56 Part 1: Strategic Management Inputs
potential customers as well as the firms serving them. For example, the communications
industry is now broadly defined as encompassing media companies, telecoms, enter-
tainment companies, and companies producing devices such as smartphones.^94 In such
an environment, firms must study many other industries to identify companies with
capabilities (especially technology-based capabilities) that might be the foundation for
producing a good or a service that can compete against what they are producing.
When studying the industry environment, firms must also recognize that suppliers
can become a firm’s competitors (by integrating forward) as can buyers (by integrating
backward). For example, several firms have integrated forward in the pharmaceutical
industry by acquiring distributors or wholesalers. In addition, firms choosing to enter
a new market and those producing products that are adequate substitutes for existing
products can become a company’s competitors.
Next, we examine the five forces the firm needs to analyze in order to understand
the profitability potential within an industry (or a segment of an industry) in which it
competes or may choose to compete.2-4a Threat of New Entrants
Identifying new entrants is important because they can threaten the market share of
existing competitors.^95 One reason new entrants pose such a threat is that they bring
additional production capacity. Unless the demand for a good or service is increasing,
additional capacity holds consumers’ costs down, resulting in less revenue and lower
returns for competing firms. Often, new entrants have a keen interest in gaining a large
market share. As a result, new competitors may force existing firms to be more efficient
and to learn how to compete in new dimensions (e.g., using an Internet-based distribu-
tion channel).
The likelihood that firms will enter an industry is a function of two factors: barriers
to entry and the retaliation expected from current industry participants. Entry barriers
make it difficult for new firms to enter an industry and often place them at a competi-
tive disadvantage even when they are able to enter. As such, high entry barriers tend to
increase the returns for existing firms in the industry and may allow some firms to dom-
inate the industry.^96 Thus, firms competing successfully in an industry want to maintain
high entry barriers in order to discourage potential competitors from deciding to enter
the industry.Barriers to Entry
Firms competing in an industry (and especially those earning above-average returns)
try to develop entry barriers to thwart potential competitors. In general, more is known
about entry barriers (with respect to how they are developed as well as paths firms can
pursue to overcome them) in industrialized countries such as those in North America
and Western Europe. In contrast, relatively little is known about barriers to entry in the
rapidly emerging markets such as those in China. However, recent research suggests that
Chinese executives perceive that advertising effects are the most significant of seven bar-
riers to China, while capital requirements are viewed as the least important.^97
There are different kinds of barriers to entering a market to consider when examining
an industry environment. Companies competing within a particular industry study these
barriers to determine the degree to which their competitive position reduces the likelihood
of new competitors being able to enter the industry to compete against them. Firms consid-
ering entering an industry study entry barriers to determine the likelihood of being able to
identify an attractive competitive position within the industry. Next, we discuss several sig-
nificant entry barriers that may discourage competitors from entering a market and that may
facilitate a firm’s ability to remain competitive in a market in which it currently competes.