Chapter Seven Creating Barriers to Entry

A firm must ask: “What distinct advantage do we have? It makes no sense to say: “We want or we hope to do... ” This is “wish-driven” strategy.

The Prelude Corporation -- briefly the largest lobster producer in North America said: “We want to become the P&G of the lobster business... The fishing industry now is just like the automobile industry was 60 years ago: 100 companies are going to come and go, but we’ll be the GM.”

Copyright © Houghton Mifflin Company.All rights reserved. 7–47–4 Erosion of Profitability A firm that is successful, tends to remain successful over time. One study shows that firms with high initial profitability at the beginning of a period of 23 years can be expected to have higher than average profitability for a long time, although there is erosion.

Copyright © Houghton Mifflin Company.All rights reserved. 7–57–5 Sustainability 1.Unless entry is inhibited, limited, made difficult, above-normal profits will be competed away. 2.How can the profits be “SUSTAINED?” “How can we ensure that our distinctive capability continues to have value?”

Copyright © Houghton Mifflin Company.All rights reserved. 7–67–6 Sustainability 1.Size or Scale? Sometimes the impression is given that size is the only source of competitive advantage. When is it a source of competitive advantage? The oil industry appears to be achieving more economies of scale -- mergers are going on between very large firms.

Copyright © Houghton Mifflin Company.All rights reserved. 7–77–7 Sustainability 1.Size or Scale? There is a tendency to confuse the indicators of success with the causes of success. Are large firms always successful?

Copyright © Houghton Mifflin Company.All rights reserved. 7–10 Sustainability 1.Size or Scale? What accounts for the number of mergers and acquisitions? Has business become more concentrated? Concentration = more market share held by fewer firms.

Copyright © Houghton Mifflin Company.All rights reserved. 7–11 Sustainability 2.Market share? Does a large market share guarantee success? What are examples of firms with large market share that are not successful? Once success occurs, what enables a firm to maintain its success?

Copyright © Houghton Mifflin Company.All rights reserved. 7–12 Sustainability 1.Strategic Assets Capital Requirements What does a huge capital requirement mean? Access to distribution channels

Copyright © Houghton Mifflin Company.All rights reserved. 7–13 Sustainability 2.Differentiation Reputation or Brand Name What does it do to the demand curve? Compare international car rental firms to local rental firms. Why is reputation or brand name valuable?

Copyright © Houghton Mifflin Company.All rights reserved. 7–14 Barriers How can a firm provide assurance or build reputation or brand name? Compare the following: A sidewalk vendor and a firm with huge sunk costs.

Copyright © Houghton Mifflin Company.All rights reserved. 7–15 Information Does the sidewalk vendor have an incentive to tell the truth? Does Motorola have an incentive to tell the truth?

Copyright © Houghton Mifflin Company.All rights reserved. 7–16 Information When consumers can easily verify the attributes of a product, there is no reason that the price of any characteristic, including better quality -- should exceed the cost of providing it. But if an attribute or characteristic cannot be easily verified, then the firm that can provide an assurance of the characteristic may be able to command a price premium.

Copyright © Houghton Mifflin Company.All rights reserved. 7–17 Strategic Advantage How can government serve as a source of strategic advantage? The government can license the “right” to be a monopoly. Firms may devote resources to obtaining the government license (referred to as rent-seeking).

Copyright © Houghton Mifflin Company.All rights reserved. 7–18 Resources What does unique resources mean? It may refer to the firm’s internal resources: its organization, structure, culture, etc.

Copyright © Houghton Mifflin Company.All rights reserved. 7–19 Pricing How can a price be used to deter entry?

Copyright © Houghton Mifflin Company.All rights reserved. 7–20 Cooperating to Deter Entry Most favored customer -- MFC Customer receives any benefits offered to other customers. Meet the competition clause -- MCC Business gets opportunity to meet any bids received by customer.