Switching costs: refer to the costs (monetary or psychological) associated with changing from one supplier to another from the buyer’s perspective. When the switching costs are minimal, customers can easily switch buying products from one firm to another. This creates an opportunity for potential new entrants because they can easily acquire customers from incumbents. Thus, the threat of new entrants increases (or the barrier to new entrants decreases) as the switching costs decrease. Accessibility to distribution channels: can be an entry barrier for potential new entrants. In the situation where incumbents control most of the distribution channels, potential entrants would find it difficult to distribute their products or services, which in turn defers new entry. Accordingly, the threat of new entrants decreases (or the barrier to new entrants increases) as accessibility to distribution channels decreases. Cost Disadvantages Independent of Scale: include governmental policies, legal protection (patents and trademarks), and proprietary products. These advantages create barriers for potential new entrants, which defer their entries. Threat of Suppliers (The Bargaining Power of Suppliers): Is the threat of suppliers high or low? Suppliers can exert bargaining power over companies by demanding better prices or threatening to reduce the quality of purchased goods or services. Therefore, the power suppliers hold directly impacts industry profitability as well as the company’s performance. There are two major factors contributing to suppliers’ power in relation to companies in an industry. The first one is how critical the resources are to the incumbents that the supplier holds. Quite often, when the raw materials suppliers provide are critical to incumbents in an industry, the suppliers are in a good position to demand better prices. The second factor is the number of suppliers available relative to the number of incumbents in an industry. Specifically, when the number of suppliers relative to the number of companies is low, the incumbents compete against each other for the relatively small number of suppliers. Threat of buyers (The Bargaining Power of Suppliers): The buyer (or the customer) certainly cannot be ignored. Depending upon the industry, the customer c an have enormous power. Is the power of buyers high or low? Let’s consider the following variables:
Switching costs - When buyers can easily switch from one seller to another, the buyer has considerable power. Clearly, if you want to buy milk or bread, there are lots of places to buy these items: grocery stores, pharmacies that carry food, departments stores (such as Walmart and Target), convenience stores and so on. On the other hand, if you have a cell phone contract that has locked you in for two years, it may not be so easy for you to switch.
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- Summer '17
- Prof Farshad Salman