Free «Tesla Motors: Threat of New Entrants» Essay Sample
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Tesla Motors is one of the companies in America that earns high profits from the sales of its products. It deals with designing, manufacturing, and selling of electric car components and trades them through NASDAQ stock exchange. Much of the attention has been gained through the production of the Tesla Roadster and the electric power train components. Following these gains realized by this company, other new entrants have been a threat to the industry. The new firms wish to enter into the industry, thus increasing the competition and leading to the decline of profits. However, these upcoming industries are faced with the challenge of barriers to entry, which hinders them from entering into the motor industry. In some situations, the barriers to entry are almost insurmountable, meaning that no new firm enters the industry while in other instances, it slows down the process (Wenkart, 2013).
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Barriers to Entry
There are several sources of barriers to entry. Firstly, the economy of scale is the most important factor. The economies arise as in the case of Tesla Motors that produces in large volumes. It gets the benefit of low cost per unit as the fixed cost can be spread over more units produced. Furthermore, more efficient technology employed during manufacturing and designing processes leads to high output, together with better terms commanded from the suppliers. However, economies of scale deter entry since the aspirant is forced to come up with large scale or even accept a low cost, which is a disadvantage to them. Other areas affected include consumer marketing, whereby the entrants ought to put more of their income in these activities in order to attract more customers leading to high profits like those of Tesla Motors (McEachern, 2011).
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Secondly, product differentiation also affects new businesses. Since Tesla Motors is a well-established industry, it is very popular among many customers in the market and the loyalty of these consumers is more common. This promotes great profits due to low costs incurred. With the presence of different products from those of others, they stand out to be the best and end up being a natural choice for the buyers who are attracted by these goods. As a result of this differentiation and high demand, the industry has a chance of raising their sales through lowering the prices. The reduction in price acts as a barrier as the entrants can make high sales only by coming up with other better products, which is a challenge to them (Arnold, 2008).
Thirdly, the aspirants are faced with the challenge of capital requirements for them to enter into the industry. A field such as motor industry requires relatively high investment to cater for operating and setting up costs. For example, manufacturing requires large factories with specialized machines. These machines also need service personnel who need to be recruited and trained. Furthermore, there are additional capital required to cope with changes in technology, parts inventories, and start-up losses, which are only catered for the big companies like Tesla Motors. For other entrants, these capital requirements are a significant barrier as they are unable to make a payment, hindering them from entering the industry (McEachern, 2011).
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Fourthly, customer switching costs act as a barrier to entry. These are the fixed costs faced by the buyers after changing their suppliers. As a result of this shift, the vendor ought to change the product specifications, build up new systems or even retrain employees to apply a new product in order to attract other consumers. This makes it hard for new entrants since the costs are high and may not be in a position to cater for them all, meaning the buyers will be few leading to less profit (Arnold, 2008).
Fifthly, access to distribution channels limits entry. Most of the products produced by Tesla Motors are necessary to be spread in order to reach the customers after production through some channels. In some cases like in developing countries, these channels never exist or cannot be trusted if present to safely store and make the distribution of the goods produced. To overcome this problem, industries set up their own distribution channels, although expensive. It results in a barrier to entry since not all aspirants will own them making it difficult to satisfy the needs of their customers in different locations (McEachern, 2011).
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Next, high-production cost of motors hinders new businesses from venturing in motor manufacturing. In addition, these are other additional costs that are a challenge to new entrants compared to the incumbents who enjoy the benefits. They include government subsidies, advantageous location for being closer to buyers; assets were bought at low prices and preferential access to supplies of materials. This affects the aspirants since the already existing industry may not be willing to share market secrets, thus sustaining the barrier to entry. However, the aspirants can only learn through a cycle of trial, which may lead to losses (Arnold, 2008).
Government policy affects the setting up of new industries. As a barrier, it supports existing firms, making it difficult for new entrants to gain high profits. In addition, local regulations may have biases as controls limit the entrants. Furthermore, the new industries may not be at a position to meet the terms and conditions to be granted permission to run their business and intellectual property right. All these reasons tend to discourage them from engaging in manufacturing and designing of automobile products (McEachern, 2011).
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Lastly, expected retaliation from competitors is considered as a barrier. Tesla Motors put measures to counter the competition, thereby making difficult for a new entrant to access the market. Thus, retaliation becomes more serious due to bias by the government in supporting the existing industry and ability of the established business to control access to the market channels. The entrants find it difficult to enter the market to avoid these challenges (Arnold, 2008).