Course Code and Title: CBME1 – Strategic Management

Lesson Number: 3

Topic: Business Competition

Professor: Joselito G. Yu, LPT, MaEd

From a microeconomics perspective, competition can be influenced by five basic

factors: Product features, the number of sellers, barriers to entry, information
availability, and location. Each factor hinges on the availability or attractiveness of
substitutes and, when no alternatives exist and the company is a single seller of a
unique product, a monopoly exists and there is zero competition.

Besides, a firm’s ability to produce a good or service more efficiently than its
competitors, which leads to greater profit margins, creates a comparative advantage.
Rational consumers will choose the cheaper of any two perfect substitutes offered. For
example, a car owner will buy gasoline from a gas station that is 5 cents cheaper than
the other stations in the area. For imperfect substitutes, like Pepsi versus Coke, higher
margins for the lowest-cost producers can eventually bring superior returns.

Economies of scale, efficient internal systems, and geographic location can also create
a comparative advantage. Comparative advantage does not imply ma better product or
service, though. It only shows the firm can offer a product or service of the same value
at a lower price.

For example, a firm that manufactures a product in China may have lower labor costs
than a company that manufactures in the U.S., so it can offer an equal product at a
lower price. The Amazon (AMZN) is an example of a company focused on building and
maintaining a comparative advantage. The eCommerce platform has a level of scale
and efficiency that is difficult for retail competitors to replicate, allowing it to rise to
prominence largely through price competition.

Learning Objectives:

At the end of the lesson, the students will be able to:

1. Distinguish the threat of new entrants.

2. Collect ideas about barriers to entry and its entry analysis.

3. Qualify the High Threat of Entry of New Competitors.

Pre-assessment:

I. Multiple Choice: Pick out the letter of the correct answer and write the
letter on the space provided before each number.

_____ 1. The dynamic external system in which a business competes and functions.

a. Individual competitors
b. Indirect competitors
c. Direct competitors
d. Competitive environment

_____ 2. Businesses that are selling the same type of product or service as you.
a. Individual competitors
b. Indirect competitor
c. Direct competitors
d. Goodwill

_____ 3. Businesses that still compete even though they sell a different different
service or product.

a. Indirect competitors
b. Direct competitors
c. Economies of scale
d. Goodwill

_____ 4. What are the advantages of being in a competitive business environment?.

a. Having friends in the industry
b. More competition means less greed
c. Motivation to improve product
d. Having more access to investors

_____ 5. What are the disadvantages of a competitive environment?

a. Other firms becoming allies
b. Losing out on potential investors
c. Decreased sales
d. All of these
 The threat of New Entrants Explanation

The threat of new entrants Porter created

affects the competitive environment for the
existing competitors and influences the ability
to existing firms to achieve profitability. For
example, a high threat of entry means new
competitors are likely to be attracted to
the profits of the industry and can enter the industry with ease. New competitors
entering the marketplace can either threaten or decrease the market share
and profitability of existing competitors and may result in changes to
existing product quality or price levels. An example of the threat of new entrants porter
devised exists in the graphic design industry: there are very low barriers to entry.

As new competitors flood the marketplace, have a plan to react before it impacts
your business. Download the External Analysis whitepaper to gain an advantage
over competitors by overcoming obstacles and preparing to react to external
forces, such as it being a buyer’s market. 

A high threat of new entrance can both make an industry more competitive and
decrease profit potential for existing competitors. On the other hand, a low threat of
entry makes an industry less competitive and increases profit potential for the existing
firms. New entrants are deterred by barriers to entry.

Barriers to Entry

Several factors determine the degree of the threat of new entrants to an industry.
Furthermore, many of these factors fall into the category of barriers to entry, or entry
barriers. Barriers to entry are factors or conditions in the competitive environment of an
industry that make it difficult for new businesses to begin operating in that market.
Examples of Barriers to Entry

A high production-profitability threshold requirement, or economy of scale, is an entry

barrier that can lower the threat of entry. Highly differentiated products or well-known
brand names are both barriers to entry that can lower the threat of new entrants.
Significant upfront capital investments required to start a business can lower the threat
of new entrants. Whereas, high consumer switching costs are a barrier to entry. When
access to distribution channels is an entry barrier – if it is difficult to gain access to these
channels, the threat of entry is low. Access to favorable
locations, proprietary technology, or proprietary production material inputs also increase
entry barriers and decrease the threat of entry.

