Threat of Entry

Characteristics

Current situation

Future trend

Importance of reputation and brand loyalty in purchase decision

Very low. Steel can be considered as a non-branded product, where loyalty does not play any significant role. As for reputation, it is far from the most influential factor, though it can affect purchase decision in some way. For instance, if a producer was caught on a fraud, or sold inferior steel, he/she can lose some customers.

If some strong steel brands appear in the future, brand loyalty will probably take place.

Entrants' access to distribution channels

Steel producers usually use direct distribution, i.e. they do not have distribution channels and sell their products directly to customers/businesses. In some cases manufacturers have some distribution channels, but they are likely to belong to the manufacturer itself.

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Entrants' access to raw materials

Raw materials such as iron ore are traded on a global market, so they can be bought. Also, access to raw materials depends on the entrant. Some areas rich with natural resources are owned by governments, so if an entrant has good relations, it can have an easy access to raw materials.

Every year entrants have less access to raw materials, as they are exhaustible nonrenewable resources.

Entrants' access to technology and know-how

Raw steel is a homogeneous product, which is produced with the same technology all over the world. So, all the actors on the market and potential entrants know this technology. Nevertheless, if it concerns not just raw steel, but also milled one, some producers may possess their own know-hows on methods and procedures of enriching steel with other metals. Thus, potential entrants may not have access to technologies of incumbents, but they may have their own know-hows.

On the one hand, incumbents try to keep in secret their special technologies, or patent their know-hows, so entrants will have less access to them. On the other, if a producer wants to enter a rather concentrated steel market, it should have a kind of competitive advantage, so it may have its own unique technologies.

Entrants' access to favorable locations

Generally, as we are discussing global steel market, entrants have access to all locations. But the question is whether they really can access the market they desire. For example, China, India and the USA are major steel consumers, but they already have a number of very strong players on their markets, which are very difficult to compete with. Besides, their governments typically protect steel producers from newcomers, so access to favorable locations is very limited to entrants. Moreover, transportation costs are very high.

Despite globalization, governments tend to protect their native producers stronger. No one will allow a foreign company to operate such a strategic industrial sector in a home country. So, entrants will choose location not on the basis of what is favorable or not, but what is easily accessible.

Experience-based advantage of incumbents

The biggest experience-based advantages of steel manufacturers are established relationships with customers and government. Experienced producers have stable relations with key customers from, for instance, car industry, with whom they have a lot of contracts signed. Also, government favors credible producers more. Besides, economies of scale are achieved with experience, especially in steel industry, where there is a very strong trend towards mergers and acquisitions in order to achieve greater economies.

Like now, in future incumbents will have more benefits with experience on the market.

Network externalities

On the one hand, there is no increase in value of steel with increase in number of consumers of steel. On the other, all steel manufacturers have such a negative external effect like environmental contamination. As for positive effects, some producers provide nearby cities with good infrastructure.

There is a strong environmental trend, so that steel producers tend to be more environmentally friendly. Also, such big companies tend to be more socially responsible. So, negative effects will be decreased, while positive increased.

Government protection of incumbents

Incumbents have a very strong government protection, as it is a strategic industry for any country. Commonly they set very high entry barriers for foreign companies like huge tariffs or taxes. Governments can use even illegal ways to protect domestic producers (like dumping).

As it has been mentioned already, governments will not reduce the level of protection of domestic steel industry.

Perception of entrants about expected retaliation of incumbents

Generally, potential entrants perceive expected retaliation as above average because incumbents can punish entrants by means of their relations with major customers, partners and government, i.e. they can form a sort of collusion under which they will act in the way that will discourage entrants from further desire to operate on the market.

Such collusions are more likely in future, as there is a strong trend towards mergers and acquisitions in the industry, so entrants will perceive retaliation as more possible.