The threat of new entrants

Porter (1999: 37) argues that the risk of new entrants that the competitors face depends on the efficiency in using resources in order to generate economic rents. This is connected with the entry barriers, which new entrants face in the industry and with the expected reaction by already established firms (Porter, 1999: 37; Schindler, 2015: 168). Thompson et al. (2005: 55) argue that the bigger the pool of entry candidates, the stronger is the competitive pressure in an industry.

Porter (1999; 37) argues that new entrants lead to additional capacities, which can lead to price decreases or an increase of the costs of established competitors. The result is in consequence a drop of the profitability (Hungenberg, 2011: 103).

Schindler (2015: 168) argues that “If the price level on the market for homogeneous products is on break-even or below, the possibility to earn

84 This also implies that the suppliers of homogeneous products can (but not necessarily need to) use homogeneous components from sub-suppliers if these components fulfill the supplier´s requirements on such components (in terms of quality, lifetime, performance, etc.).

85 Cf. Subchapter 8.6.4 and §98 (1); (2) GWB regarding procurement principles.

economic rents is not given and the motivation to enter the market is low”. That means, the smaller the threat of unestablished firms who want to enter the market, the more attractive is the respective industry for already established companies (Hungenberg, 2011: 103) and the sooner it is worth to prevent the entry of competitors by appropriate measures. If the market behavior of already established manufacturers of homogeneous products is based on co-existence in positions where they share the market, then it opens the option for growth or to maximize the rents of the established firms, and a change of the situation focuses on the efficient implementation of resources (Schindler, 2015: 168-169). New entrants provoke a decision by the already established firms in how to deal with the situation. Therefore, a possible decision by the established firms might be to accept the entry of the non-established firm, if they assess, e.g. unlike the non- established firm, that it is not, or only partially able to overcome the entry barriers, or only to do so with obvious competitive disadvantages (e.g. related to price, technology, etc.).

The established firms could associate the acceptance of the market entry of unestablished firms with a certain calculus, or an expectation of failure (e.g. lack of information, technological disadvantage, missing or non-optimal access to customers, etc.). This situation might be applied by the established firms as a deterrent example for all other unestablished firms and to strengthen the competitive position of the established strategic group. Likewise, the established firms may also decide to exclude the new competitor, or to start a price war as a possible defense strategy. With the exclusion of the new competitor from the beginning the entry barriers must be high enough, so that unesteablished firms have quasi no option to enter the market or are unable to utilize any chance they may have (e.g. from an economic and / or technical perspective). For example, this could be the case, if the capital needs (Thompson et al., 2005: 57) or the necessary investments for the entry would be so high that they exceed the expected return and the achievable rents would be below expectations. High amounts of industry- specific investments, like in advertising, sales promotion, R&D or infrastructure limit the number of possible unestablished firms and increase their risk (Hungenberg, 2011: 103-104). Furthermore, established firms may have built such

a competitive position within the market – e.g. by setting an industry standard⁸⁶ - which would leave no or only a small space for the penetration of a not yet established firm. If a non-established firm should use the space for the penetration then the established firms could use their market postion by cost advantages to force the unestablished firm to reach break-even earlier than the established firms.⁸⁷ Cost advantages could be generated through early access to information, cumulated intra-organizational and cooperation-based experience with the customer, an organizational structure customized to the industry´s needs, industry-specific knowledge, and economies of scale (Hungenberg, 2011:

103).⁸⁸ The unestablished firm will usually have higher expenses and therefore higher costs in order to establish itself in an branch of industry, compared to those firms that are already established. The lower level of prominence of an unestablished firm ensures that it needs to enter the market on a smaller scale than the established firms, and is forced to break up existing connections between established firms and customers at great expense (Hungenberg, 2011: 103). For example, the cost of storage could increase if the unestablished firm perceives conditions in the target market, to which it was not previously exposed. For example, there would be possible investments in storage capacities in order to realize short delivery times (Porter, 2000: 617) or the establishment and financing of a consignment warehouse or the provision of an efficient service organization in order to exceed necessary warranties. Also the conversion costs of a customer and the compensation of the risk to fail he faces with an unestablished firm as supplier for a system must be considered and cannot be ignored. It is anticipated that the customer will compensate the risk by price reductions, resulting in lower profitability or a less attractive ratio of costs and revenues for an unestablished

86 Grant (1991: 118) states: “An industry standard (which raises costs of entry), or a cartel, is a resource which is owned collectively by the industry members.” Grant (1991: 134, fn. 13) continues additionally “(…) such jointly owned resources are “public goods” – their benefits can be extended to additional firms as negligible marginal cost.”

