Preface

 

On Friday, 16 July 2010, the Business & Management Department of the International Space University's Space Studies Program (SSP) held a "Space Tourism" Workshop. The purpose of the workshop was to give the students an overview of a Industry Structural Analysis as described in the Michael Porter textbook entitled "Competitive Strategy."

 

Approximately 20 students participated in a 3.5 hour workshop that was originally designed to be conducted over 3.5 days. The students participated in this overwhelming activity with alacrity and the workshop output reflects their willingness to learn and apply a week's worth of material in less than four hours!

 

Below is a series of descriptive paragraphs, questions, and responses. Most of the descriptive paragraphs are direct quotes from Porter's "Competitive Strategy" and were included to provide explanation as needed in answering the questions. The questions were derived the from the textbook material from Chapter 1 that describes the Industry Structural Analysis in detail. The responses to the questions given below were generated by the workshop participants.

 

The results from this workshop are given below and are intended to be a starting point for the ISA for this market sector. There is a lot more work to be done, and future studies can use this information as a starting point. A word document of these results can also be downloaded here.

 

 

Industry Structural Analysis of the Emerging Commercial Suborbital Human Transportation Market (aka “Space Tourism”)

 

Introduction

 

The work performed below is based on Michael Porter's "Competitive Strategy" textbook. The Industrial Structural Analysis (ISA) responds to the following questions:

 

• What are the key factors for competitive success and the important industry opportunities and threats?
• What are the sources of the five competitive forces? (see figure below)

 

 

 

 

Force 1: Threat of Entry by Potential Entrants

 

The threat of entry into an industry depends on the barriers to entry that are present, coupled with the reaction from existing competitors that the entrant can expect.

 

Entry Barriers

 

The following are factors that influence the entry barriers:

 

1. Economies of Scale
2. Product Differentiation
3. Capital Requirements
4. Switching Costs
5. Access to Distribution Channels
6. Cost Disadvantages Independent of Scale
7. Government Policy

 

Properties

 

• Entry barriers can and do change as the conditions previously described change.
• Although entry barriers sometimes change for reasons largely outside the firm’s control, the firm’s strategic decisions also can have a major impact.
• Some firms may possess resources or skills which allow them to overcome entry barrier into an industry more cheaply than most other firms. 

 

For each of the BoEs factors of influence below, we will ask a series of questions to address these three BoE properties.

 

- Are the specific examples in this BOE influencing factor category independent of, or vary as a function of, the other BOE influencing factor categories?

 

- What can the firm do to control the specific examples in this BOE influencing factor category?

 

- Do the firms in this market possess resources or skills that would allow them to overcome the specific examples in this BOE influencing factor category more cheaply than their competitors?

 

Factors of Influence

 

The following is a list of factors that influence the strength of entry barriers into a given industry.

 

Force 1a: Economies of Scale

 

1. Identify all business functions (e.g., manufacturing) and subfunctions (e.g., mfg of component A, mfg of component B) and estimate the economies of scale barrier strength of each. Provide examples.

•  Development
•  Development of subsystems
• Development of ground systems
• Testing
• Manufacturing
• Application
•  Research
•  Financing

 

2. Are shared function operations possible for any of the industry players being considered? Provide examples. Is the benefit illusory? (see footnote 2 in the textbook)

• Yes. Example: for testing, for manufacturing

 

3. Do joint costs benefits exist? Provide examples.

•  Yes. Example: engines, avionics

 

4. Do the industry members have intangible assets to exploit? Provide examples.

•   Yes. Examples: Intellectual Property (IP), hardware

 

5. Do vertical integration economies exist? Provide examples.

•   No response.

 

6. In general, what are the economies of scale barriers of entry in this market, if they even exist? Provide examples.

•  Economy of scale barriers of entry exist in this market. They include:
•  Capital
•  Large testing fields (test sites)
•  Knowledge

 

7. How strong is each economies of scale barrier of entry?

• Capital – very strong
• Testing Field (Site) – weak (low)
• Knowledge – weak (low)

 

8. How strong is the overall barrier of entry category of economies of scale for this market?

• Overall, the Very strong ($$ difficult!)

