost of that machine is spread across many products, lowering the cost per product. 3. Specialization: - As companies grow, they can specialize their operations. Workers can focus on specific tasks, improving efficiency and skill in those areas. Specialization leads to better performance and lower costs. - Example: In a large coffee shop chain, one worker might be specialized in making coffee, while another handles customer service. This focus leads to faster, better service and lower labor costs. *[Example: coffee shop -- output]* What you would need to produce and sell one cappuccino in a coffee shop, focusing on the variable inputs (things you use more of as you make more cappuccinos): 1. Coffee beans: - Variable input: You use a certain amount of coffee beans for each cappuccino. - More cappuccinos = more beans used. 2. Milk: - Variable input: Milk is needed to make the frothy part of the cappuccino. - More cappuccinos = more milk used. 3. Electricity/Water: - Variable input: You need water for the espresso and steam for the milk. - More cappuccinos = more electricity and water needed for the coffee machine. 4. Labor: - Variable input: As you\'re working alone, you're doing everything (making coffee, steaming milk, serving) - More cappuccinos = more time and effort required. 5. Cups and Lids: - Variable input: Every cappuccino needs a cup and a lid. - More cappuccinos = more cups and lids used. 6. Packaging (optional): - If customers take the cappuccino to go, you also need packaging like paper bags or napkins. - More cappuccinos = more packaging used. These are variable inputs because they change directly with the number of cappuccinos you make. The more cappuccinos you produce, the more you'll need of each input. You're working alone during the night shift, so all of these inputs rely on your time and effort as well. *[Technical input-output relationships in a coffee shop:]* When the number of orders or drinks increases, your inputs (like time, ingredients, and labor) will change. Here\'s how: Immagine che contiene testo, Carattere, schermata, algebra Il contenuto generato dall\'IA potrebbe non essere corretto. *[More depth to analysis:]* If the number of customers and drinks increases, the input/output relationship changes as follows:  *[Implications for inputs/output relationships]* 1. Increasing the Number of Customers: When you have more customers, you generally need more labor. However, if drinks are ordered close together, the labor required increases more. If drinks are ordered further apart, the time may not increase as quickly. 2. Increasing the Number of Drinks Per Customer: If customers order more drinks, you use more ingredients (like coffee and milk) but you may not need double the time for labor. The time increase is usually less than double, which is where economies of scale come into play. *[Positive Technical Input-Output Relationships:]* - Larger companies (incumbents) benefit from lower costs because they have more experience, bigger scale, and more efficient production. This creates a barrier to entry for smaller or new companies. - New companies (entrants) would have to deal with higher costs because they can\'t take advantage of economies of scale the way larger companies can. - Effect on Competition: Because larger companies have lower costs and higher efficiency, new companies are less likely to enter the market, reducing competition. This leads to higher profits for the established firms. *[Indivisibilities]* - Indivisibilities refer to the idea that some resources or activities come in large, indivisible sizes that can't be scaled down. As companies grow, they can use these resources more efficiently by spreading the cost over a larger volume of output, leading to lower costs per unit. - Larger firms benefit more because they can absorb the fixed costs of these large resources across a higher level of production, reducing the per-unit cost and making it harder for smaller firms to compete. - Indivisible or lumpy investments lead to economies of scale because larger firms can spread their costs over many more units, while smaller firms struggle to achieve the same cost efficiency. - This results in high barriers to entry for smaller competitors, reducing competition and leading to higher profits for established firms in the industry. *[Specialization]* Specialization refers to dividing tasks among workers so each person can focus on doing one specific job, instead of doing everything. This leads to increased efficiency and lower costs - How Specialization Works: 1. Starting Small (One-Person Firm): - When you start a business on your own, you have to do everything---accounting, sales, legal work, and production. - This means you can't specialize because you are the only worker, and doing multiple jobs limits your efficiency. 2. Specialization in Larger Firms: - As your company grows and you hire more people, each employee can focus on one task. This is called specialization. - For example, in a factory, one worker might focus on assembling parts, another on packaging, and another on quality control. Immagine che contiene testo, Carattere, schermata, algebra Il contenuto generato dall\'IA potrebbe non essere corretto. - Impact on Competition: 1. Economies of Scale: - Larger firms can lower their costs by having workers specialize. This leads to lower production costs per unit (e.g., lower cost per pin). 2. Barrier to Entry: - New, smaller firms can't compete with the larger firms because they don't have enough workers to specialize and achieve the same level of efficiency. - This makes it harder for smaller or new firms to enter the market because their costs are higher. 3. Less Competition, Higher Profits: - Since larger firms with specialization have lower costs, they can sell products at competitive prices while still making a profit. - New firms, with no specialization, face higher costs and are less likely to succeed, leading to less competition in the industry and higher profits for the established firms. 2. Absolute cost advantage - Absolute Cost Advantage means that some incumbent firms (firms that entered the market earlier) have lower unit costs than new entrants, even if the new firms are the same size. - This advantage is not related to economies of scale (which are about cost reductions due to larger production). Instead, it is due to other factors, like early entry into the market. - How Do Incumbent Firms Benefit from Early Entry? - Firms that enter an industry early often build a knowledge base and develop certain advantages over time, regardless of their size. - These advantages could come from experience in the industry, familiarity with the market, or the skills that develop as the firm operates for a longer period. - Absolute Cost Advantage through Learning: - Learning Curve: As a company gains more experience in producing a product, it often becomes more efficient. This means they can lower their cost per unit without needing to produce at a larger scale. This is called the learning curve. - Economies of Learning: - Increased Skills: Workers and managers in the firm improve their skills over time, becoming faster and better at their tasks. - Improved Organizational Routines: As the firm gains more experience, it can also improve its internal processes (e.g., how work is organized, production methods, or quality control). 