Question

3. In topic 2 we discussed the threat of new entrants as one of the five competitive forces impacting industry profitability. In particular we discussed an industry characterized as differentiated increasing the barrier to entry for potential new entrants. Please note: I am asking you about an industry-level effect, not a firm-level effect. In other words, I am not asking you about a company with a differentiated business model like Apple or BMW. a. How does an industry characterized as highly differentiated (in other words, the opposite of highly commoditized) serve as a barrier to entry? Besides explaining what the barrier means, conceptually explain how a potential new entrant specifically is going to be at a disadvantage. b. How do you identify/measure this disadvantage for the potential new entrant - give me two viable financial measures. Offer rationale for each measure as to why it is a direct and meaningful way of measuring the disadvantage for the potential new entrant. c. For a potential new entrant (i.e., a client who hired you for consulting advice) who faces this barrier, what is one viable option for it to consider should it still want to enter the industry, be competitive, and not accept below-normal performance? Give this client a game plan.

Answer 1

a. How does an industry characterized as highly differentiated (in other words, the opposite of highly commoditized) serve as a barrier to entry? Besides explaining what the barrier means, conceptually explain how a potential new entrant specifically is going to be at a disadvantage.

An industry is characterized as highly differentiated

• where the products or services are not for general public
• the production or servicing is highly regularized and several round of background check.
• The production is licenced and limited or restricted licencing is required
• The technology involved is sophisticated and required highly regulated and control environment

One such example is solar energy for electricity, each player needs to get licenses for working in this field and they have limited out put and even the prices are in a way pegged and direct commercialization is not allowed.

Even more regulated one is Nuclear energy, where each step has to be as per the regulator and selling of energy is also restricted.

b. How do you identify/measure this disadvantage for the potential new entrant - give me two viable financial measures. Offer rationale for each measure as to why it is a direct and meaningful way of measuring the disadvantage for the potential new entrant.

Two financial measures to identify disadvantage are:

• ROI vs Industry: As this clearly shows the return on investment as compared to the industry ROI, it clearly shows how slow the returns are increasing and how much of gap is present.
• Annual Growth rate: Annual revenue increase over a period of time clearly states the delay in the industry to achieve a sustainable growth and all limiting factors’ impact is shown here.

c. For a potential new entrant (i.e., a client who hired you for consulting advice) who faces this barrier, what is one viable option for it to consider should it still want to enter the industry, be competitive, and not accept below-normal performance? Give this client a game plan.

For any competitor who is entering a barrier ridden industry the advice will be

• Measure each activity and ROI and Growth Vs the Industry should be tracked and try to take initiatives to minimize the gap.
• Never try to achieve growth too fast as barriers are there , having patience is the key and monthly or quarterly progress is checked rather than yearly to change the strategy on the go.
• Be agile and identify bottlenecks every month/quarter and remove that to move swifter and try to have allies in regulated environment and try more collaboration.