Question

In topic 2 we discussed the threat of new entrants as one of the five competitive...

  1. In topic 2 we discussed the threat of new entrants as one of the five competitive forces impacting industry profitability. In particular, we discussed an industry characterized as differentiated increasing the barrier to entry for potential new entrants. Please note: I am asking you about an industry-level effect, not a firm-level effect. In other words, I am not asking you about a company with a differentiated business model like Apple or BMW.

  1. How does an industry characterized as highly differentiated (in other words, the opposite of highly commoditized) serve as a barrier to entry? Besides explaining what the barrier means, conceptually explain how a potential new entrant specifically is going to be at a disadvantage.
  2. For a potential new entrant (i.e., a client who hired you for consulting advice) who faces this barrier, what is one viable option for it to consider should it still want to enter the industry, be competitive, and not accept below-normal performance? Give this client a game plan.     

Homework Answers

Answer #1

b. For a potential new entrant (i.e., a client who hired you for consulting advice) who faces this barrier, what is one viable option for it to consider should it still want to enter the industry, be competitive, and not accept below-normal performance? Give this client a game plan.     

Highly differentiated goods can be a barrier to entry if the products have been highly differentiated and the consumer base is loyal to the product that they relate with or that they have used for a longer period of time. This is a barrier because it discourages new firms from entering the industry thereby it is a barrier and that can be a disadvantage for new firms.

Explanation:

An industry where the products are highly differentiated can create a situation where the products are different to the extent that the clients are loyal to a particular group of products from a given firm. This automatically makes all the other new firms that are entering the market to find it hard to gain new clients thereby creating a barrier to entry and placing the other firms at a disadvantage. Also there can be such a situation where the price of differentiation is high which makes it hard for the new firms to differentiate their products and make them unique thereby acting as a barrier to entry

The barrier is an obstacle to a firm's entrance into the industry. Therefore if the product is highly differentiated, new firms will struggle to attract new clients and new customers and this might be a barrier to entry because the firm will consider a new industry where they can be able to attract more clients when they are new and where they can be able to make more money. Also if the price of differentiating one's products will be high, these new firms will have to have additional more money to stand a chance of being successful in the industry which is by itself a disadvantage to the firm.

a. How does an industry characterized as highly differentiated (in other words, the opposite of highly commoditized) serve as a barrier to entry? Besides explaining what the barrier means, conceptually explain how a potential new entrant specifically is going to be at a disadvantage.

An industry is characterized as highly differentiated

  • where the products or services are not for general public
  • the production or servicing is highly regularized and several round of background check.
  • The production is licenced and limited or restricted licencing is required
  • The technology involved is sophisticated and required highly regulated and control environment

One such example is solar energy for electricity, each player needs to get licenses for working in this field and they have limited out put and even the prices are in a way pegged and direct commercialization is not allowed.

Even more regulated one is Nuclear energy, where each step has to be as per the regulator and selling of energy is also restricted.

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