 

9. Does the strength of the economies of scale barriers of entry favor smaller or larger companies? Provide examples.

• The strength of the economies of scale barriers of entry favors large companies for each economy of scale barrier identified.

 

 

10.  Are the specific examples in the economies of scale barriers of entry independent of, or vary as a function of, the other barriers of entry influencing factor categories?

 

• The economies of scale barriers of entry are not independent of the other barriers of entry, because they have a close relationship.

 

11.  What can the firm do to control the specific examples in the economies of scale barriers of entry?

• Find a lot of money
• Buy a large field (site).
• Hire smart people.

 

12.  Do the firms in this market possess resources or skills that would allow them to overcome the specific examples in the economies of scale barriers of entry more cheaply than their competitors?

• Already existing company already have investors, test facilities and man power.

 

13.  The presence of economies of scale always leads to a cost advantage for the large-scale firm (or firm that can share activities) over small-scale firms. However, even the economies of scale barriers of entry have strategic limits when used by incumbent firms. Are any of these limits applicable to this specific market?

• Capital – there is a limit
• Test Site – no limits
• Knowledge – no limits

 

Force 1b: Product Differentiation

 

14.  What are the product differentiation barriers of entry in this market, if they even exist? Provide examples.

• Cost of investment
• Level of technology required

 

15.  How strong is each product differentiation barrier of entry?

• Cost of investment - Strong
• Level of technology required – Strong, but less than the Cost of Investment

 

16.  How strong is the overall barrier of entry category of product differentiation for this market?

• This influence too much this market. (???)

 

17.  Does the strength of product differentiation barriers of entry favor smaller or larger companies? Provide examples.

• Product differentiation favors large companies.
• Example: Virgin Galactic

 

18.  Are the specific examples in product differentiation barriers of entry independent of, or vary as a function of, the other barriers of entry influencing factor categories?

• This factor is related to the other barrier of entry factor categories.

 

19.  What can the firm do to control the specific examples in product differentiation barriers of entry?

• Money – Firms can try to associate with others or look for government funding.
• Technology – improving the ability, knowledgment inside [the firm].

 

20.  Do the firms in this market possess resources or skills that would allow them to overcome the specific examples in product differentiation barriers of entry more cheaply than their competitors?

• Resources – is cheaper if the firm have their own money
• Skills – is cheaper if the firm has the ability and technology.

 

Force 1c: Capital Requirements

 

21.  What are the barriers of entry of capital requirement in this market, if they even exist? Provide examples.

 

• High risk
• Long-term investment
• Lots of capital required

 

22.  How strong is each capital requirement barrier of entry?

• From the perspective of the bank, etc.
• High Risk = very bad [strong]
• Long term = accepted [weak]
• Lots of Capital = fine [weak]
• From the perspective of the Venture Capitalist
• High Risk = accepted [weak]
• Long term = not good [medium - strong]
• Lots of Capital = ?

 

23.  How strong is the overall barrier of entry category of capital requirements for this market?

• Extremely important, strong.
• Show stopper

 

24.  Does the strength of the capital requirement barriers of entry favor smaller or larger companies? Provide examples.

• Capital requirements barriers of entry favor larger companies, because they have more capital and more experience.

 

25.  Are the specific examples in the capital requirement barriers of entry independent of, or vary as a function of, the other barriers of entry influencing factor categories?

• The other barrier of entry influencing factor categories are influenced by capital.

 

26.  What can the firm do to control the specific examples in the capital requirement barriers of entry?

• Firms can cut costs, decrease risk, and get to market early.

 

27.  Do the firms in this market possess resources or skills that would allow them to overcome the specific examples in the capital requirement barriers of entry more cheaply than their competitors?

