Taken together, these steps are the key to forecasting a company's earning power. The following is a Five Forces analysis of The Coca-Cola Company in relationship to its Coca-Cola brand. Economies of scale act as barrier to entry by requiring the entrant to come on large scale, risking strong reaction from existing competitors, or alternatively to come in on a small scale accepting a cost disadvantage. There are several types of entry barriers: Economies of scale. The threat of new entrants is a function of both barriers to entry and the reaction from existing competitors. The second is an assessment of the company's own strategy-of how well it has positioned itself to prosper in this environment. The five forces are (1) Threat of New Entrants, (2) Threat of Substitute Products or Services, (3) Bargaining Power of Buyers, (4) Bargaining Power of Suppliers, (5) Competitive Rivalry Among Existing Firms. A major force shaping competition within an industry is the threat of new entrants. High entry and low exit barriers makes for an attractive industry. The first step in structural analysis is an assessment of the competitive environment in which the company operates-the basic competitive forces and the strength of each in shaping industry structure. The threat of new entrants can be lowered or even blocked by the largest companies. Alternatively, it can take an offensive approach by developing strategies designed to influence the balance of existing forces or to exploit a change in the competitive balance before rivals recognize it.
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Gaining planning authorisation from local government takes a considerable amount of time and resources to establish new supermarkets and this is therefore a considerable barrier to new entrants. A company may take a defensive posture, positioning itself so that its capabilities provide the best defense against the existing array of competitive forces. Therefore, new entrants have to produce something at an exceptionally low price and/or high quality to establish their market value. The goal of competitive strategy for a company is to find a position in its industry where these competitive forces will do it the most good or the least harm. It's relatively easy to set up this kind of business, but there are a limited number of people who are interested in using a dog-walking service.
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These forces range from intense in industries like tires, paper and steel, where no firm earns spectacular returns, to mild in industries such as oil field equipment and services, cosmetics and toiletries, where high returns are common. An example of an industry with a high threat of entrants is a dog-walking business. The underlying economic and technological characteristics of the industry determine the strength of the five basic competitive forces-threat of new entrants, bargaining power of buyers, rivalry between existing competitors, threat of substitute products and bargaining power of suppliers. Intensity of competition is not a matter of luck.
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HIGH THREAT OF NEW ENTRANTS EXAMPLE FREE
The intensity of competition in an industry determines the degree to which investment inflows drive returns to the free market level, hence the ability of firms in the industry to sustain above average returns.