Question

In Chapter 3, we discuss Porter’s Forces, which represents the competitive environment a company operates within. Please address these questions about Porter’s Forces: a) What is the Threat of New Entry? What are barriers to entry and how do they impact the Threat of New Entry? Finally, give me a few examples of barriers to entry. b) What is Threat of Buyer Power? What are switching costs and how do they impact Threat of Buyer Power? Provide a few examples of switching costs.

Answer 1

a) Threat of new entrants - This force considers the threat from the new entrants in the market which can offer new or differentiated or better products or can easily imitate the firm.

Barriers of entry are the several ways the entry of new firm is blocked or halted.
The impact of these barriers on new entrants will be high as it gets extremely difficult to enter the market and prove successful.

Examples of barriers entry include -

1. Products/services that are difficult to imitate

2. Huge investment costs

3. Powerful competition

4. Difficult to please customers.

b) Bargaining power of buyers - This force is the power of buyers in setting their own demands from a price, quality and delivery standpoint from the suppliers.

Switching costs are the costs incurred by buyers to switch from one supplier to another.

If the switching costs are higher, the bargaining power of buyers lowers as they stick to the existing supplier which makes it difficult to bargain.

Examples of switching costs include - the administration costs of switching, the lost rewards and long-term relationships, costs of building new relationships etc.