3 Potential entrants: The threat of potential entrants will be determined
by a number of barriers to entry that may exist in any given industry:
●The capital investment necessary to enter the industry can be very high
in areas such as electrical power generation or chemical production.
●A well-entrenched competitor who moved into the industry early
may have established cost advantages irrespective of the size of
their operation. They have had time to establish crucial aspects of
their operation such as effective sources of supply, the best loca-
tions, and customer franchises.
●Achieving economies of scale in production, distribution or market-
ing can be a necessity in certain industries.
●Gaining access to appropriate distribution channels can be difficult.
Peugeot/Citroen bought Chrysler’s entire UK operations in order
to gain an effective dealership network in Britain.
●Government legislation and policies such as patent protection,
trade relations with other states and state owned monopolies can all
act to restrict the entry of competitors.
●The prospect of a well-established company’s hostile reactions to a new
competitor’s entry to the market may be enough to act as a deterrent.
4 Substitutes: Substitution can arise in a number of ways:
●A new product or service may eradicate the need for a previous
process. Insurance services delivered directly by producers over the
phone or Internet are substitutes for the services of the independent
insurance broker.
●A new product replaces an existing product or service. Cassette
tapes replaced vinyl records, only to be replaced by compact discs.
●All products and services, to some extent, suffer from generic sub-
stitution. Consumers may choose to substitute buying a car in order
to purchase an expensive holiday instead.
5 Competitive rivalry: The intensity of competition in the industry will be
determined by a range of factors:
●The stage of the industry life cycle will have an effect. Natural
growth reaches a plateau once an industry reaches maturity; the
only way a organisation can continue to grow in the industry is to
take market share off its rivals.
●The relative size of competitors is an important factor. In an indus-
try where rivals are of similar size, competition is likely to be
intense as they each strive for a dominant position. Industries that
already have a clear dominant player tend to be less competitive.
●In industries that suffer from high-fixed costs, companies will try to
gain as much volume throughput as possible, this may create com-
petition based on price discounting.
●There may be barriers that prevent companies withdrawing from an
industry. This may be plant and machinery that is specialist in
nature and therefore cannot be transferred to other uses. The work-
force may have non-transferable specialist skills. If the industry is in
maturity, moving towards decline, and rivals cannot easily leave the
industry then competition inevitably will increase.
External analysis 27