Forces That Shape CompetitionThe co

Forces That Shape Competition
The configuration of the five forces differs by industry. In the market for commercial air-
craft, fierce rivalry between dominant producers Airbus and Boeing and the bargaining
power of the airlines that place huge orders for aircraft are strong, while the threat of entry, the threat of substitutes, and the power of suppliers are more benign. In the movie theater industry, the proliferation of substitute forms of entertainment and the power of the movie producers and distributors who supply movies, the critical input, are important. The strongest competitive force or forces determine the profitability of an industry and become the most important to strategy formulation. The most salient force, however, is not always obvious.
For example, even though rivalry is often fierce in commodity industries, it may not be the factor limiting profitability. Low returns in the photographic film industry, for instance, are the result of a superior substitute product—as Kodak and Fuji, the world’s leading producers of photographic film, learned with the advent of digital photography. In such a situation, coping with the substitute product becomes the number one strategic priority. Industry structure grows out of a set of economic and technical characteristics that determine the strength of each competitive force.
We will examine these drivers in the pages that follow, taking the perspective of an incumbent,
or a company already present in the industry. The analysis can be readily extended to under-
stand the challenges facing a potential entrant. Threat of entry. New entrants to an indus-
try bring new capacity and a desire to gain market share that puts pressure on prices, costs, and the rate of investment necessary to compete. Particularly when new entrants are diversifying from other markets, they can leverage existing capabilities and cash flows to shake up competition, as Pepsi did when it entered the bottled water industry, Microsoft did when it began to offer internet browsers, and Apple did when it entered the music distribution business. The threat of entry, therefore, puts a cap on the profit potential of an industry. When the threat is high, incumbents must hold down their prices or boost investment to deter new competitors. In specialty coffee retailing, for example, relatively low entry barriers mean that Starbucks must invest aggressively in modernizing stores and menus. The threat of entry in an industry depends on the height of entry barriers that are present and on the reaction entrants can expect from incumbents. If entry barriers are low and new-comers expect little retaliation from the entrenched competitors, the threat of entry is high and industry profitability is moderated. It is the threat of entry, not whether entry actually occurs, that holds down profitability. Barriers to entry. Entry barriers are advantages that incumbents have relative to new entrants. There are seven major sources:
1. Supply-side economies of scale.
These economies arise when firms that produce at larger volumes enjoy lower costs per unit because they can spread fixed costs over more units, employ more efficient technology, or command better terms from suppliers. Supply-side scale economies deter entry by forcing
the aspiring entrant either to come into the industry on a large scale, which requires dis-
lodging entrenched competitors, or to accept a cost disadvantage.Scale economies can be found in virtually every activity in the value chain; which ones are most important varies by industry.