• No. But choice of location important. (US vs. EU)

 

Force 1d: Switching Costs

 

28.  What are the switching cost barriers of entry in this market, if they even exist? Provide examples.

• Knowledge base for the particular market
• Specific skills
• Labor / Training
• Patents (EADS -> Airbus)

 

29.  How strong is each switching cost barrier of entry?

• Knowledge base – Strong
• Specific Skills – Weak
• Labor – Weak
• Patents - Strong

 

30.  How strong is the overall barrier of entry category of switching costs for this market?

• Strong in the volatile beginning, but once an established market – not so hard.
• Mergers / Acquisition problems.

 

31.  Does the strength of the switching cost barriers of entry favor smaller or larger companies? Provide examples.

• Favors a company that can risk and has more money.

 

32.  Are the specific examples in the switching cost barriers of entry independent of, or vary as a function of, the other BOE influencing factor categories?

• Related to Capital Requirements, Product Differentiation, Access to Distribution Channels, and Government Policy.

 

33.  What can the firm do to control the specific examples in the switching cost barriers of entry?

• Agreements, MOUs, contracts, incentives
• Partnerships and Collaborations.

 

34.  Do the firms in this market possess resources or skills that would allow them to overcome the specific examples in the switching cost barriers of entry more cheaply than their competitors?

• No response.

 

Force 1e: Access to Distribution Channels

 

35.  What are the distribution channels barriers of entry for this industry, if they even exist? Provide examples.

• Marketing [Attracting customers in a non-consumption market.]
• Health Requirements [Medical testing and acceptance prior to flight]
• Schedule Modification (season) [Irregularity of scheduled flights due to weather or technical issues may present schedule planning challenges.]

 

36.  Are the wholesale or retail distribution channels unable to accommodate new clients, or do they have excess capacity?

• [Happy face, indicates that wholesale or retail distribution channels will be able to accommodate new clients?]

 

37.  How strong is each distribution channels barrier of entry?

• Schedule modification – hard [strong]
• Marketing in a new market – [strong]

 

38.  How strong is the overall barrier of entry category of distribution channels for this market?

• [No response.]

 

39.  Does the strength of the distribution channels barriers of entry favor smaller or larger companies? Provide examples.

• All companies are small, so no difference.

 

40.  Are the specific examples in the distribution channels barriers of entry independent of, or vary as a function of, the other BOE influencing factor categories?

• [No response.]

 

41.  What can the firm do to control the specific examples in the distribution channels barriers of entry?

• New market = develop from scratch!

 

42.  Do the firms in this market possess resources or skills that would allow them to overcome the specific examples in the distribution channels barriers of entry more cheaply than their competitors?

• [No response.]

 

Force 1f: Cost Disadvantages Independent of Scale

 

Be careful not to lump cost decreases due to experience in with economies of scale.

 

43.  What are the cost disadvantages barriers of entry, independent of scale, if they even exist? (i.e., Do members of this market have scale-independent, critical advantages that represent cost disadvantages to their competitors?)

• Product Differentiation (Boeing Aircraft…)
• Capital Requirements
• Switching Cost (advantage)
• Access to Distribution channels (vertical integration)
• Cost disadvantage independent of scale (access to raw materials, favored sites and government subsidies)
• Government policy

 

44.  Are there specific examples of proprietary technology among members of this market?

• Engine design
• 2 Plane Idea [dual fuselage design of White Knight 2]

 

45.  Are there specific examples of favorable access to raw materials among members of this market?

• Virgin’s link to airplane industry.

 

46.  Are there specific examples of favorable locations among members of this market?

• Deserts for testing
• Launch in USA or near people with money to be customers.

 

47.  Are there specific examples of government subsidies among members of this market?

• NASA support for commercial space

 

48.  Is this a market where cost declines with experience seem to be significant? Are firms in this market at the proper product development phase where this is a significant factor?

• Fixed costs paid off with more flights
• Having expertise, you develop better, less expensive R&D

 

49.  Are there any examples among members of this market of shared operations or related activities within the same company that can expedite the benefits of increased experience?

