"Chapter 7 Creating Barriers to Entry"
Chapter 7 Creating Barriers to Entry I. Economic profits arises from a distinctive capability A. Economic profits can only be sustained through the ability to protect the distinctive capability. B. Distinctive capability protected by creating barriers to entry. II. Sustaining profits with size A. Economies of scale 1. When industry starts firms generally lack economies of scale 2. Often the early history of an industry is the race to grow to achieve economies of scale. 3. Businesses that lag behind often fail 4. Growth is often achieve through mergers and acquisitions to achieve economies of scale. 5. Once established it becomes hard for new company to enter the business a. Must be capitalized sufficiently to compete b. Recent examples DHL shipping, Abebooks, AirGorilla B. Capital Requirements 1. New entrants have to absorb costs that existing firms have already absorbed. 2. Sunk Cost – cost for an asset that has no liquidation value 3. Brand Name Id C. Access to distribution channels 1. Established distribution network significant advantage III. Differentiation A. Successful differentiation reduces the elasticity of demand meaning firm can raise price without loss of revenue B. Brand Name 1. Price of strongest brand names 19% higher than price of weakest brand names 2. Consumer tends to be satisfied with product that meets their needs and not search further. 3. Try it you’ll like it can be a hard sell. 4. Believe brand name means quality C. Advantage of brand name seen in example of soft soap bottom of page 155 1. Brand names can let no name develop a business then capture it at will when desired. D. Market segmentation 1. Giving the product variety of attributes to meet all demands a. Colors, textures, flavors, etc. b. Advertising positioning – Cat food 2. Guarantees a. Better guarantee can introduce product b. Competitors quickly follow suit. IV. Other Strategies A. Government Regulation 1. All regulations established to promote but well being 2. Also protect those who have required credentials and licenses from competition a. Beer distributorships b. Liquor licenses 3. Deregulation movement 1980 a. Late 1970s began dismantling regulatory systems put it place during WWII. b. Transportation 1. Airlines a. CAB no longer assigns routes to airlines 2. Trucking a. FTA no longer sets trucking prices c. Communications 1. FCC licenses more extensive 2. Band width auctioned off rather than assigned d. Telephone 1. AT&T not longer only legal source for phones B. Unique Resources 1. Human capital – talent C. Internal Strategic Assets 1. Google search engine algorithm