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CS-161 Porters Five Forces - Part 01 Threat of New Entrants v05

CS-161 Porters Five Forces - Part 01 Threat of New Entrants
Case Study (CS-161) - Porter's Five Forces - Part 01 - Threat of New EntrantsProfitable industries that yield high returns will attract new market entrants -decreasing the profitability of the incumbents. If there is no cost to entry thenmany new entrants will lead to perfect competition and zero profitability.Barriers to entry, including large capital requirements and economies of scale,discourage new competitors. Background: Barriers to entry can come from patents, regulations, productdifferentiation, brand equity, and network effects. But the strategic decisions of theincumbents can also raise barriers to entry.In the 1970s, Kmart and other "big box" retailers adopted new automateddistribution and procurement controls with large fixed costs. These strategiesreduced costs and prices, but had a modest impact on profitability. However, thesehigh fixed costs raised barriers which prevented easy entry by new competitors. Shopping Baskets vary not onlyin Size and Price, but also in theCost to the retailer and theConsumer Surplus valueprovided to the customer. The shopping Experience variesby customer. Some have apositive experience, but mosthave a negative experience (afteraccounting for time and travel). Stage 1: Predict early Kmartresults assuming they enjoylocal monopolies in thisemerging market. Stage 2: If Kmart doesn't buildbarriers to entry then newcompetitors can quickly buildmarket share. Stage 3: Kmart can scare off newentrants by elevating the fixedcost to compete. But immediateimpact to profit can be modest. Stage 4: Now if a new entrantwere to compete they wouldstruggle to survive while Kmartremains large and profitable. By raising the fixed cost tocompete, Kmart did little toincrease their profitability. Butthey reduced the risk of acompetitor entering the market.Cost, Price, andBasket ValueCustomerBasket ValueKmartExperienceNew EntrantExperiencePredict Quantity,Revenue and ProfitPredict Result ofEarly New EntrantKmart InvestsBut No New EntrantPredict Results ofLate Entrant vsNew KmartCompare Stage1, 2, 3, and 4 Table Creator CustomerDistributions CustomerDistributions CustomerDistributions Stage 1: Kmartpre-1970's Stage 2: What-IfNew Entrant Stage 3: Kmart InvestmentBut No Entrant Stage 4: New Kmartvs New Entrant Concatenate Case Study (CS-161) - Porter's Five Forces - Part 01 - Threat of New EntrantsProfitable industries that yield high returns will attract new market entrants -decreasing the profitability of the incumbents. If there is no cost to entry thenmany new entrants will lead to perfect competition and zero profitability.Barriers to entry, including large capital requirements and economies of scale,discourage new competitors. Background: Barriers to entry can come from patents, regulations, productdifferentiation, brand equity, and network effects. But the strategic decisions of theincumbents can also raise barriers to entry.In the 1970s, Kmart and other "big box" retailers adopted new automateddistribution and procurement controls with large fixed costs. These strategiesreduced costs and prices, but had a modest impact on profitability. However, thesehigh fixed costs raised barriers which prevented easy entry by new competitors. Shopping Baskets vary not onlyin Size and Price, but also in theCost to the retailer and theConsumer Surplus valueprovided to the customer. The shopping Experience variesby customer. Some have apositive experience, but mosthave a negative experience (afteraccounting for time and travel). Stage 1: Predict early Kmartresults assuming they enjoylocal monopolies in thisemerging market. Stage 2: If Kmart doesn't buildbarriers to entry then newcompetitors can quickly buildmarket share. Stage 3: Kmart can scare off newentrants by elevating the fixedcost to compete. But immediateimpact to profit can be modest. Stage 4: Now if a new entrantwere to compete they wouldstruggle to survive while Kmartremains large and profitable. By raising the fixed cost tocompete, Kmart did little toincrease their profitability. Butthey reduced the risk of acompetitor entering the market.Cost, Price, andBasket ValueCustomerBasket ValueKmartExperienceNew EntrantExperiencePredict Quantity,Revenue and ProfitPredict Result ofEarly New EntrantKmart InvestsBut No New EntrantPredict Results ofLate Entrant vsNew KmartCompare Stage1, 2, 3, and 4Table Creator CustomerDistributions CustomerDistributions CustomerDistributions Stage 1: Kmartpre-1970's Stage 2: What-IfNew Entrant Stage 3: Kmart InvestmentBut No Entrant Stage 4: New Kmartvs New Entrant Concatenate

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Created by: Berlin
Created at: 2019-12-03
On NodePit since: 2021-02-05
Last update: 2024-11-21
Created with KNIME version: v4.3.0
Tags: Market Simulation

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