• Probably not relevant to this market.

 

50.  How strong is each cost disadvantages barrier of entry?

• Vertically integrated
• Existing relationships
• Access to material

 

51.  How strong is the overall barrier of entry category of cost disadvantages for this market?

• [No response]

 

52.  Does the strength of the cost disadvantages barriers of entry favor smaller or larger companies? Provide examples.

• Larger, with existing relationships.

 

53.  Are the specific examples in the cost disadvantages barriers of entry independent of, or vary as a function of, the other barriers of entry influencing factor categories?

• [No response]

 

54.  What can the firm do to control the specific examples in the cost disadvantages barriers of entry?

• [No response]

 

55.  Do the firms in this market possess resources or skills that would allow them to overcome the specific examples in the cost disadvantages barriers of entry more cheaply than their competitors?

• [No response]

 

56.  Experience is a more ethereal entry barrier than scale, and even though it can be just as effective keeping new firms from entering the market, it too, just as in the case of economies of scale, has limitations. Are any of these limits applicable to this specific market?

• [No response]

 

Force 1g: Government Policy

 

57.  What are the government policy barriers of entry for this market, if they even exist?

• Increase Requirements of Call for Tender (to win government work)
• Regulation
• Access to space
• Launch Facilities
• Safety
• Taxes
• Limits the number of companies who win government work

 

58.  How strong is each government policy barrier of entry?

• Favor companies experienced
• Favors big groups
• Favors companies which have prestige

 

59.  How strong is the overall barrier of entry category of government policy for this market?

• Countries with less rules will attract more entrepreneurs
• On the contrary, escape of entrepreneurs

 

60.  Does the strength of the government policy barriers of entry favor smaller or larger companies? Provide examples.

• Influencing larger companies

 

61.  Are the specific examples in the government policy barriers of entry independent of, or vary as a function of, the other barrier of entry influencing factor categories?

• All barrier of entry influencing factor categories are dependent on each other.

 

62.  What can the firm do to control the specific examples in the government policy barriers of entry?

• Be the first
• Collaboration
• Accumulate knowledge
• Lobby government

 

63.  Do the firms in this market possess resources or skills that would allow them to overcome the specific examples in government policy barriers of entry more cheaply than their competitors?

• Varies by country, but Yes!

 

Competitor Reaction

 

64.  Provide and estimation of competitor reaction strength supported by specific examples for each industry.

• [Not addressed]

 

Summary Remarks

65.  Overall, how would you prioritize the factors influencing the BoEs to this market? Which is the strongest, and which is the weakest?

 

66.  What implications might this ranking of BoEs have on strategic decisions of new entrants and incumbent firms in this market?

• [Not addressed]

Do we want to discuss and make an estimate of the Entry Deterring Price?

• [Not addressed]

 

Force 2: Intensity of Rivalry Among Existing Competitors

 

Intense rivalry is the result of a number of interacting structural factors.

• Numerous or Equally Balanced Competitors.
• Slow Industry Growth.
• High Fixed or Storage Costs (relative to value added)
• Lack of Differentiation or Switching Costs.
• Capacity Augmented in Large Increments.
• Diverse Competitors.
• High Strategic Stakes.
• High Exit Barriers.

 

Exit barriers are economic, strategic, and emotional factors that keep companies competing in businesses even though they may be earning low or even negative returns on investment. Major sources of exit barriers include: Specialized assets, Fixed costs of exit, Strategic interrelationships, Emotional barriers, Government and social restrictions

 

• Mutual Dependency: A market state in which “competitive moves by one firm have noticeable effects on its competitors and thus may incite retaliation or efforts to counter the move.”

 

67.  Can you cite specific examples of mutual dependency between firms in this market?

• Safety – if proven unsafe, market size would shrink considerably.
• Dependence on the same supply chain.