And of course, if the opposite is true for any of these factors, barriers to entry are low
and the threat of new entrants is high. For example, no required economies of scale,
standardized or commoditized products, low initial capital investment requirements, low
consumer switching costs, easy access to distribution channels, and no relevant
advantages due to locale or proprietary assets all indicate that entry barriers are low
and the threat of entry is high.

Other factors also influence the threat of new entrants. Expected retaliation of existing
competitors and the existence of relevant government subsidies or policies can
discourage new entrants. While no expected retaliation and the lack of relevant
government subsidies or polices can encourage new entrants.
The threat of Entry Analysis

When analyzing a given industry, all of the aforementioned factors regarding the threat
of new entrants may not apply. But some, if not many, certainly will. Of the factors that
do apply, some may indicate a high threat of entry and some may indicate a low threat
of entry. But, the results will not always be straightforward. Therefore it is necessary to
consider the nuances of the analysis and the particular circumstances of the given firm
and industry when using these data to evaluate the competitive structure and profit
potential of a market.

High Threat of Entry of New Competitors When:

 Profitability does not require economies of scale

 Products are undifferentiated
 Brand names are not well-known
 Initial capital investment is low
 Consumer switching costs are low
 Accessing distribution channels is easy
 Location is not an issue
 Proprietary technology is not an issue
 Proprietary materials is not an issue
 Government policy is not an issue
 Expected retaliation of existing firms is not an issue
The threat of New Entry is Low if:

 Profitability requires economies of scale

 Products are differentiated
 Brand names are well-known
 Initial capital investment is high
 Consumer switching costs are high
 Accessing distribution channels is difficult
  Location is an issue
 Proprietary technology is an issue
 Proprietary materials is an issue
 Government policy is an issue
 Expected retaliation of existing firms is an issue
The threat of New Entry of competitors Interpretation

When conducting Porter’s 5 forces industry analysis, a low threat of new entrants
makes an industry more attractive and increases profit potential for the firms already
competing within that industry, while a high threat of new entrants makes an industry
less attractive and decreases profit potential for the firms already competing within that
industry. The threat of new entrant’s porter’s 5 forces explained is one of the factors to
consider when analyzing the structural environment of an industry.

Generalization:

* From a microeconomics perspective, five factors (product features, number

of sellers, barriers to entry, information availability, and information) can affect
competition.

* When a company has a unique product that no other company is selling, a

a monopoly exists, as there is no competition.

* Most markets are somewhere in between competition and a monopoly. The

Amount of competition will also vary depending on location, the barriers to
entry, and the availability of pricing

Evaluation:

I. Multiple Choice: Pick out the letter of the correct answer and write the letter on
the space provided before each number.

__1. What is a comparative environment?

a. When there is no competition in the area

b. A dynamic external system in which a business competes and functions
c. When there are businesses similar in the area
__2. What will lowering prices create?

a. Lower profits
b. No profit
c. Higher profit

d. Breaking even
__3. Where would be the best place to start a hairdressing business?

a. Sport stadium
b. Close to a housing estate
c. A town center
d. Close to competitors
__4. What is a good example of good customer service?

a. Refunding an item for a customer

b. Not listening to customers’ requests
c. Smiling at customers
d. Offering your help and service to a customer.
__5. What can a business do to stand out?

a. Change the brand name

b. Differentiate a product or service
c. Have a logo
d. Have a mascot
__6. What can a business do to add value to a product?

a. Improve quality
b. Make their prices lower
c. Make their prices higher
d. Keep the product the same
__7. Why is it important for a business close to similar shops?

a. To sell more products

b. Increase in profit
c. To catch possible customers who move from store to store
d. To break even
__8. What is goodwill?

a. A good deed
b. When a business accepts refunds
c. Helpful friendly service
d. No customer service
__9. What is the product range?

a. Producing products that are better than competitors

b. Having many of the same things
c. Having a wide range of products
d. Having lots of businesses
__10. How could a business improve its product quality?

a. Charge more for products

b. Use better raw materials
c. Change supplier
d. Meet customer needs

Reinforcement:

Submit a written report discussing Porter’s Five Model of Industry Competition.

Relate your report to existing rivalries in the local industry.

References:

https://www.youtube.com/watch?v=DzhJNiQ3vMM

https://www.investopedia.com/ask/answers/042115/what-factors-influence-

competition-microeconomics.asp