Entry, mobility, and exit barriers

Industries differ greatly in ease of entry. It is easy to open a new restaurant but difficult to enter the aircraft industry. Major entry barriers include high capital requirements; economies of scale; patents and licensing requirements; scarce locations, raw materials, or distributors; and reputation requirements. Even after a firm enters an industry, it might face mobility when it tries to enter more attractive market segments.

Firms often face exit barriers, such as legal or moral obligations to customers, creditors, and employees; government restriction; low asset-salvage value due to overspecialization or obsolescence; lack of alternative opportunities; high vertical integration; and emotional barriers. Many firms stay in an industry as long as they cover their variable costs and some or all of their fixed costs. Their continued presence, however, dampens profits for everyone. Even if some firms do not want to exit the industry, they might decrease their size. Companies can try to reduce shrinkage barriers to help ailing competitors get smaller gracefully.

Cost Structure:

Each industry has a certain cost burden that shapes much of its strategic conduct. For example, steelmaking involves heavy manufacturing and raw material costs; toy manufacturing involves heavy distribution and marketing costs. Firms strive to reduce their largest costs. The integrated steel company with the most cost-efficient plant will have a great advantage over other integrated steel companies; but even it has higher costs than the new steel mini-mills.

Degree of vertical integration:

Companies find it advantageous to integrate backward or forward (vertical integration). Major oil producers carry oil exploration; oil drilling, oil refining, chemical manufacture, and service-station operation. Vertical integration often lowers costs, and the company gains a larger share of the value-added stream. In addition, vertically integrated firms can manipulate prices and costs in different parts of the value chain to earn profits where taxes are lowest. There can be disadvantages, such as high costs in certain parts of the value chain and a lack of flexibility. Companies are increasingly questioning how vertical they should be. Many are outsourcing more activities, especially those that can be done better and more cheaply by specialist firms.

Degree of Globalization:

Some industries are highly local (such as lawn care); others are global (such as oil, aircraft engines, cameras).Companies in global industries need to compete on a global basis if they are to achieve economies of scale and keep up with the latest advances in technology.

Market Concept of Competition:

Using the market approach, competitors are companies that satisfy the same customer need. For example, a customer who buys a word-processing package really wants “writing ability” — a need that can also be satisfied by pencils, pens, or typewriters. Marketers must overcome “marketing myopia” and stop defining competition in traditional category terms. Coca-Cola, focused on its soft-drink business, missed seeing the market for coffee bars and fresh-fruit-juice bars that eventually impinged on its soft-drink business.

The market concept of competition reveals a broader set of actual and potential competitors. Profiling a company’s direct and indirect competitors by mapping the buyer’s steps in obtaining and using the product can be done. The first outer ring lists Kodak’s main competitors with respect to each consumer activity Olympus for buying a camera, Fuji for purchasing film, and so on. The second outer ring lists indirect competitors — HP, Intel cameraworks.com — who in Kodak’s case are increasingly becoming direct competitors. This type of analysis highlights both the opportunities and the challenges a company faces.