Reasons Motivate New Entrant To Enter An Industry Marketing Essay

Reasons Motivate New Entrant To Enter An Industry Marketing Essay

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Many reasons motivate new entrant to enter an industry like gain high return, expand market share. New entrants bring new capacity, innovation and often substantial resource. New entrants compete by price and cost which lead to increase the necessary investment rate to compete in the industry. New entrant threat depends on the level of the entry barriers that present in the industry and the expected reaction from incumbents. If the barriers to enter are low and new entrants expect low reaction from the entrenched competitors, so that make high entry threat with moderated industry profitability (Porter, 2004).

Barriers to entry:  "Entry barriers are advantages that incumbents have relative to new entrant" (Porter)

Economies of Scale

"An industry has economies of scale when a larger firm is able to recognize cost advantages over a smaller firm due to its size. The increased popularity of the internet has caused the economies of scale for the music industry to be moderately low. Independent artists and record labels can now offer their products online at very low cost, and in doing so skip several steps in the traditional value chain. Even though hard-copy CDs still account for the majority of industry sales, the significant shift towards digital downloading in the past several years has eliminate this "economies of scale" advantage. Overall, the moderately low level of economies of scale in the music industry leads to lower revenues and profits" (Porter, 2008)

Many reasons motivate new entrant to enter an industry like gain high return, expand market share. New entrants bring new capacity, innovation and often substantial resource. New entrants compete by price and cost which lead to increase the necessary investment rate to compete in the industry. New entrant threat depends on the level of the entry barriers that present in the industry and the expected reaction from incumbents. If the barriers to enter are low and new entrants expect low reaction from the entrenched competitors, so that make high entry threat with moderated industry profitability (Porter, 2004).

Barriers to entry:  "Entry barriers are advantages that incumbents have relative to new entrant" (Porter)

Economies of Scale

"An industry has economies of scale when a larger firm is able to recognize cost advantages over a smaller firm due to its size. The increased popularity of the internet has caused the economies of scale for the music industry to be moderately low. Independent artists and record labels can now offer their products online at very low cost, and in doing so skip several steps in the traditional value chain. Even though hard-copy CDs still account for the majority of industry sales, the significant shift towards digital downloading in the past several years has eliminate this "economies of scale" advantage. Overall, the moderately low level of economies of scale in the music industry leads to lower revenues and profits" (Porter, 2008)

Thy purchase a large amount of the industry output

Depend on the amount of the industry output that buyers purchase they get more negotiation force to reduce the price.

Undifferentiating Product

While recording contents is offered in various formats overall, so the various recording companies offer low differentiation products. Most of the large recording companies have artists representing all the most popular genres that target all the various consumer preferences. In addition, the retailers have access to all the recording companies for their artists' record. This low product differentiation decreases costs and decreases profits for the recording industry.

Buyers face few switching costs

While recording contents is offered in various formats overall, so the various recording companies offer low

Threat of Backward Integration

Furthermore, the threat of backward integration by buyers is low in the music industry. In most cases, you won't see the traditional retailers, nor the online retailers, enter into the business of recruiting talent and producing recording content. While there are some instances of backward integration, for example, Starbucks starting its' own recording company, these cases make up a very small fraction of the market. This low threat of backward integration works in favor of the industry and increases revenues and profits.

In this new age, buyers have significant power within the recording industry. In the 1990s, the large recording groups were able to control the distribution channel strictly emphasizing brick and mortar retailers. Today, however, suppliers are forced to offer their products in various channels including online. By offering various formats through various channels increases the costs for firms in the recording industry and decreases profits. The recording industry has also been forced to reduce prices for their recording content. With the advent of peer based sharing applications, consumers have become increasing price sensitive with regards to buying recording content. Now, record labels must begin offering much lower prices for their recording content just to stay competitive. Overall, because of the high buyer power, revenues are decreased, costs are increased, and profits are decreased for the recording industry. The diagram above to the right summarizes my analysis on buyer power within the music recording industry.

Threat of substitutes product and service

A substitute is a product or service provided by a firm's rivals that meets approximately the same customer needs in the same ways as the product or service provided by the firm itself. In our analysis of the music and records industry the main product of focus is the Audio Cassette & CD.

The main purpose of a Cassette & CD is to provide consumers with the power to listen to a particular artist or type of recording content whenever they want. Many other products including mp3s, and another digital formats file meet the needs of users in the same way at a lower cost.

Substitutes to physical products like mp3s and other downloadable formats place a ceiling on prices firms in the music industry can charge and on the profits those firms can make. In the extreme, substitutes can ultimately replace an industry's products and services if they are thought to be superior.

"When the threat of substitutes is high, industry profitability suffers. Substitute products or services limit an industry's profit potential by placing a ceiling on prices. If an industry does not distance itself from substitutes through product performance, marketing, or other means, it will suffer in terms of profitability - and often growth potential. Substitutes not only limit profits in normal times, they also reduce the bonanza an industry can reap in good times" (Porter, 2008).The threat of a substitute is high if:

Price/performance of the Substitute

It offers an attractive price-performance trade-off to the industry's product. So the advances in technology create new substitutes that shift price-performance comparisons in one direction or the other. Trends in the availability or performance of complementary producers also shift the threat of substitutes. (Porter, 2008)

Switching Cost

The buyer's cost of switching to the substitute is low, so switching from Cassette or CD to another recording format become easier with the internet and digital content portable devices.

Rivalry among competing firms

Number and Size of Competitors:

Rivalry between the industry players depend in their size and market share.

Industry Growth:

The recording industry's value based on sales (in millions) has been decreasing over the last decade. CDs remain the industry's largest revenue contributor, versus other formats such as digital downloads like mp3s. Sales from digital downloading, however, have been gaining market share since their introduction into the market in 2001. Digital downloads have been able to gain popularity because they are less expensive then CDs and give consumers more flexibility in terms of listening.

Product Differentiation:

There is also low product differentiation across the recording industry. While each recording company owns a selection of artists, the genres that they represent are common throughout the industry. Each recording company usually has a handful of popular artists that represent the different top genres. Given this, consumers are not dependent upon any one record company for a particular type of recording content. Similarly, the format of the recording content that is offered is driven by consumer preferences requiring every record label to offer both CDs and various digital forms. Low product differentiation causes revenues and profits for the industry to decrease.

"Awareness of the five forces can help a company understand the structure of its industry and stake out a position that is more profitable and less vulnerable to attack"

"IN ESSENCE, the job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly, as if it occurred only among today's direct competitors. Yet competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products. The extended rivalry that results from all five forces defines an industry's structure and shapes the nature of competitive interaction within an industry" (Porter).