Porter barriers to entry pdf

High fixed costs result in an economy of scale effect that increases rivalry. When total costs are mostly fixed costs, the firm must produce near capacity to attain the lowest unit costs. Since the firm must sell this large quantity of product, high levels of production lead to a fight for market share and results in increased rivalry. High storage costs or highly perishable products cause a producer to sell goods as soon as possible.

If other producers are attempting to unload at the same time, competition for customers intensifies. Low switching costs increases rivalry. When a customer can freely switch from one product to another there is a greater struggle to capture customers. Low levels of product differentiation is associated with higher levels of rivalry. Brand identification, on the other hand, tends to constrain rivalry. Strategic stakes are high when a firm is losing market position or has potential for great gains.

This intensifies rivalry. High exit barriers place a high cost on abandoning the product. The firm must compete. High exit barriers cause a firm to remain in an industry, even when the venture is not profitable. A common exit barrier is asset specificity. When the plant and equipment required for manufacturing a product is highly specialized, these assets cannot easily be sold to other buyers in another industry. Litton Industries' acquisition of Ingalls Shipbuilding facilities illustrates this concept.

Litton was successful in the 's with its contracts to build Navy ships. But when the Vietnam war ended, defense spending declined and Litton saw a sudden decline in its earnings. As the firm restructured, divesting from the shipbuilding plant was not feasible since such a large and highly specialized investment could not be sold easily, and Litton was forced to stay in a declining shipbuilding market.

A diversity of rivals with different cultures, histories, and philosophies make an industry unstable. There is greater possibility for mavericks and for misjudging rival's moves. Rivalry is volatile and can be intense.

The hospital industry, for example, is populated by hospitals that historically are community or charitable institutions, by hospitals that are associated with religious organizations or universities, and by hospitals that are for-profit enterprises. This mix of philosophies about mission has lead occasionally to fierce local struggles by hospitals over who will get expensive diagnostic and therapeutic services.

At other times, local hospitals are highly cooperative with one another on issues such as community disaster planning. Industry Shakeout. A growing market and the potential for high profits induces new firms to enter a market and incumbent firms to increase production. A point is reached where the industry becomes crowded with competitors, and demand cannot support the new entrants and the resulting increased supply.

The industry may become crowded if its growth rate slows and the market becomes saturated, creating a situation of excess capacity with too many goods chasing too few buyers. A shakeout ensues, with intense competition, price wars, and company failures. BCG founder Bruce Henderson generalized this observation as the Rule of Three and Four: a stable market will not have more than three significant competitors, and the largest competitor will have no more than four times the market share of the smallest.

If this rule is true, it implies that:. Whatever the merits of this rule for stable markets, it is clear that market stability and changes in supply and demand affect rivalry. Cyclical demand tends to create cutthroat competition. This is true in the disposable diaper industry in which demand fluctuates with birth rates, and in the greeting card industry in which there are more predictable business cycles. In Porter's model, substitute products refer to products in other industries.

To the economist, a threat of substitutes exists when a product's demand is affected by the price change of a substitute product. A product's price elasticity is affected by substitute products - as more substitutes become available, the demand becomes more elastic since customers have more alternatives. A close substitute product constrains the ability of firms in an industry to raise prices. The competition engendered by a Threat of Substitute comes from products outside the industry.

The price of aluminum beverage cans is constrained by the price of glass bottles, steel cans, and plastic containers. These containers are substitutes, yet they are not rivals in the aluminum can industry.

To the manufacturer of automobile tires, tire retreads are a substitute. Equally important as a barrier to entry would be the lack of availability of a highly skilled management, engineering, and production workforce.

From a practical perspective, this group would have to be put together before any initial effort on the design of a new aircraft could go forward. And they would have to b. Specifically speaking, different marketing process for specific products needs capital Analyze activity-based costing and activity-based management. Concentric diversification Put plainly concentric diversification is said to be when a firm originally concentrating on one specific product, service, or product Deming saw production targets as encouraging the delivery of poor-quality goods.

Steve Kahl Spring Porter proposed that the differentiation strategy is one of two generic business strategies for outperforming other organisations in a particular industry. It focuses on product uniqueness, brings brand quality, emphasis on marketing and research and has superior after-sales service. S Presidents Trump suggestion of tariff on German, imported cars into the U. Branding is proposed as the primary tactic for product differentiation, and Mercedes-Benz is a globally recognised symbol of quality in the marketplace.

Just Check out their impressive Annual Press video. Greenwald and Kahn describe how Cadillac once had the equivalent position in the United States. Yet, despite their recognition and association with quality, both have not been able to translate the power of their brands into exceptional profitable businesses. The years after World War II, Cadillac and Mercedes-Benz dominated their local markets and made exceptional profits, which those same profits attracted other companies to enter their markets.

In figure 1. Daimler AG needs their Return on average Equity adjusted, we need to strip out their most profitable division which is financing. The financing division earned Posted by Carrie Cabral Jul 25, Here's what you'll find in our full Understanding Michael Porter summary : How Porter's famous Five Forces help you analyze every industry How IKEA, Southwest Airlines, and Zara have ironclad, defensible strategies Why the best companies reject opportunities to focus on what they know Get the world's best book summaries now.

Carrie Cabral Carrie has been reading and writing for as long as she can remember, and has always been open to reading anything put in front of her. New Product Development in Marketing: Considerations. What Does a Stock Broker Do? Do You Need One? Production Leadership: Leading by Producing. Creative Organizations: 4 Tools to Manage Effectively. Leave a Reply Cancel reply Your email address will not be published.