Structural Barrier of Entry: Amway

September 22, 2017 Marketing

Qns 6 Entry and Exit will determine the extent of competition in an industry. Apply to the airline, pharmaceutical or supermarket businesses. Using the industry of your choice, how can this company deter entry? Entry is the beginning of production and sales by a new firm in a market, and exit occurs when a firm ceases to produce in a firms. The existence of high start-up costs or other obstacles that prevent new competitors from easily enter an industry or area of business.

Barriers to entry benefit existing companies already operating in an industry because they protect an established company’s revenues and profits from being whittled away by new competitors. Structural barriers to entry exist; when the incumbent has cost advantages or marketing advantages over the entrants and incumbent are protected by favorable government policy and regulation. Barriers to entry protect incumbent firms and restrict competition in a market; they can erect strategic barriers by expanding capacity and/or resorting to limit pricing and predatory pricing.

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The existence of monopoly and market power is often aided by barriers to entry. The three main types of structural barriers to entry are 1. Control of essential resources 2. Economies of scale and scope 3. Marketing advantages of incumbency The company to be used is Amway Amway is a direct selling company and manufacturer that use network marketing to sell a variety of products, primarily in the health, beauty, home care market, etc…Amway was founded in 1959 by Jay Van Andel and Richard DeVos. It was ranked No. 14 among the largest global retailers by Deloitte in 2006, and No. 32 among the largest private companies in the U. S. by Forbes in 2010 Its product lines include home care products, personal care products, Beauty product (Artistry) jewelry, electronics, Nutrilite dietary supplements, water purifiers (eSpring), air purifiers (Atmosphere), insurance and cosmetics. 1. Control of Essential Resources Incumbent is protected from entry if it controls a resource necessary for production and can be use that resource more effectively than newcomers

Amway’s Health Product Brand, Nutrilite is the only global vitamin and mineral to grow, harvest and process plant on their own certified organic farms. They have their own Nutrilite farm with other 2590 hectares (6400 acres). It could be costly and difficult for new entrant to make the claim of their own farm to be certified organic. Incumbent can legally erect entry barriers by obtaining patents to novel and nonobvious products or production processes. Once the patent is approved, anyone who wishes to use the process or make the product must obtain permission from the patent holder.

Patent lives are currently 20 years in most developed nations. Access Business Group’s Research & Development Centre in Ada boasts state-of-the-art equipment, 38 laboratories, with more than 400 scientists and support staff. Amway has 450 patents granted worldwide with over 250 patents pending. Patent provide significant marketing and financial advantages for Amway against its’ rivals. The patents granted to Nutrilite scientists and researchers help to improve the NUTRILITE brand by complementing our high-quality products with technology that is unique to the brand.

Special Know-How that is hard for the rivals to replicate may be zealously guarded by the incumbents. In fact, Amway has been successful as the annual sales growth is 9. 5% reaching US$9. 2 billion for the year ending December 31, 2010. It has been a very established firm to know how to use the direct selling from the start of their business and is known for its high-powered sales techniques. 2. Economies of scale and scope When economies of scale are significant, established firms operating at or beyond the minimum efficient scale (MES) will have a substantial cost advantage over smaller entrant.

Amway use direct selling method, which is the marketing and selling directly to consumer away from a fixed retail location. That mean, rental and advertising cost can be saved. Consumers are their distributors; they can earn high sale commissions and build their networking by recruiting more people to become distributors. Consumers benefit from direct selling because of the convenience and service it provides, including personal demonstration and explanation of products, home delivery, and generous satisfaction guarantees.

In contrast to franchising, the cost for an individual to start an independent direct selling business is typically very low with little or no required inventory or other cash commitments to begin. Economies of scope in production may exist when multiple products that share inputs and production technology are produced in the same plant. Amway’s headquarters are in Ada, Michigan, the manufacturing facility holds hundreds of research and development scientists, product development teams, and global support personal.

They have helped in developing products with better quality with many patents so that to achieve customer satisfaction and loyalty. Economies of scope in marketing are due to the bulky up front expenditure an entrant has to incur to achieve comparable brand awareness as the incumbent brand. Amway builds all kind of product brands, which are necessities in the lives of their customers, including: nutritional supplements, cosmetic and skin care products, personal toiletries, household cleaners, laundry care systems, water treatment systems, etc… No other competitors and new entrants can accomplish this huge invention and production. . Marketing Advantage of Incumbency The brand umbrella makes the incumbent’s sunk cost of introducing a new product less than that of a new entrant because the entrant must spend additional amounts of money on advertising and product promotion to develop credibility in the eyes of consumers, retailers, and distributors. Amway’s own product lines include home care products, personal care products, Beauty product (Artistry) jewelry, electronics, Nutrilite dietary supplements, water purifiers (eSpring), air purifiers (Atmosphere), insurance and cosmetics.

Amway’s product, eSpring, was introduce in 2000, was the first home water treatment system to incorporate a carbon block filter and Ultraviolet disinfection unit. eSpring had did very well that competitor, Diamond water as it is the first home system to achieve certification for ANSI/NSF Standards 42, 53 and 55 As Amway is a very established direct selling company, not only can it sell it own line products, it can help other company to sell their product as well. However, the company cannot market, distribute and advertise the products in the territorial where Amway’s distributors help to sell.

Products that are not from Amway, for example, Sharp Steamwave Oven (AX-1100), this product market in Amway Singapore, you will not find it in any departmental store like Best Denki, Harvey Norman and Carrefour in Singapore and Sharp could only distribute this product through Amway. Sharp Steamwave Oven (AX-1100) is a 3-in-1 steam oven with a combination of steamer, grill and microwave. It is a best-selling product and sale revenues had done quite well under Amway’s distributors.

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