 

68.  If mutual dependency exists in this market, what are its advantageous and disadvantageous effects on the market?

• Safety
• Disadvantages include the market size is dependent on a competitor
• Advantages if safe, market confidence and size will increase
• Supply Chain Dependence
• Disadvantage – Reliance of industry on single supplier
• Advantage – more purchase power to lower cost

 

69.  What is the status of the different interacting structural factors listed above and what does that indicate about the intensity of rivalry in this market?

• Safety – It would indicate a level of collaboration within the industry.

 

70.  What can you say about the number of firms in this market? How do they match up against each other? Do a small number of firms dominate the market? Are there any non-U.S. entities in this market, and how do they stack up? Does this tend toward market stability or instability? Why?

• Emerging market, lots of different ideas, few serious companies both US and non-US.

 

71.  What is the growth rate of this market? What implications does that have on the nature of the competition among firms in this market?

• Large projected growth,
•  maybe not
• Competition will increase as market develops (as new firms enter)

 

72.  In this market, is a high fixed/storage cost with respect to value added (e.g., is this product hard or costly to store?), pressuring a trend to fill capacity by cutting price in times of excess capacity?

• Not a high storage cost. Made to order type of product.

 

73.  Is the product of this market seen as a commodity? What is the resulting level of volatility of this market’s rivalry as a result?

• Not a commodity.
• High volatility.

 

74.  What is the size of the increment that capacity can be added in this market, and what does that mean for competition?

• Not many, because now it’s too expensive and if many companies will be involved, it will destroy the environment.
• As fast as you can get a part of market, it will be better for your company.

 

75.  In terms of strategies, origins, personalities, and relationships with their parent companies, what is the level of diversity of the firms in this market?

• Very similar origins and personalities reducing diversity in the market.

 

76.  Are the strategic stakes in this market high or low? What implications does that have on the nature of the competition among firms in this market?

• Stakes are high
• Need to be the first then the cheapest.

 

77.  What is the state of each of the major sources of exit barriers in this market? What implications does that have on the nature of the competition among firms in this market?

• Only brand loyalty.
• High competition for repeat customers (low exit barriers)

 

78.  What is the relationship between, and the joint level of, entry barriers and exit barriers? Often, they are related. Refer to Fig 1-2 in the text.

• [No Response]

 

79.  What are the time-dependant characteristics of the rivalry in this market due to market maturity, acquisitions, and technological innovation?

• Highly technical so it will be hard for another company to play catch-up.
• This will likely make acquisitions attractive.

 

Force 3: Pressure from Substitute Products

 

Impact of substitutes can be summarized as the industry’s overall elasticity of demand.

 

Substitutes not only limit profits in normal times, but they also reduce the bonanza an industry can reap in boom times.

 

Position vis-à-vis substitute products may well be a matter of collective industry actions.

 

Substitute products that deserve the most attention are those that (1) are subject to trends improving their price-performance tradeoff with the industry’s product, or (2) are produced by industries earning high profits.

 

80.  Are there substitutes (products that can perform the same function) in this market?

• Benefits of the commercial suborbital human transportation market include (a) providing prestige, (b) satisfying curiosity, and (c) being unique. Functions that are accomplished are (a) access to microgravity, (b) seeing Earth from above, and small scale science.
• Substitutes for “access to microgravity” include:
• Russian flights to ISS
• Parabolic flights (aircraft)
• Substitutes for “seeing Earth from above” include:
• Russian flights to ISS
• Simulation (virtual reality)
• Substitutes for “small scale science” include:
• Sounding rockets

 

81.  If substitutes exist, do they require the attention of the market firms?

• Yes, there is a need for differentiation from parabolic flights

 

Force 4: Bargaining Power of Buyers

 

Buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other—all at the expense of industry profitability.

 

A buyer group is powerful if the following circumstances hold true:

• It is concentrated or purchases large volumes relative to seller sales.
• The products it purchases from the industry represent a significant fraction of the buyer’s costs or purchases.
• The products it purchases from the industry are standard or undifferentiated.
• It faces few switching costs.
• It earns low profits.
• Buyers pose a credible threat of backward integration.
• The industry’s product is unimportant to the quality of the buyers’ products or services.
• The buyer has full information.

