Exit barriers are also important as they vary widely across industries depending on the amount of sunk costs. These are costs a company will not recover when it exits a business.

Power of supplier: Integration potential Industry dynamics might be changed, for example, by vertical integration
of suppliers.

Threat by new competitors: High entry barriers can decrease the threat by new competitors. Entry barriers can result from:

• Economies of scale
• Product differentiation
• Cost advantages
• Capital needs
• Access to distribution channels
• Technology know-how
• Access to raw materials
• Location advantages
• Government subsidies
• Learning curve/product experience.

Threat by substitutes: The quality or price of substitutes poses a threat to an industry since those substitutes may induce a structural change of an industry.

Power of buyers: Price sensitivity and bargaining power of buyers have a great effect on the profitability of industries. The automobile industry is a good example at this point. The build-up of overcapacities created a buyers market.

The alternative to raising taxes to cover the cost of maintaining current services is to cut services to correspond to what current taxes will raise. This is not quite as horrible as the word “cut” implies because the projections have spending increases built into them that Tennessee doesn’t have to make. For example, increasing enrollments could be handled by increasing class sizes and increasing compensation costs for state and local workers could be held to inflation alone, denying these workers the real (inflation-adjusted) increases in living standards that private sector workers will enjoy. The state could attempt a similar squeeze on compensation of workers the state pays indirectly, such as workers in hospitals, nursing homes, and child care agencies.

Obviously, state policy could combine tax increases and spending cuts. For example, maintaining a moratorium on tax cuts and expanded programs, raising taxes about 1% a year, and squeezing current service budgets by about 1% a year would work — mathematically at least.