3. Product differentiation - Product Differentiation happens when companies make their products seem unique or distinct in some way compared to competitors. - This can be through actual differences in the product or through marketing and branding efforts that shape how consumers perceive the product. - How does product differentiation create barriers to entry? - In industries where products are differentiated, established firms benefit from brand recognition and customer loyalty. Consumers may prefer a well-known brand over new, unknown ones. - For example, Kellogg\'s Corn Flakes has been around for over 100 years. A new company trying to sell corn flakes would find it difficult to compete, even if the actual product is very similar, because it would have to spend a lot on advertising and brand building to gain consumer trust and awareness. - Why is it hard for new entrants? - New firms have to create brand awareness and build a loyal customer base from scratch. - This requires high costs for advertising, promotion, and marketing. - Example: A new corn flakes company has to convince consumers that its brand is just as good, which can be expensive and take a long time. - How does product differentiation lead to barriers to entry? - If consumers perceive that products are differentiated (that is, not just a simple commodity), it becomes harder for new entrants to compete because: 1. They have to build a strong brand to compete with established firms. 2. They must spend heavily on marketing and advertising to create awareness and trust. - This means that it is less likely for new firms to enter the market and successfully compete with the larger, established brands. 4. Distribution channels - Distribution channels are the methods or pathways through which products reach consumers. These can include retail stores, supermarkets, online platforms, or food trucks. - For example, when a company wants to sell its product in a store, it must have access to shelf space in that store. - How does access to distribution channels create barriers to entry? New suppliers often face challenges in gaining access to these channels, especially when: 1. Shelf space or other distribution resources are limited (e.g., stores have only so much room for products). 2. Retailers are risk-averse and may hesitate to carry new brands or products because they are unsure if they will sell. 3. Retailers have fixed costs for carrying additional products, so adding a new brand may not be worth the investment unless there is a guaranteed market demand. - Channels for new entrants: 1. Retailer Reluctance: New firms often have trouble convincing retailers to carry their product. Established brands already have a relationship with retailers, making it difficult for newcomers to break in. 2. Slotting Fees: To secure shelf space in a store, new brands may need to pay slotting fees (a fee paid to retailers to \"reserve\" space for their product). These fees can be high, which creates an additional financial barrier for new firms. 3. Limited Shelf Space: Supermarkets and stores have limited room on their shelves, meaning there is tough competition to get products onto them. Established brands already have a significant presence, so newcomers often struggle to gain space. - How does the internet help? - Online Sales: The internet offers a solution to the distribution challenge by allowing businesses to sell directly to customers online, bypassing traditional retail channels. - Example: Mymuesli, a company that sells custom muesli, sells directly to consumers through its website without relying on physical store shelf space. - Alternative Distribution Channels: New businesses can also leverage non-traditional channels, such as: - Food trucks: Wil\'s Grill might face difficulties getting prime spots at festivals, but it can still access the market by targeting areas with demand. - App stores and platforms: Companies like Apple's App Store and Steam allow businesses to bypass traditional retail channels and sell directly to consumers through online platforms. - Advantages for incumbents (established firms): - Access to Distribution Channels: Firms that are already established often have better access to distribution channels, making it easier for them to get their products in front of customers. - More Shelf Space: They have relationships with retailers and are often prioritized when it comes to shelf space, giving them a competitive edge over new entrants. 5. Retaliation - Retaliation refers to the actions that established firms (incumbents) may take in response to new firms entering the market. These actions are often intended to discourage or prevent the new entrant from gaining a foothold in the industry. - Examples of retaliation include: - Aggressive price cuts: Reducing prices to a level that makes it hard for the new firm to compete. - Increased advertising: Boosting marketing efforts to maintain brand loyalty and awareness. - Sales promotions: Offering discounts, deals, or incentives to attract customers away from the new entrant. - Litigation: Taking legal action against the new firm to tie them up in costly lawsuits. - How does retaliation create barriers to entry? - Fear of retaliation: New firms may be discouraged from entering an industry if they expect that incumbents will fight back aggressively. They know that established firms can use their resources to make it difficult for newcomers to succeed. - This creates a barrier because the new firm is less likely to enter if they fear being pushed out through aggressive tactics like price cuts or heavy promotions. - Example of retaliation: - Airline Industry: Southwest Airlines and other budget airlines have complained about predatory pricing by major airlines like American Airlines. The larger airlines used selective price cuts on certain routes to prevent the budget carriers from entering new markets. This is a typical example of retaliation to discourage competition. - Automobile Industry: When Toyota, Nissan, and Honda first entered the U.S. car market, they targeted the small car segment, which was considered unprofitable by major U.S. car makers. By targeting these less visible segments, they reduced the risk of retaliation from the big U.S. car manufacturers who were more focused on larger, more profitable vehicles.