 

82.  Who are the buyer groups in this market?

• Adventurous people with lots of money.
• 23% of American population has greater than or equal to $100,000 savings.
• A buyer must have at least $100,000, be a risk taker, and be an adrenaline junkey.
• Potential Buyers include:
• Individuals, Pilots, para-gliders, risk takers
• distribution from companies travel
• government, space agencies (including NASA), military training, astronauts
• companies, industries
• life insurance
• exchanging technologies
• research companies in medicine, materials, technologies
• Companies who offer incentives to their employees.

 

83.  Using the list above, what are the detailed characteristics of each buyer group? What are the implications of each characteristic? Provide specific examples where possible.

• Detailed characteristics of Individuals:
• Age
• Health
• Money
• Occupation
• Personality
• Luxury
• Personal
• Companies for Research
• Anyone who is interested in micro-gravity but can’t afford ISS.
• Companies for Seats
• “Crazy” companies
• Rewards
• Xmas party
• Break-even point market influence will dramatically decrease

 

84.  Are the buyer groups powerful?

• Yes. It is purely for the experience – no NEED as such!
• Influential but not powerful, because if one person drops out, the company will still survive. If a company dropped out would this shake investors? Probably.

 

85.  How has/does the buyer groups’ power changed/change with time?

• Flights get cheaper as time moves forward, therefore buyers become less powerful.
• Economy – As market becomes more developed, power and influence reduces.

 

86.  Who are the most and least powerful buyers? Rank the buyers by their level of influence.

• The more flights somebody buys the more powerful they become.
• Individuals have the most influence.
• Research institutes have medium influence.
• Companies have less influence.
• There are no perfect buyers because they can’t have full info.

 

Force 5: Bargaining Power of Suppliers

 

Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods and services.

 

A supplier group is powerful if the following apply:

• It is dominated by a few companies and is more concentrated than the industry it sells to.
• It is not obliged to contend with other substitute products for sale to the industry.
• The industry is not an important customer of the supplier group.
• The suppliers’ product is an important input to the buyer’s business.
• The supplier group’s products are differentiated or it has built up switching costs.
• The supplier group poses a credible threat of forward integration.

 

Labor must be recognized as a supplier as well. The principles in determining the potential power of labor as a supplier are similar to those just discussed. The key additions in assessing the power of labor are its degree of organization, and whether the supply of scarce varieties of labor can expand.

 

87.  Who are the supplier groups in this market?

• Material manufacturers, patented ideas.
• Propulsion, material, COTS parts, labor, machine shop, propulsion systems.

 

88.  Using the list above, what are the detailed characteristics of each supplier group? What are the implications of each characteristic? Provide specific examples where possible.

• Propulsion material-
• Broad Market
• No substitutes – they are generic
• Not important customer
• Suppliers are important

 

89.  What is the impact of labor as a supplier on this market? What is the ability of labor to unionize or expand?

•  Propulsion Material
• High impact of labor on CST market.
• Limited ability to unionize but high ability to expand. 

 

90.  Are the supplier groups powerful?

• Propulsion Material
• Powerful supplier groups

 

91.  How has/does the supplier groups’ power changed/change with time?

• Propulsion Material
• With technical growth some suppliers have grown, while others have found extra competition. 

 

92.  Who are the most and least powerful suppliers? Rank the supplier by their level of influence.

• Propulsion Materials
• A large majority of the procured material comes from a small fraction of the suppliers (Pareto principle). This small majority of suppliers are the most powerful. 

 

Analysis

 

This section will be composed of analysis of the research results of the previous sections in this report.

 

Government as an Industry Competition Force

 

Government at all levels must be recognized as potentially influencing many if not all aspects of industry structure both directly and indirectly.

