In his analysis of the industry’s structure, Michael Porter points to the following factors eroding industry profitability:
- The product is one of many such commodities available on the market
- Everybody generates the same costs and has access to the same technology
- Buyers pay attention to prices, are knowledgeable and ready to instantly switch to another vendor to get more benefits
Hence the importance of…
…Entry and Mobility Barriers
- Economy of scale – the bigger the scale of production, the lower the operational costs.
- Product differentiation – the company which differs from its competitors is under less of a competitive pricing pressure.
- Monopoly of key components of a success in the industry, i.e. patents and strategic location.
- Sunk costs – the costs that cannot be recovered once the firm has made a market exit.
- Distribution channels – even the best company will not become successful without the access to distribution channels.
- Costs of a vendor replacement– the company is in a better strategic position if the costs of a vendor replacement have to be incurred by clients.
The company should create entry or mobility barriers for its market rivals
Examples of entry barriers: a frequent user programme.
Invented by the airlines, frequent user programmes are designed to award clients who often buy a certain product.
Such programmes are most effective in the case of expensive products or services which are or can be purchased relatively often.
Examples of entry barriers include:
- Strategic location:
- Petrol stations
- Fast food restaurants
- Shops/ department stores
What can you do to set up entry or mobility barriers for your current or potential competitors?
Business Psychologist, Mentor, Founder of INSPIRE