It is considered
that in a sector where it is known that the performance of the invested
capital is superior to the cost, the arrival of companies interested
in participating in this sector is quick and frequent as they want
to take advantage of the opportunities that the market has to offer.
This is when we see the arrival of stakeholders. They are groups of
people that effect or are effected by a company's decision. In this
case, we apply them to a sector, and see if they see the results in
an attractive light and are interested in entering the sector. What
happens in a certain sector is that the more companies that develop,
the lower the profits and competition increases.
When this
happens, we can speak about a sector being questionable, as it depends
on the existence of entrance and exit barriers. Therefore, a sector
is questionable when these barriers don't exist and the prices depend
on the sector's competitive level (law of offer and demand) without
influencing the number of companies in the sector. The existance of
entrance barriers brings sunken costs, which are those that a company
should confront, so that they can enter into the sector and invest
in determined shares which they will not be able to recover when they
decide to leave the sector.
That is
why people say that when there aren't sunken costs, the companies
"use" the sector, in the sense that they aren't interested
in its survival or growth, but in the benefits that it can bring at
a determined moment, as once they have received what they want, they
can leave the sector.
In order
to avoid the sectors vulnerability, entrance barriers are created
and they are the following:
- Necessary
Investment
In determined
sectors, the investment needed to enter a sector is so great that
companies can not afford it, no matter how big they are. This is what
happens in the aeroplane sector, in which Boeing and AIRBUS have all
of the control and it is difficult to compete with them. Other sectors
don't have such high entrance costs.
- Economies
of scale
There are
sectors in which small production is not efficient for the company,
therefore they have to produce on a large scale. This happens with
publicity companies, where fixed costs are important to them and in
which variable costs are hardly used. Therefore, a company that wishes
to be in this sector has to decide whether it is entering on a small
production scale, which implies great unitary costs or whether it
is entering on a large production scale, knowing that there are greater
costs and there is more risk involved.
- Absolute
advantage in costs
The fact
of being the first in a sector, linked with other factos like supplying
raw material or learning economies, cause the company which is already
in a sector to have cost advantages, which supposes an important obstacle
for those companies that want to form part of this sector.
- Differentiation
of the product
It is very
difficult for a company that enters into a new sector to compete against
others that are well established. These well established companies
already have a well known brand and faithful clients. This in turn
forces companies entering into the sector to carry out large publicity
investments, a cost that they would have saved if they had entered
the sector previously. If the companies do not have the funds to buy
large publicity campaigns they can compete directly with the other
companies in the sector with regards to price, or act in the market
niche's that have not been considered by other companies.
- Access
to distribution channels
This barrier
is very important, as the final consumer will not have the possibility
to acquire the product if is not sold at a sales point. For a new
company in a sector it is not easy to occupy a place in the distribution
channels, which are used by well known companies. Besides, new companies
don't have the consumer's trust so they can't occupy a priviledged
place at a sales point. An example of this is what happens in supermarkets,
where space is limited to what is offered on the shelves, which are
already occupied by companies well established in the sector. If the
access to these channels is impeded, it will be impossible for these
new companies to be successful.
- Administrative
and legal barriers
These are
the government and high commission taxes and they are connected with
obtaining licenses issued by public authorities, patents, copyrights,
requirements related to the environment, security....Examples of what
we are talking about are taxis and television (licenses), research
jobs (patents),....These barriers, increase everyday especially those
related to quality and the environment. These suppose great costs
for new companies.
- Revenge
A company
that already exists in the sector can take revenge, according to how
they interpret the entace of a new company. The revenge could consist
in agressive publicity campaigns or abrupt price drops, until they
suffocate the new company, whose profit margen is lower because it
is starting. This last measure could ruin the new company. The way
the established companies react will determine the arrival of companies
into the sector.
- Efficient
entrance barriers
When talking
about the efficiency of entrance barriers you have to consider different
opinions. On the one hand, the research carried out by Bain and Mann
found that cost-effectiveness is greater in sectors with higher entrance
barriers than in those with lower entrance barriers. On the other
hand, George Yip doesn't believe that companies that want to enter
in a sector and then decide not to, don't enter because the of the
entrance barriers, as they believed they could overcome these barriers,
as they had the right resources and sufficient cappacities to compete.
Therefore, we can conclude by saying that the effectiveness of the
entrance barriers to disuade companies considering entering depends
on the resources they have.
