1) If you were to start up a smartphone company, what five (5) entry barriers would you
likely have?
Answer:
Economies of Scale - Economies of scale refer to spreading the costs of production over
the number of units produced. The cost of a product per unit declines as the number of
units per period increases. From the new entrants’ point of view, the entry barrier is
increased (and the threat of new entrants is reduced) when incumbents enjoy the benefits
of economies of scale. Economies of scale can provide the incumbents with cost
advantages to compete with new entrants on the price, if necessary. Global companies,
for example, that sell their goods in various countries often achieve economies of scale
because of the high volume of products they produce. Clearly, smartphone companies
already have established manufacturing plants or have outsourced them to produce a
great number of phones. They have learned how to be more efficient and can produce
great volumes. General manufacturing overhead costs such as lighting, heating, or
property taxes in a manufacturing facility can be spread over the costs of the units. The
more units produced, the lower the overhead cost per unit.
Capital Requirements – The smartphone industry has become an oligopoly in Canada.
Only a few companies dominate the industry. In order to enter this industry, it may
require millions of dollars to establish the technology, produce the product, distribute it to
willing sellers, etc. For some industries, such as the airline and mining industries,
the required capital to establish a new firm is significant. Accordingly, the level of
required capital for entering certain industries creates barriers for potential new entrants.
Thus, the threat of new entrants is reduced as the level of required capital increases.
Hence, the capital costs to enter the smartphone industry would be huge.
Switching Costs - 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.
The question is would customers who already have a iPhone, Blackberry, Nokia, or
another type of phone switch to your new phone if it came out on the market. Would your
company’s product be significantly cheaper or innovative compared to the competition’s
product that a customer would be willing to switch to your phone, despite contract
cancellation fees, etc?
Access to Distribution Channels - 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
Test Bank for Karakowsky and Guriel, The Context of Business, 1e
Copyright © 2015 Pearson Canada Inc. 1
, decreases (or the barrier to new entrants increases) as accessibility to distribution
channels decreases.
Cost Disadvantages Independent of Scale - The prior four sources are primarily
associated with economic factors. However, sometimes advantages that some incumbents
hold over potential entrants are independent of economic factors. Such advantages
include governmental policies, legal protection (patents and trademarks), and proprietary
products. Certainly, other smartphone companies would have patents over certain
technologies they would own. Therefore, you would not be able to sell your smartphone
with those technologies unless of course you were granted permission via a license, etc.
These advantages create barriers for potential new entrants, which defer their entries.
2) Making any assumptions required, discuss the coffee industry with regard to Porter’s
Five Forces Model.
Answer:
High Threat Low Threat
1.Threat of new entrants
(new start ups or
diversification of existing
firms)
a) Economies of Scale No manufacturing
(spread production plant (i.e.
costs over number of production costs),
units produced) but corporate head
office costs can be
spread over each
new coffee shop
set up
b) Capital requirements Low capital
(buildings, machinery, requirements:
manufacturing plants, No massive
etc) production of a
product at a
manufacturing
plant; just selling
coffee at coffee
shops;
Coffee shops
likely “rented” (no
building
ownership) since
Test Bank for Karakowsky and Guriel, The Context of Business, 1e
Copyright © 2015 Pearson Canada Inc. 2
likely have?
Answer:
Economies of Scale - Economies of scale refer to spreading the costs of production over
the number of units produced. The cost of a product per unit declines as the number of
units per period increases. From the new entrants’ point of view, the entry barrier is
increased (and the threat of new entrants is reduced) when incumbents enjoy the benefits
of economies of scale. Economies of scale can provide the incumbents with cost
advantages to compete with new entrants on the price, if necessary. Global companies,
for example, that sell their goods in various countries often achieve economies of scale
because of the high volume of products they produce. Clearly, smartphone companies
already have established manufacturing plants or have outsourced them to produce a
great number of phones. They have learned how to be more efficient and can produce
great volumes. General manufacturing overhead costs such as lighting, heating, or
property taxes in a manufacturing facility can be spread over the costs of the units. The
more units produced, the lower the overhead cost per unit.
Capital Requirements – The smartphone industry has become an oligopoly in Canada.
Only a few companies dominate the industry. In order to enter this industry, it may
require millions of dollars to establish the technology, produce the product, distribute it to
willing sellers, etc. For some industries, such as the airline and mining industries,
the required capital to establish a new firm is significant. Accordingly, the level of
required capital for entering certain industries creates barriers for potential new entrants.
Thus, the threat of new entrants is reduced as the level of required capital increases.
Hence, the capital costs to enter the smartphone industry would be huge.
Switching Costs - 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.
The question is would customers who already have a iPhone, Blackberry, Nokia, or
another type of phone switch to your new phone if it came out on the market. Would your
company’s product be significantly cheaper or innovative compared to the competition’s
product that a customer would be willing to switch to your phone, despite contract
cancellation fees, etc?
Access to Distribution Channels - 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
Test Bank for Karakowsky and Guriel, The Context of Business, 1e
Copyright © 2015 Pearson Canada Inc. 1
, decreases (or the barrier to new entrants increases) as accessibility to distribution
channels decreases.
Cost Disadvantages Independent of Scale - The prior four sources are primarily
associated with economic factors. However, sometimes advantages that some incumbents
hold over potential entrants are independent of economic factors. Such advantages
include governmental policies, legal protection (patents and trademarks), and proprietary
products. Certainly, other smartphone companies would have patents over certain
technologies they would own. Therefore, you would not be able to sell your smartphone
with those technologies unless of course you were granted permission via a license, etc.
These advantages create barriers for potential new entrants, which defer their entries.
2) Making any assumptions required, discuss the coffee industry with regard to Porter’s
Five Forces Model.
Answer:
High Threat Low Threat
1.Threat of new entrants
(new start ups or
diversification of existing
firms)
a) Economies of Scale No manufacturing
(spread production plant (i.e.
costs over number of production costs),
units produced) but corporate head
office costs can be
spread over each
new coffee shop
set up
b) Capital requirements Low capital
(buildings, machinery, requirements:
manufacturing plants, No massive
etc) production of a
product at a
manufacturing
plant; just selling
coffee at coffee
shops;
Coffee shops
likely “rented” (no
building
ownership) since
Test Bank for Karakowsky and Guriel, The Context of Business, 1e
Copyright © 2015 Pearson Canada Inc. 2