87 Cf. Subchapter 3.3.2.

88 Cf. Bain (1956: 16) and Subchapter 3.3.2 concerning entry barriers and the effects of economies of scale.

firm, which in consequence reduces the attractiveness of its market entry.

Therefore, a price competition between established and unestablished firms is a significant risk for the unestablished firm and can lead to failure of the entry into the branch of industry or make this impossible from the beginning.

A retaliatory measure to an unestablished firm entering the branch of industry might be that established firms influence its ability to function via a third party, such as the state, or by influencing the application of design standards and regulations. This could be done through targeted support of those political movements that would increase the mobility barriers. That means according to Porter (2000: 619): „Jede staatliche Politik fördern, die Barrieren erhöht.“.⁸⁹

This could be done, for example, by supporting the intensification and expansion of safety and environmental protection measures, the suggestion of depth product testing, the expression of doubts concerning the products and methods of the competitor (Porter, 2000: 618) as well as by respecting ethical principles and social values. Further possible retaliatory measures might be the formation of coalitions (e.g. in the form of a consortium^90;91) among the established firms who can demonstrate their determination to retaliate the market entry of the unestablished firms.

89 Translation from GER according to Porter (2000: 619): “Foster every policy of the state that raises the barriers."

90 Consortia are required under certain circumstances due to the complexity and the scope of a tender subject. Several bidders close together so that they make a common offer for the tender subject. Due to the legal conditions to protect SME, larger contracts are divided into lots acc. to §97 (3) GWB. If this is not possible consortia are allowed (VK Thüringen, Beschluss vom 16.02.2007-360-4003.20- 402/2007-001-UH- and decision of VK Bund, Beschluss vom 01.02.2001-VK1-1/01- ), translation from GER: “Decision of 16.02.2007-360-4003.20-402/2007-001-UH-“;

“Decision of 01.02.2001-VK1-1/01-“).

91 Cf. §22 SektVO that enables the customer to require a certain legal form of a alliance if it is necessary from the customer´s perspective and sets the alliance in this case as equal to a single firm.

So the established firms could signal to the market that they have the possibility, based on the use of their existing reputation, to expand existing capacity even before the emergence of a demand, thus creating excess capacity that demonstrates their serious intent to retaliate to unestablished firms (Porter, 2000: 622). Entering into a consortium, or being a general contractor with correspondingly competitive subcontractors, demonstrates unity and willingness to retaliate and withdraws the allied firms from the market - and thus their availability for a coalition with the unestablished firms. In order to respond with a coalition, an unestablished firm would be forced into an alliance with a subordinated selection of potential coalition partners (e.g.

second- or third-rated), so that they face a higher risk and probrably are confronted with competitive disadvantage.

In reference to chapter 8, and the limitations within the industry, new entrants face the problem of a high degree of system complexity and of probably not having the relevant experience in planning, design, and optimization of logistical systems in an airport environment, especially if they have their usual business in other industries (e.g. automotive). The customers’ requirements of airport logistics concern highest system availability through the fulfillment of the contractually agreed capacities, and meeting aviation security standards and requirements. Another problem new entries face is connected with economies of scale (Porter, 2000: 32, Hungenberg, 2011: 103) and learning curve effects. New entrants are often not able to copy the experience and necessary know-how of the established firms, which are experienced in the field of business and belong to a branch of industry leaders. The result is a lack of information for new entrants. If the information deficit cannot be healed and the information gap cannot be closed between the time of receiving the tender documents and the closing date, new entrants face the threat of not being able to calculate the risks of the project. The lack of information, knowledge and know-how can create a situation that presents industry attractiveness to new entrants which is simply not given in reality and under conditions of full awareness of the circumstances. This can lead to non-profitable calculations and offers and to a situation where the new entrant is awarded the project to financial deficits and struggling for additional payments in order to equalize financial project deficits (e.g. by claiming the cost for any additionally needed material). This means in conclusion that new entrants need to

have a certain risk awareness regarding the specific rules and requirements within the branch of industry, and a strategy to cover the risks coming with late return of project investments and losses in case of failures and with low returns on capital. Considering these points, new entrants would need strong financial resources⁹² (Porter, 2000: 32). In cases of positive experiences of the final customer with a system partner, the customer’s loyalty to the partner is probably high, so that customers who identify themselves with the system partner will not enter into risks in order to avoid problems during and after the project.⁹³ On the one hand this might be a chance for new entrants to be an alternative to established suppliers, but on the other hand it poses the risk of not being successful.