The strength of this threat is likely to vary from industry to industry, depending on the strength of the barriers to entry. Barriers to entry discourage new entrants and influence the likely response of existing competitors to the new entrant. The more the barriers the more is the chance to avoid the threat of new entrants into the market.
According to Porter, five competitive forces influence the state of competition in an industry. These
collectively determine the profit (i.e. long-run return on capital) potential of the industry as a whole. Porter claims that the intensity of the fifth force, competitive rivalry, is driven by the intensity of the other
four forces. If these other forces are driving profitability down the firms in the industry will compete more
intensely to restore their own profits.
The Threat of New Entrants in Porter’s Five Forces
A new entrant into an industry will bring extra capacity and more competition. The strength of this threat is likely to vary from industry to industry, depending on the strength of the barriers to entry. Barriers to
entry discourage new entrants and influence the likely response of existing competitors to the new entrant.
The Barriers to Entry into the Market
The more the barriers the more is the chance to avoid the threat of new entrants into the market.
1. Scale economies
Scale of economies is a significant barrier to entry into the market. The threat of new entrants is high when there are low economies of scale. If the market as a whole is not growing, the new entrant has to capture a large slice of the market from existing competitors, to make sales to cover high fixed costs.
2. Product differentiation
The threat of new entrants is high when there are low differentiation in products. Existing firms in an industry may have built up a good brand image and strong customer loyalty over a long period of time. A few firms may promote a large number of brands to crowd out the competition.
3. Capital requirements
When capital investment requirements are high, the barrier against new entrants will be strong, particularly when the investment would possibly be high-risk.
4. Switching costs
Switching costs refer to the costs (time, money, convenience) that a customer would have to incur by switching from one supplier’s products to another’s. Although it might cost a consumer nothing to switch from one brand of frozen peas to another, the potential costs for the retailer or distributor might be high.
5. Access to distribution channels
Distribution channels carry a manufacturer’s products to the end buyer. New distribution channels are difficult to establish, and existing distribution channels hard to gain access to. The more difficult is the access to distribution channels the more is the chance to avoid the threat of new entrants into the market.
6. Cost advantages of existing producers, independent of economies of scale:
These cost advantages include:
Experience and know-how (the learning curve)
Government subsidies and regulations
Favored access to raw materials
7. Response of incumbents
Incumbents have substantial resources including cash to fight back
May cut prices to keep market share
Slow growth in a mature market may mean all companies’ profits are reduced.
How The Barriers to Entry into the Market may be reduced?
Barriers to entry discourage new entrants and influence the likely response of existing competitors to the new entrant. However, the Barriers to entry into might be lowered by:
Changes in the environment
Novel distribution channels for products or services
Generally an industry with low barriers to entry will be characterized by a large number of small firms.
Porter’s Five Forces Model is One of the most influential models used in strategic analysis to assess the state of competition in an industry.
Long term profitability determined by the extent of competitive rivalry and pressure on an industry.
By considering the strength of each force and the implications for the organization, management can
develop strategies to cope.
Like all models of analysis it has limitations particularly in industries that are rapidly changing.