Strategic Financial Management Barriers Term Paper

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[. . .] Visibly, major part of the R & D. is devoted to developing newer products. However essential overruns are there that enable firms to better their production processes and lower per unit cost. This enables the already present firms to become more market aggressive and provides them with a structurally advantageous position against their competitors. Sixthly, barriers to entry can undertake various forms. This will be prevalent if huge volume of specialized machinery is necessary to enter an industry and resale of this machinery is not so easy. They will be there if a firm is able to earn a standing for the quality or consistency of a product. They will also be present if a firm should spent resources to obtain governmental approval to enter. (Geroski; Schwalbach, 1989)

In all these cases, the entry barriers can be construed as sunk costs. In situations when the control of market power proves advantageous, it must draw new entrants into the industry. If the entry is uncomplicated, then the presence of a very few or even only one firm might not yield in economic inefficiency. The risk of potential entry might be sufficiently competitive to keep the industry functioning at or close to the competitive solution. This is an example of a market that is keenly contested. Although, if entry is difficult, but there are substantial barriers to entry, the risk of rivalry is less. Barriers to entry happen when there are sunk costs. A lot of industries have a significantly very high initial costs or the ratio of fixed to variable cost is very high for them. (Schmalensee, 1981) little of these expenses may not be recoverable just in case an entrant decides to quit the market. This makes the entry into the industry very unfeasible. Seventhly trade restrictions like tariffs and quotas also are included within the purview of barriers to the entry of global rivalry in protected domestic markets. Eighthly, at times a business venture is par excellence i.e. too good to be emulated and hence it enjoys an absolute monopoly status without fear of any competition. Example can be given of the company IBM which in 1960 was the topnotch mainframe manufacturing company and a very few could compete with them. (Demsetz, 1982)

Market Share is a vital barrier to entry. Maintaining market share is the crux to survival. Control of a huge chunk of the emerging market is one of the most significant competitive benefits investors identify with. But, market share does not necessarily turn into sustainability. Companies with huge market share have experienced their market share dwindle with the entry of competitors with simpler, better-managed, or offering simpler solutions to the needs of the customers. The ability to capture and also to retain market share is nearly as significant as having it. Strategically positioned associates, pioneering solutions, and a plan that is executable with ease contribute to the totality of the gain in market share. (Gilbert; Vives, 1986)

Customer service, launching of new products and its enhancements, efficient and concurrent customer feedback, a through competitive analysis and the capability to look into the mounting segmentation of the customer preferences will assist in maintaining customer loyalty. These barriers to entry and the impact of these barriers might be dependent on the extent of market power that a business has. This market power is dependent on the extent to which they can impact the market as regards to controlling supply, demand or price. In cases where barriers are present, prices might be steeper than under more competitive situations, preference may be limited and firms within the industry might be raking in super profits -- far more than normal profits. (Stewart, 2001)

Entry can happen in a number of ways. An external takeover outside the industry, the broadening of the product range from a firm outside the realm of a particular market but with a shape of improved technology that outperform existing firms; A shift of brand name from one segment of the economy to another for instance the diversification program practiced by EasyGroup and Virgin lately; augmenting rivalry from abroad-maybe enthused by the rise and fall of the exchange rates of the development of a competitive advantage by foreign businesses; Developing markets -when demand is rising market prices are anticipated to go up and through the functioning of the price mechanism, increased prices offer increased potential profits for new enterprises although their initial production costs are greater than the serving firms; Existing firms might be happy to control the surge of new firms arriving into a market rather than employing strategies devised to prevent the entry of any new firm. (Von, 1980)

Barriers might originate from various reasons. The objective of barriers to entry analysis can be, inter alia, an endeavor to evaluate enterprise market condition. This type of study is done for instance by antitrust offices. Either legal, regulatory or other distinct political barriers to entry are traditionally the most familiar fountainhead of long-standing monopolistic or cartelized conditions in the market arena, either by way of unconcealed contribution of monopoly to enterprises enjoying political favors or by way of ratifying laws or ordinances having identical impact indirectly by imposing such steep costs or holdups for becoming eligible for licensure, consent to import across geographical barriers, or further necessary legal permissions to offload in the marketplace that new competition is in fact not paid any heed without explicitly barred. (Demsetz, 1982)

The continuation of patent protection that is legally enforceable might offer the present organization a huge price or quality advantage over other potential rivals- at least till new and improved products or manufacturing technologies have not been discovered or got hold of by prospective new competitors. Still in the absence of political favoritism, a reputed firm or firms in the industry might also benefit from huge starting expenditure advantages compared to new entrants because of the necessity of very huge initial outlays in severe capital intensive industries wherein the current technology makes significant economies of scale for the firm who have since allocated those outlays in the earlier years. Spending billions of dollars readily to foray in a competition where certainty of success in the long-term is absent might entail such threat that a little more than average profits in the industry will not be sufficient to usher in newer entrants, so if the monopolist is intelligent not to hike prices inordinately high beyond marginal costs he might circumvent unhealthy competition for several years. (Geroski; Schwalbach, 1989)

Indeed, in case of the hazard of possible competition triggers the monopolist to restrain his attitude in this manner, the unpleasant well-being effects people look forward from monopoly might be comparatively trifle in this procedure. Often it is recommended that widespread expenditure in product differentiation, costly advertisement over the years, and the consequential fostering of brand loyalty among the customers can raise strong entry barriers, though ostensibly brand-loyal customers frequently display an astonishing eagerness to change rapidly to novel brands if they obtain comprehensible proof of enhanced quality or a significant cost differential in the process. (Stewart, 2001)

The multiplicity of probable barriers to entry results in their value as a problem or economic factor influencing the functioning of the enterprise. Further, entry barriers impinge on the functioning of both enterprises already carrying out business in the market, that wish to guard their market status, as also the firms intending to penetrate certain markets, while barriers might render the entry much complicated might result in holdup or still make the entry improbable. It is difficult to overstate the significance of barriers to entry in comprehending the extent to which a market may probably be aggressive. If entry barriers are low, even a real monopoly player would not be able to trouble its consumers by hiking prices and/or providing deficient services. The remedial effects of low barriers to entry can even happen although if entry does not happen at all. (Gilbert; Vives, 1986)

The severe menace of entry is frequently sufficient to compel the prevailing firm to pretend as if much rivalry was looming in the industry. Barrier to entry presently changes into a non-level playing field - home advantage, if you prefer. The critically distressing fact for several companies is that the tradition of obsolete ideas imbibed in person's brain and work methodologies, as also in computer software infers that a disadvantage to the recognized players whereas the advantage is enjoyed by the new entrants. Virgin Insurance and Direct Line are major competitors, specifically as they are not saddled by the historical baggage of other insurance companies. This advantage could be true as well as apparent -hence there might be a brand advantage for a new entrant who has been covered well by the media. (Demsetz, 1982)

Broker-dealers of U.S.A often experience difficulties to go into or work efficiently in foreign markets due to inequitable, retaliatory, and costly barriers. Though they gain access into some… [END OF PREVIEW]

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