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CHAPTER 3 • THE EXTERNAL ASSESSMENT 77

raw materials, possession of patents, undesirable locations, counterattack by entrenched
firms, and potential saturation of the market.
Despite numerous barriers to entry, new firms sometimes enter industries with
higher-quality products, lower prices, and substantial marketing resources. The strate-
gist’s job, therefore, is to identify potential new firms entering the market, to monitor the
new rival firms’ strategies, to counterattack as needed, and to capitalize on existing
strengths and opportunities. When the threat of new firms entering the market is strong,
incumbent firms generally fortify their positions and take actions to deter new entrants,
such as lowering prices, extending warranties, adding features, or offering financing
specials.

Potential Development of Substitute Products
In many industries, firms are in close competition with producers of substitute products in
other industries. Examples are plastic container producers competing with glass, paperboard,
and aluminum can producers, and acetaminophen manufacturers competing with other man-
ufacturers of pain and headache remedies. The presence of substitute products puts a ceiling
on the price that can be charged before consumers will switch to the substitute product. Price
ceilings equate to profit ceilings and more intense competition among rivals. Producers of
eyeglasses and contact lenses, for example, face increasing competitive pressures from laser
eye surgery. Producers of sugar face similar pressures from artificial sweeteners. Newspapers
and magazines face substitute-product competitive pressures from the Internet and 24-hour
cable television. The magnitude of competitive pressure derived from development of substi-
tute products is generally evidenced by rivals’ plans for expanding production capacity, as
well as by their sales and profit growth numbers.
Competitive pressures arising from substitute products increase as the relative price
of substitute products declines and as consumers’ switching costs decrease. The compet-
itive strength of substitute products is best measured by the inroads into the market share
those products obtain, as well as those firms’ plans for increased capacity and market
penetration.

Bargaining Power of Suppliers
The bargaining power of suppliers affects the intensity of competition in an industry,
especially when there is a large number of suppliers, when there are only a few good
substitute raw materials, or when the cost of switching raw materials is especially costly.
It is often in the best interest of both suppliers and producers to assist each other with
reasonable prices, improved quality, development of new services, just-in-time deliveries,
and reduced inventory costs, thus enhancing long-term profitability for all concerned.
Firms may pursue a backward integration strategy to gain control or ownership of
suppliers. This strategy is especially effective when suppliers are unreliable, too costly, or
not capable of meeting a firm’s needs on a consistent basis. Firms generally can negotiate
more favorable terms with suppliers when backward integration is a commonly used strat-
egy among rival firms in an industry.
However, in many industries it is more economical to use outside suppliers of compo-
nent parts than to self-manufacture the items. This is true, for example, in the outdoor power
equipment industry where producers of lawn mowers, rotary tillers, leaf blowers, and edgers
such as Murray generally obtain their small engines from outside manufacturers such as
Briggs & Stratton who specialize in such engines and have huge economies of scale.
In more and more industries, sellers are forging strategic partnerships with select
suppliers in efforts to (1) reduce inventory and logistics costs (e.g., through just-in-time
deliveries); (2) speed the availability of next-generation components; (3) enhance the
quality of the parts and components being supplied and reduce defect rates; and (4)
squeeze out important cost savings for both themselves and their suppliers. 13

Bargaining Power of Consumers
When customers are concentrated or large or buy in volume, their bargaining power repre-
sents a major force affecting the intensity of competition in an industry. Rival firms may