Strategic Financial Management Term Paper

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Strategic Financial Management

Barriers to entry are situations that make it difficult for rivals to penetrate in market. These are the reasons, which inhibit the entry of business to an industry. Theoretically, if an industry is showing a rising trend of profits, it indicates that demand for it products are well and the goods can be sold at a cost generating profits. Thus there will be an inducement for firms to enter this industry to have share of these profits. With the arrival of new firms in the industry, supply increases resulting in a fall of prices. Hence, competitive environment has been created with demand meeting the requirement and prices falling. Barriers to entry are the main reason for market control and the resulting inefficiencies that creates. Generally, monopoly, oligopoly, monopsony, and oligopsony are dependent on the market control to varied barriers to entry. In contrast, perfect competition, monopolistic competition, and monopsonistic competition have fewer barriers to entry resulting in little or absolutely no market control. (Geroski; Schwalbach, 1989)

Firms wish to gain increased profits. Companies that become triumphant in competition can find, although, that the increased profits earned by them eat away as new companies enter the fray. With the entry of new forms, competition intensifies and profits decline. The situation becomes deplorable for the firms who were the market leaders in the yesteryears only finding themselves edged out by the one or more of the new firms penetrating the industry with talented people. Obviously, firms that have enjoyed a spate of profits within an industry would see to it that new firms are prevented from entering the industry. To put it differently, they would prefer erecting entry barriers for their industry. If they are capable of constructing barriers to entry in a successful manner, firms within the industry can continue to rake in increased profits. Then again, if firms are fortunate to discover themselves with barriers to entry that were unwittingly made they can also reap good profits for an extended period. (Von, 1980)

Some industries witness unabated competition. Winners become triumphant and edge out loosing firms. But again new firms seem to replace the existing firms and the competition persists. Arrival of a new competitor has the potential to drive out an existing and profit making industry that was a market leader several years ago. Other industries are able to get some respite from the perennial competition. Yet some industries discover that they are happy in substantially lessening or, even, removing competition. Every entrepreneur's dream remains to be in an industry having fewer degree of competition. Why some industries are confronted with endless rivalry? Why do others experience a medium level of competition? The crux remains in the presence or absence of barriers to entry. (Gilbert; Vives, 1986)

Barriers to entry are elements that impede the entry of firms in an industry. This means, Barriers to entry trims down or disallows the entry of new businesses in an industry. At times Barriers to entry can nearly be undefeatable: an industry totally is blocked from entry by new firms. At different periods, Barriers to entry can make the movement of new firms a bit sluggish: new firms emerge but relatively slowly. On the other hand, very low Barriers to entry however, indicate that new firms can enter the industry in a rapid manner. A high level of Barrier to entry implies new competitors might not appear in the industry and the competition is usually restricted among the firms already inside the industry. This has a very vital significance. (Demsetz, 1982)

Competition results in winners and losers. When the losers have left the industry, a small number of old firms remain. This makes the existing firms to make higher profits. But, if the barriers to entry keep the new competitors at bay, these increased profits might remain. Barriers to entry enable in creating industries earning higher profits within an economy. But other industries that are unable to capitalize from the significant barriers to entry languish as low-profit industries. (Bain, 1956) The real detrimental barriers are legal restrictions, which avert firms from penetrating markets and competing. For example regional governments can check entry into local landline telephone service, and they can thwart competition in cable TV and waste disposal by offering licenses to selected firms and putting off others. The federal government legally debars all entry into important air carrier service markets from the year 1938 to 1978 and even to this day excludes private organizations from handling first class mail delivery. There is a consensus among the Economists that this regulatory segregation holds back trade and impairs consumers. (Stewart, 2001)

Firms that suggest their enthusiasm to enter markets is sure that their costs are lesser compared to the existing suppliers or that they give products that are better than those available otherwise. If their expectations are proved wrong, conducting business on the part of new suppliers will be unprofitable and they will rapidly wean away without consumer welfare remaining unaffected. But if they are proved correct, the new supply will result in mutually beneficial exchanges that will improve overall economic welfare. Evidently legal barriers to entry constantly circumvent the competitive process and restrict consumers with limited choices or less welfare. Legal barriers shield inefficiencies and the profit margins of existing suppliers -which is possibly the reasons for their continuation primarily. (Geroski; Schwalbach, 1989)

Barriers to entry is also an expression used in the subject of economics and particularly in theory of competition to attribute to the hurdles placed before a market participant who desires to enter a chosen field. Barriers of entry might indicate either to an individual who is prevented from joining some profession or trade, or to a firm or a country as a whole that is even barred from becoming a member of a trade block. In this first group, which is individuals experiencing barriers to entry in the job market, instances abound like educational qualification or quota restrictions limiting the total number of people who can be enter the legal profession for example and educational and experimental criteria for people wish to be neurosurgeons. Even as both sets of barriers to entry might and also assure that people joining these disciplines have the requisite aptitude, the barriers to entry also trim down competition and possesses the effect of commanding the price of their skills as premium. (Bain, 1956)

This means just about anybody entering these fields pulls down salary level. Under the second category i.e. firms experiencing barriers to entry, instances include air transport systems that render it difficult to get landing permission at some airports, and massive investment needs for new antibiotics that make it difficult for new firms to compete against the big drug companies. Firms which have gained foothold within an industry can afford to make it troublesome for new competitors to do good business e.g. By resorting to heavy ad spends which the new brands would find it increasingly difficult to maintain. Too conclude countries can face barriers to entry for example as seen by the extended delays that several countries have experienced in their applications to join the European Community. (Gilbert; Vives, 1986)

Barriers can conveniently be classified into three categories: those created by nature and are outside the realm of government decisions and industry members, those formed by governments-like caps on foreign ownership; matters formed by firms in the industry - like steps taken to prevent entry of rivals by spells of anti-competitive behavior. Barriers to entry might take several structures. This might be technical barriers, legal barriers or barriers due to powerful branding of the product. Legal barriers happen when Govt. At the federal, state and regional level occasionally gives to individual firms the special rights to offer some goods or services to the buyers. For example, the U.S. Postal Service enjoys a monopoly status on the regularly programmed daily delivery and pick up of mail. The food given at concession rates in a municipal stadium is a monopoly arrangement put in place by a local government. And local governments frequently award monopolies to cable supply companies. (Von, 1980)

Instances of barriers for entering comprises include: Firstly, offering the enterprise with legal protection support to produce a product that enjoy patent protection for several years. Inventors are awarded patents by governments. The patents thus awarded give the inventor the sole rights to regulate the use of the invention. For the inventor the incentive for the invention is the patent granted by the government. Secondly firms might implement predatory pricing policies by offering sufficiently decreasing the prices to a point forcing new entrants to suffer losses if they offer the same prices. Thirdly lower cost, maybe in the business for pretty long; it enables the monopolists to slash prices and win price wars. Fourthly garnering customer loyalty by launching branded products can render favorable entry in the market by new firms very costly. This is specifically significant in products like cosmetics, confectionery and the motorcar industry. (Stewart, 2001)


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