Walmart Five Forces Analysis

1. Threat of Entry: The ease at which new entrants can enter the market.

a. New entrants: firms that have either recently started operating in an industry or that threaten to begin operations in an industry soon.

i. Why would new entrants be interested in entering the market?

1. They are motivated to enter into the industry by the superior profits that Wal-Mart is earning.

Q: “Is there a high threat of entry in Wal-Mart’s discount retailer industry?”

b. Wal-Mart’s threat of entry: Very Low

i. New entrants lack the financing and resources to enter the market and be competitive.

ii. The cost of entry into Wal-Mart’s industry is greater than the potential profits the new entrants could obtain by entering.

1. New entrants Barriers to Entry:

a. 1) Economies of Scale: When a firm’s costs fall as a function of its volume of production.

i. The three things potential entrants can attempt to enter the industry:

1. Expand the total size of the market. (not likely)

2. Develop new production technology. (not likely)

3. Make their products seem very special to their customers, enabling them to charge higher prices to offset higher production costs associated with a smaller-than optimal plant. (not likely)

a. ALL THREE OF THESE OPTIONS ARE VERY COSTLY.

ii. If the cost of these “barrier-busting” activities is greater than the return from entry, entry will not occur. (pg 43)

2. Product Differentiation: incumbent firms possess brand identification and customer loyalty that potential entrants do not.

a. New entrants will not be likely to gain the customer loyalty and brand identification Wal-Mart...