The Five Forces of the Porter Model: Threat of New Entrants

This is the sixth in a series of articles about the Porter Five Forces Model for Market Positioning. This article is preceded by an article with the title "Porter's Five Forces Model: Tread of New Entrants" by the same author. To best comprehend the context of this article it is advised to first read the preceding articles in this series.

In this article the threat of new players entering the market as defined by Porter in his Five Forces Model will be discussed.

One of the competitive advantages that can exist in almost any industry or market is a barrier for competitors to enter and compete with existing companies. Markets with a high barrier to entry are normally not very attractive for new firms to enter whereas markets with a low barrier to entry can be more attractive for new firms to enter.

The Five Forces

One of the better analytical models for assessing the nature of competition in an industry or market is the Michael Porter Five Forces Model. Some industries and markets are more profitable than others. The answer can be found in the dynamics of the competitive structure and make up of the market segments in the industry.

The threat of new entrants and the barriers to entry will be discussed based on the Porter Five Forces Model.

Threat of New Entrants

Both potential and existing competitors can have an influence on the attractiveness to operate in any particular industry. With the increase in the number of potential or real competitors in an industry the level of competitiveness, and thus the profitability for individual companies in the industry, decrease. This can reduce the attractiveness for companies to enter or to continue operate in the segment.

A number of complex business and marketing factors influences the magnitude of the threat of new entrants to an industry or market segment. An industry where profitability is generally high will attract more new entrants that are looking to benefit from the potentially high profits. The threat of new entrants for the most part depends on the presence and magnitude of barriers to entry in the particular industry.

Barriers to entry are factors or conditions in the competitive environment of a market, industry or market segment that make it tough for new competitors to launch an operation in the said market segment.

Some of the significant barriers to entry include economies of scale that may be necessary for competitiveness in some industries, the necessity for sizeable capital investment requirements, the considerable cost necessary for customers to switch, difficulty to access industry distribution channels and the likelihood of retaliation from existing industry players when attempting to enter the industry. The presence of an elevated production vs. profitability threshold requirement is an entry barrier that can significantly lower the threat of entry.

From a marketing perspective companies often position the products in a highly differentiated manner to reduce the risk of new entrants to the market.

Another barrier to entry that can lower the threat of new entrants is if the particular product is very well known or the brand names are very well established.

The requirement to have a significant initial capital investment to establish in a new industry or market is normally also an advantage that will lower the threat of new entrants.

New entrants who do not have access to favorable geographical locations, specialized technology required for the industry or necessary production substances as inputs will also significantly increase entry barriers and thus decrease the threat of entry.

High consumer switching costs are a barrier to entry. When access to distribution channels is an entry barrier - if it is difficult to gain access to these channels, the threat of entry is low.

Barriers to entry also include an absolute cost advantages that the existing players have established. A slow learning curve that is based on proprietary information will also increase the barrier to entry. In some cases Government policy that is in favor of existing industry participants will be a strong barrier to entry.

Conclusion

When considering the threat of new entrants one should be reminded that the thread will rise as the barrier to entry diminishes in a marketplace. As more companies enter a market, one will experience an increase in rivalry. This will consequently result in a reduction in profitability will fall to a point where there is no incentive for new competitors to enter the market.

The threat of new entrants to a market of industry is commonly based on the barriers to entry. These barriers can take different structures and are employed to avoid the influx of competitors into an industry whenever profits hare high. Companies will consider the cost of capital and the potential profit to be realized in an industry as part of the decision to enter a particular industry.

© Carl Marx