Chapter 15: Problem 8

The German company Koenig \& Bauer has 90 percent of the world market for presses that print currency. Discuss the factors that would make it difficult for new companies to enter this market.

Short Answer

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Barriers that would make it difficult for new companies to enter the currency printing press market include high setup and research & development costs, intense regulation, the requirement of specialized knowledge and skills, and established relationships between Koenig & Bauer and potential customers worldwide. These combined barriers create a high threshold for entering in this particular market.

Step by step solution

Understand the concept

Gain a general understanding of what entry barriers are in a market. They can be economic, legal or even technological barriers that prevent new competitors from easily entering an industry or area of business.

Examine the specific scenario

Consider the specifics of the given scenario. The market is for presses that print currency. This is a specialized market, implying that some unique factors may be at work preventing new entries.

Identify relevant barriers to entry

Identify the specific barriers to entry for this market. Some possible barriers in this case might include: 1. High setup costs - The machinery involved in printing currency is likely highly specialized and costly.2. Regulation - Any entity dealing with currency production will likely face intense scrutiny and regulation.3. Knowledge and skill - The production of currency printing presses requires highly specialized knowledge and skills.4. Network effects - Koenig & Bauer, with its 90% market share, likely has established relationships with most potential customers around the world. 5. High research and development costs - The technology to print currency has to be constantly updated and advanced to prevent counterfeiting.

Discuss each identified barrier

Discuss each of these barriers in detail and explain how they make it difficult for new companies to compete in this market.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Market Entry Barriers

Market entry barriers are obstacles that can prevent or hinder new competitors from entering a particular industry. These barriers can take various forms, ranging from high initial investment requirements to regulations that are difficult to comply with.

In the context of Koenig & Bauer, which dominates the market for currency printing presses, these barriers are particularly formidable, given the specialized nature of the products and the narrow, niche market. Recognizing these hurdles is crucial for any potential market entrant, as they can significantly affect the cost and feasibility of entering into competition with established players.

Economic Barriers

Economic barriers encompass all financial aspects that might deter a new company from entering a market. For a specialized market, such as currency printing, the economic barriers are especially high.

This includes exorbitant setup costs for acquiring the proper machinery, which is usually custom-built and involves advanced technology. Additionally, the high costs associated with research and development to stay ahead of counterfeiters are significant. These economic challenges can be prohibitive and protect incumbent companies like Koenig & Bauer from new competition.

Regulatory Barriers

Regulatory barriers consist of laws and regulations that protect consumers, ensure fair market practices, and maintain national security, among other objectives.

In the currency printing industry, these barriers are immensely high due to the sensitive nature of the product—national currencies. Potential entrants must navigate a complex web of international and national regulations, acquire various certifications, and perhaps most critically, earn the trust of governments to handle such a sensitive function. Thus, the regulatory framework helps maintain the market's status quo, making it challenging for new entrants to gain a foothold.

Technological Barriers

Technological barriers reflect the necessary technical capabilities a company must possess to compete in a specific market. In an industry such as currency printing, technology is not only about having sophisticated machinery but also about possessing the expertise to innovate and adapt to prevent counterfeiting.

Companies like Koenig & Bauer have decades of experience and ongoing investments in technology, which act as a significant barrier for new companies lacking the same level of expertise and resources to develop the necessary technology.

Network Effects

Network effects occur when the value of a product or service increases as more people use it. In the currency printing press market, the network effect can be a substantial barrier to entry.

Koenig & Bauer's dominant market share means they have longstanding relationships with central banks and financial institutions around the world. These relationships can lead to preferential treatment and reinforce loyalty, creating a cycle that is hard for new entrants to break into, as potential clients often gravitate towards the established and trusted provider.