moves?” “What is the meaning of that competitor’s strategic move and how seriously should we take it?” and “What areas should we avoid because the competitor’s response will be emotional or desperate?”

1. How likely is retaliation? 2. How soon will retaliation come? 3. How effective will retaliation potentially be? 4. How tough will retaliation be, where toughness refers to the willingness of the competitor to retaliate strongly even at its own expense? 5. Can retaliation be influenced?

Product Differentiation. Product differentiation means that established firms have brand identification and customer loyalties, which stem from past advertising, customer service, product differences, or simply being first into the industry. Differentiation creates a barrier to entry by forcing entrants to spend heavily to overcome existing

Cost Disadvantages Independent of Scale. Established firms may have cost advantages not replicable by potential entrants no matter what their size and attained economies of scale. The most critical advantages are factors such as the following: • Proprietary product technology: product know-how or design characteristics that are kept proprietary

Achieving differentiation may sometimes preclude gaining a high market share. It often requires a perception of exclusivity, which is incompatible with high market share.

Economies of Scale. Economies of scale refer to declines in unit costs of a product (or operation or function that goes into producing a product) as the absolute volume per period increases.

Switching Costs. A barrier to entry is created by the presence of switching costs, that is, one-time costs facing the buyer of switching from one supplier’s product to another’s.

Competition in an industry continually works to drive down the rate of return on invested capital toward the competitive floor rate of return, or the return that would be earned by the economist’s “perfectly competitive” industry. This competitive floor, or “free market” return, is approximated by the yield on long-term government securities

Achieving a low overall cost position often requires a high relative market share or other advantages, such as favorable access to raw materials.