Sample Essay

Threat of New Entrants

The competition in an industry will be greater the easier it is for other companies to enter this industry. New entrants can affect major components of the market environment (e.g. market shares, prices, customer loyalty) at any time this will inevitably have а major influence on the strategy of existing players. The threat of new entries will depend on the extent to which there are barriers to entry.

These are typically:

  • Economies of scale (minimum size requirements for profitable operations),
  • High initial investments and fixed costs,
  • Cost advantages of existing players due to experience curve effects of operation with fully depreciated assets,
  • Brand loyalty of customers
  • Protected intellectual property like patents, licenses etc,
  • Scarcity of important resources, e.g. qualified expert staff
  • Access to raw materials is controlled by existing players,
  • Distribution channels,
  • Existing customer relations, e.g. from long-term service contracts,
  • High switching costs for customers
  • Legislation and government action

The likelihood of new entrants to the supermarket industry is doubtful mainly due to the high initial investments and fixed costs. There would be an enormous amounts of capital needed to create а nationwide supermarket chain that was able to compete with the likes of Sainsbury’s, Wal-Mart and Asda. Not withstanding the high entry costs there is also the issue of brand loyalty.

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