Threat of new entrants

Threat of new entrants
See also
Mobility barriers Five forces analysis Competitive environment Bargaining power of buyers Low cost strategy Opportunities and threats Competitive rivalry Cost leadership strategy Concentration strategy

Threat of new entrants is one of five aspect (force) of Five forces analysis. It is a method of strategic analysis and assessing the intensity of competitive forces in the economic sector, developed by Michael E. Porter in 1979. Porter's Five forces analysis should be part of every business plan. The analysis is recommended to be carried out for new created company before entering the market because thanks to the estimation of five factors related to the company's environment and shaping competition on the market, it gives an assessment of the attractiveness of the sector, helps to understand the structure of the sector and it will defines what strategic position to take to increase profits and reduce the tendency to attack from the outside. Analysis is a helpful tool for existing companies to consider a new venture or assess its strategic position. Investors can also use it to estimate the company's development prospects which they are interested.

Five forces shaping competition in Porter's analysis are (T. Grundy 2006, s. 214):

• bargaining power of suppliers,
• bargaining power of buyers,
• competition inside the sector,
• threat of new entrants,
• threat of substitutes.

Factors that increase the threat of new entrants

The following factors may increase the threat of new entrants:

• there is high number of competitors in the industry
• barriers to entry is very low, low capital needed to introduce product/services to market
• government regulation promote creating new companies on the market
• low customer loyalty to brand or company
• relatively easy access to infrastructure, suppliers and distributors
• no patented technology present in products

Threat of new entrants applies to all companies that can enter a given market, both existing ones and those that are just being created. Their striving to gain market share determines the level of prices, costs and investments necessary to continue to compete. The mere threat and not the actual appearance of new participants limits the amount of potential profits in the industry. When the probability of this threat is highly real, companies with an established market position to discourage new players use the tactics of lowering prices and increasing investment outlays.

Threat of new entrants depends on existing entry barriers and on the response to such situation of companies already present on the market. The lower the entry barriers and the new participants can expect little retaliation, the risk of increasing the number of players on the market increases and the profitability of the industry is moderate. Entry barriers are defined as the advantage that current players have in relation to newly entering companies (M.E. Porter 2008, s. 26). The risk of new entries for a given market is inversely proportional to entry barriers and directly proportional to the profitability of a given market.

The factors affecting entry barriers

The factors affecting entry barriers (M.E. Porter 1979, s. 138-140):

• Capital intensity - The higher the capital requirements of business, the lower the threat of entering new entrants.
• Economies of scale - The threat of new entries is lower when existing companies gain significant economies of scale.
• Know-how - Acquisition of specialist knowledge is a long-term process, sometimes difficult and expensive, and can constitute a significant restriction of market entry for new competitors.
• The cost of changing supplier by the customer - The threat of new entries is higher when it's easier fot the customer to change suppliers.
• Differentiation of products among competitors - The barriers to entry are higher when the products offered are varied and have features that allow the customer to associate them with a specific brand.
• Legal barriers - Government policy can hinder new entry because of licensing requirements, restrictions on foreign investment, patenting rules, environmental or safety regulations and make it easier through subsidies or funding basic research. It's typical in that industries like: liquor retailing, taxi services or airlines.

References

• Bakos, J. Y., & Treacy, M. E. (1986). Information technology and corporate strategy: a research perspective. MIS quarterly, 107-119.
• Chae, S., & Heidhues, P. (2004). Buyers' alliances for bargaining power. Journal of Economics & Management Strategy, 13(4), 731-754.
• Grundy, T., (2006). Rethinking and reinventing Michael Porter's five forces model. Strategic Change 15 (5), John Wiley & Sons.
• Porter, M. E., (1979). How competitive forces shape strategy. Harvard Business Review.
• Porter, M. E., (2008). The Five Cometitive Forces That Shapes Strategy. Harvard Business Review.

Author: Anna Gołdyn

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