3. Competitive Advantage

Question 1

b) How does the threat of new entrants have the potential to suppress an industry’s profitability? [6 marks]

Answer 1

Industries with low barriers to entry are attractive to new firms

These new entrants compete for market share and compete away the profits of incumber firms

This can mean that all firms in the market make small profits, under the assumptions of a perfectly competitive industry

Question 2

a) What is the purpose of industry analysis? [6 Marks]

Answer 2

Industry analysis is important to assess the attractiveness of the industry.

Industry analysis may also lead to finding new opportunities to exploit.

For example converging technologies and trends may lead to changes in industry. For example, people with more income, less time and internet -> internet shopping

Industry analysis helps firms to find ways to gain a compeitive advantage

For incumbent firms, Industry analysis is imperative to ensure that a firm is adapting to changes in the industry.

For example, incumnbent firms may be lowering prices/diversifying product range/increasing market share. All of which may have implications for the competing firm. In order to stay in the market, they need to be responsive to such changes

Question 3

Name and describe one model to carry out industry analysis

Answer 3

Porter’s Five Forces Model

1. Existing competitive rivalry between suppliers
2. Threat of new market entrants
3. Bargaining power of buyers
4. Power of suppliers
5. Threat of substitute products (including technology change)

Under the model, competition works to drive the profits for the company to zero. The model says that if a business can find a way to differentiate the business from its competition, it can gain the competitive advantage, increase its market share and increase the business profits.

Question 4

What creates barriers to entry?

Answer 4

Economies of scale

High fixed costs

Patents

Laws/regulation

Existing brand loyalty

Access to distribution channels

Question 5

What is an ideal supplier situation for a new entrant?

Answer 5

That there are many suppliers all competiting for the business of the new entrant

Vertical integration is not attractive to the supplier

The supplier’s product is a commodity (ie not unique)

Question 6

What is an ideal buyer situation?

Answer 6

The power of buyers is critical in determining how you can set your prices

Industry is more attractive to a new entrant when…?

• Buyers (customers) are plentiful
• Cost of switching is low
• Buyers find it hard to integrate backwards
• Customers want differentiated products (ie not commodities)
• Your product cost is a small component in their overall business cost
• Few substitutes

Question 7

Identify the advantages and disadvantages of trying to capture a first-mover advantage.

2011 - 8marks

Answer 7

Advantages

* No competition
* Customer loyalty
* Space/location
* Brand genericization e.g. hoover. iPhone
* Patents, protection
* Learning curve

Disadvantages

* Copy first mover but avoid negatives
* Less risk
* easier to get finance
* Shifts in customer needs
* Incumbent inertia - locked into specific technology
* Cannibalise existing products - taking your own market share

Question 8

Give three exit strategies

Answer 8

IPO - Initial public offering, sell to the public

Sell to larger rival

Diversify, enter new market