Technological innovation can boost the level of fixed costs in the production process, as it did in the shift from batch to continuous-line photo finishing in the 1960s.Competitors are numerous or are roughly equal in size and power. In many U.S. industries in recent years foreign contenders, of course, have become part of the competitive picture.
That costs decline with experience in some industries is not news to corporate executives.This in turn is raising barriers to entry and may drive some smaller competitors out of the industry once growth levels off.It ranges from intense in industries like tires, metal cans, and steel, where no company earns spectacular returns on investment, to mild in industries like oil field services and equipment, soft drinks, and toiletries, where there is room for quite high returns.A new food product, for example, must displace others from the supermarket shelf via price breaks, promotions, intense selling efforts, or some other means.
For example, the replacement market for most products is less price sensitive than the overall market.Finally, Dr Pepper met Coke and Pepsi with an advertising onslaught emphasizing the alleged uniqueness of its single flavor.These characteristics will in turn be influenced by such factors as the establishment of brand identities, significant economies of scale or experience curves in equipment manufacture wrought by technological change, the ultimate capital costs to compete, and the extent of overhead in production facilities.The essence of strategy formulation is coping with competition.Stens offers high quality replacement Stihl chainsaw parts at low prices.
The success of Dr Pepper in the soft drink industry illustrates the coupling of realistic knowledge of corporate strengths with sound industry analysis to yield a superior strategy.The government also can play a major indirect role by affecting entry barriers through controls such as air and water pollution standards and safety regulations.
The newcomer on the block must, of course, secure distribution of its product or service.In contract aerosol packaging, for example, the trend toward less product differentiation is now dominant.In the ready-to-wear clothing industry, as the buyers (department stores and clothing stores) have become more concentrated and control has passed to large chains, the industry has come under increasing pressure and suffered falling margins.
These substitutes are bound to become an even stronger force once the current round of plant additions by fiberglass insulation producers has boosted capacity enough to meet demand (and then some).All this suggests that the experience curve can be a shaky entry barrier on which to build a strategy.The state of competition in an industry depends on five basic forces, which are diagrammed in the Exhibit.Entry is easy, and competitors are battling to establish solar heating as a superior substitute for conventional methods.Powerful suppliers can thereby squeeze profitability out of an industry unable to recover cost increases in its own prices.The company may have to muster the courage to turn away business and sell only to less potent customers.Substitutes often come rapidly into play if some development increases competition in their industries and causes price reduction or performance improvement.The products it purchases from the industry are standard or undifferentiated.
In fact, in some industries, building a strategy on the experience curve can be potentially disastrous.Yet it is easy to view competition too narrowly and too pessimistically.Capital is necessary not only for fixed facilities but also for customer credit, inventories, and absorbing start-up losses.Obviously, the trends carrying the highest priority from a strategic standpoint are those that affect the most important sources of competition in the industry and those that elevate new causes to the forefront.By raising their prices, soft drink concentrate producers have contributed to the erosion of profitability of bottling companies because the bottlers, facing intense competition from powdered mixes, fruit drinks, and other beverages, have limited freedom to raise their prices accordingly.Customers likewise can force down prices, demand higher quality or more service, and play competitors off against each other—all at the expense of industry profits.If costs are falling because a growing company can reap economies of scale through more efficient, automated facilities and vertical integration, then the cumulative volume of production is unimportant to its relative cost position.
A version of this article appeared in the March 1979 issue of Harvard Business Review.
Similarly, decisions by members of the recreational vehicle industry to vertically integrate in order to lower costs have greatly increased the economies of scale and raised the capital cost barriers.MyStore411.com is a place where you can find retail store locations, store hours, phone numbers, maps, driving directions, store services and more.How Competitive Forces Shape Strategy. The outcome of such an exercise may differ a great deal from the existing industry structure. U.S./Canada: 800.988.0886.Entrenched companies may have cost advantages not available to potential rivals, no matter what their size and attainable economies of scale.The more limited the wholesale or retail channels are and the more that existing competitors have these tied up, obviously the tougher that entry into the industry will be.
Large volume buyers are particularly potent forces if heavy fixed costs characterize the industry—as they do in metal containers, corn refining, and bulk chemicals, for example—which raise the stakes to keep capacity filled.These economies deter entry by forcing the aspirant either to come in on a large scale or to accept a cost disadvantage.The weaker the forces collectively, however, the greater the opportunity for superior performance.Free of the legacy of heavy past investments, the newcomer or less experienced competitor can purchase or copy the newest and lowest-cost equipment and technology.The product or service lacks differentiation or switching costs, which lock in buyers and protect one combatant from raids on its customers by another.A few characteristics are critical to the strength of each competitive force.When dealing with the forces that drive industry competition, a company can devise a strategy that takes the offensive.
Rather, competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry.This book is one recommended book that can heal and deal with the time you have.For example, even a company with a strong position in an industry unthreatened by potential entrants will earn low returns if it faces a superior or a lower-cost substitute product—as the leading manufacturers of vacuum tubes and coffee percolators have learned to their sorrow.Its product is unique or at least differentiated, or if it has built up switching costs.While space does not permit a complete treatment here, I want to mention a few other crucial elements in determining the appropriateness of a strategy built on the entry barrier provided by the experience curve.While major corporations have the financial resources to invade almost any industry, the huge capital requirements in certain fields, such as computer manufacturing and mineral extraction, limit the pool of likely entrants.By the time only one rival is left pursuing such a strategy, industry growth may have stopped and the prospects of reaping the spoils of victory long since evaporated.