Barriers to Entry and Bargaining Power
Chapter 2
Chapter 2
Strategy Analysis
2. What are the critical drivers of industry profitability?
Rivalry Among Existing Firms. The greater the degree of competition among firms in an industry, the lower average profitability is likely to be. The factors that influence existing firm rivalry are industry growth rate, concentration and balance of competitors, degree of differentiation and switching costs, scale/learning economies and the ratio of fixed to variable costs, and excess capacity and exit barriers.
Threat of New Entrants. The threat of new entry can force firms to set prices to keep industry profits low. The threat of new entry can be mitigated by economies of scale, first mover advantages to incumbents, greater access to channels of distribution and existing customer relationships, and legal barriers to entry.
Threat of Substitute Products. The threat of substitute products can force firms to set lower prices, reducing industry profitability. The importance of substitutes will depend on the price sensitivity of buyers and the degree of substitutability among the products.
Bargaining Power of Buyers. The greater the bargaining power of buyers, the lower the industry’s profitability. Bargaining power of buyers will be determined by the buyers’ price sensitivity and their importance to the individual firm. As the volume of purchases of a single buyer increases, its bargaining power with the supplier increases.
Bargaining Power of Suppliers. The greater the bargaining power of suppliers, the lower the industry’s profitability. Suppliers’ bargaining ability increases as the number of suppliers declines when there are few substitutes available.
6. Coca-Cola and Pepsi are both very profitable soft drinks. Inputs for these products include corn syrup, bottles/cans, and soft drink syrup. Coca-Cola and Pepsi produce the syrup themselves and purchase the other inputs. They then enter into exclusive contracts with independent bottlers to
Chapter 2
Strategy Analysis
2. What are the critical drivers of industry profitability?
Rivalry Among Existing Firms. The greater the degree of competition among firms in an industry, the lower average profitability is likely to be. The factors that influence existing firm rivalry are industry growth rate, concentration and balance of competitors, degree of differentiation and switching costs, scale/learning economies and the ratio of fixed to variable costs, and excess capacity and exit barriers.
Threat of New Entrants. The threat of new entry can force firms to set prices to keep industry profits low. The threat of new entry can be mitigated by economies of scale, first mover advantages to incumbents, greater access to channels of distribution and existing customer relationships, and legal barriers to entry.
Threat of Substitute Products. The threat of substitute products can force firms to set lower prices, reducing industry profitability. The importance of substitutes will depend on the price sensitivity of buyers and the degree of substitutability among the products.
Bargaining Power of Buyers. The greater the bargaining power of buyers, the lower the industry’s profitability. Bargaining power of buyers will be determined by the buyers’ price sensitivity and their importance to the individual firm. As the volume of purchases of a single buyer increases, its bargaining power with the supplier increases.
Bargaining Power of Suppliers. The greater the bargaining power of suppliers, the lower the industry’s profitability. Suppliers’ bargaining ability increases as the number of suppliers declines when there are few substitutes available.
6. Coca-Cola and Pepsi are both very profitable soft drinks. Inputs for these products include corn syrup, bottles/cans, and soft drink syrup. Coca-Cola and Pepsi produce the syrup themselves and purchase the other inputs. They then enter into exclusive contracts with independent bottlers to