Analysis of the extent to which barriers to entry (bte’s) have contributed to profitability in the air compressor industry in kenya

Abstract

Industry attractiveness is the (relative) future profit potential of a market. It is mainly measured by industry growth and average industry profitability. However other attractive industry characteristics like stability of demand, potential for entry and exit by major firms etc may be used. In general, industry attractiveness can be determined by analysing the competitive market forces. Porter (1980) provided a framework that models industry as being influenced by five forces. These forces are threat of new entrants, threat of substitute products, bargaining power of buyers, bargaining power of suppliers and rivalry among existing competitors. The combined effect of these forces determines the industry competition and profitability. However, it is expected that where incumbent firms are doing well and perceived profits exceed the cost of entry or of surmounting mobility barriers, new firms will enter the industry. The objective of this study was to analyse the extent to which entry barriers have contributed to profitability in the air compressor industry in Kenya. Secondly, it sought to establish why the industry in spite of being profitable attracted only five players over a period of 71 years. The research design was a cross sectional survey of the five incumbent firms in the industry based on Porter’s five force industry model. Senior managers of these firms were interviewed using a standard questionnaire. The research findings confirmed that Porter’s five industry forces were at play in the air compressor industry in Kenya and that each force had a varying degree of influence on company profitability. However the threat of new entry was found to be the strongest force and the one that governed the rules of competition in the industry. It was the most critical for strategy formulation. Further, it was concluded that the competitive structure of the industry was unique and clearly attractive from a profit-making stand point. It was also found that competitive rivalry among the incumbents was moderate, high entry barriers existed, competition from substitutes was negligible, and buyers had a low bargaining leverage. On the other hand suppliers had considerable leverage.