Abstract
The threat of entry depends on the presence of entry barriers and the reaction that can be expected from existing competitors. Firstly, economies of scale in the production of tires represent an entry barrier for potential competitors, as the market leaders have high levels of production allowing scale economies, especially in research and distribution.
The tire industry requires high capital investments which is necessary to build manufacturing sites, to invest in R&D and advertising. Moreover, it seems essential for companies competing in the industry, to own their main raw material plants (vertical integration). These huge capital requirements limit the pool of likely entrants.
In addition, the threat of entry is lowered by product differentiation and innovations. The latter is essential in the tire industry in order to maintain market shares, as tires are commodity products,. The reputation, brand and image of a firm are important sources for differentiation. As the industry is mature, strong brands established distribution networks, patent ownerships, and achieved cost advantages in production operations and processes due to experience, indicating high barriers to entry. Important evidence is given by the fact that the five biggest tire producers of today have been dominating the industry for many years (Case Exhibit 1).