 

Many times government’s role as a supplier or buyer is determined more by political factors than by economic circumstances,

Government regulations can also set limits on the behavior of firms as suppliers or buyers.

 

Government can also affect the position of an industry with substitutes through regulations, subsidies, or other means.

 

Government can also affect rivalry among competitors by influencing industry growth, the cost structure through regulations, and so on.

 

For purposes of strategic analysis it is usually more illuminating to consider how government affects competition through the five competitive forces than to consider it as a force in and of itself. However, strategy may well involve treating government as an actor to be influenced.

 

93.  How does government affect competition through each of the five competitive forces?

• Regulation to provide license/authorization to companies entry in the market of space tourism scarity.
• Regulation by Civil Aviation Agencies to take care for the passengers and environment
• The government can affect by discovering a new tcechnology that can be used as substitute of the current.
• By ITAR, the US government can affect potential entrants.
• The government can affect the competition by taxes.

 

94.  What is the rank of the five forces by relative strength? Why? How does this ranking affect strategy formulation?

• [No Response]

 

95.  How can firms decrease the level of power of their buyers?

• The government can affect (help) the buyers by doing the marketing of space activities.
• By ITAR, the US government can affect also the suppliers and buyers.

 

96.  How can firms decrease the level of power of their suppliers?

• By ITAR, the US government can affect also the suppliers and buyers.
• The government can affect the suppliers by supporting them or limiting.
• Government can affect the suppliers by controlling the costs of materials, resources.

 

97.  Based on the preceding five sections, how would you characterize this emerging commercial space sector as a description of the strength of the five forces? Remember that the stronger any or all of these forces are, the more competitive the industry will be, and thus the lower the prospects for excess profits.

• [No Response]

 

98.  Looking at the strength five forces from a different perspective, what are the positions of competitive *disadvantage* that companies should avoid? For example, if the entry barrier of Economies of Scale is high, entering this market without large scale operations that can overcome that barrier would be a mistake. Therefore, to be competitive, companies intending to be successful in this market must avoid small scale operations.

• [No Response]

 

Appendix A: Glossary of Terms

 

• Access to Distribution Channels: The new entrant’s need to secure distribution for its product. One of the major factors influencing entry barriers.
• Capital Requirements: The need to invest large financial resources in order to compete creates a barrier to entry, particularly if the capital is required for risky or unrecoverable up-front advertising or research and development (R&D). One of the major factors influencing entry barriers.
• Cost Disadvantages Independent of Scale: Established firms may have cost advantages not replicable by potential entrants no matter what their size and attained economies of scale. Most critical advantages include: Proprietary product technology, Favorable access to raw materials, Favorable locations, Government subsidies, and Learning or experience curve. One of the major factors influencing entry barriers.
• Economies of Scale: Declines in unit costs of a product (or operation or function that goes into producing a product) as the absolute volume per period increases. Economies of scale deter entry by forcing the entrant to come in at large scale and risk strong reaction from existing firms or come in at a small scale and accept a cost disadvantage, both undesirable options. One of the major factors influencing entry barriers.
• Government Policy: Licensing or permitting requirements (i.e., regulation), limits on access to raw materials, or restrictions on operating standards can be a major barrier of entry source. Though typically imposed for societal benefits, these policies can also impose increased capital cost and lead time barriers on market participants.
• Mutual Dependency: A market state in which “competitive moves by one firm have noticeable effects on its competitors and thus may incite retaliation or efforts to counter the move.”
• Product Differentiation: Established firms have brand identification and customer loyalties, which stem from past advertising, customer service, product differences, or simply being first into the industry. Differentiation creates a barrier to entry by forcing entrants to spend heavily to overcome existing customer loyalties. One of the major factors influencing entry barriers.
• Substitutes: Products that can perform the same function as the product of an industry.
• Switching Costs: One-time costs facing the buyer (or seller) of switching from one supplier’s (or buyer’s) product to another’s. One of the major factors influencing entry barriers.