Threat of New Entrants: Characteristics and Examples

The threat of new entrants is one of Porter’s Five Forces for evaluating a company’s competitive position. The threat of new entrants refers to how easy it is for new competitors to enter your industry. Harvard Business School professor Michael E. Porter devised his five forces analysis in 1979 and described the forces model in a Harvard Business Review article called “How Competitive Forces Shape Strategy.” Michael Porter encouraged businesses to look beyond their direct industry competition and conduct a comprehensive industry analysis to get a full picture of their growth capabilities. Porter named five forces that determined the competitive intensity of a given market: competitive rivalry, bargaining power of buyers, the threat of substitutes, bargaining power of suppliers, and the threat of new entrants.

Understanding the threat of new entrants is vital for a business so it can judge the competitive environment and respond accordingly. For example, a business facing a high threat of new entrants may decide to patent its technology, bring down costs to sell its product at a more competitive price, or find ways to differentiate its offerings by advertising its unique features and benefits.

Barriers to entry are various factors that make it difficult for new businesses to enter an industry. Here are some of the most common entry barriers:

• Cost advantages: Existing companies with large customer bases are able to utilize economies of scale to offer their products or services at a lower cost than new companies.
• Brand loyalty: Existing companies have established customer loyalty. Customers are more likely to stick with familiar brand names than try something new.
• Capital requirement: There is a high fixed cost to entering a new industry.
• Access to distribution channels: Existing companies control supply chains and distribution channels and have easy access to raw materials.
• Government regulations: Government policy may regulate a company’s operations and require licenses and permits in order to enter an industry.
• Retaliation: Existing companies may combine forces to deter potential entrants.
• Switching costs: Customers pay a price for switching from one company to another. Switching costs can deter customers from leaving an existing company for a new one.
• Product differentiation: A new entrant looking to compete in an industry must bring a highly unique product/service to market in order to succeed.

Low barriers to entry increase the threat of entry. New companies can easily enter the industry and take market share from existing companies. A high threat of new entrants may occur when:

1. 1. Little capital investment is needed to enter an industry.
2. 2. The threat of retaliation by existing companies is low.
3. 3. The technology needed is not proprietary.
4. 4. There’s a low level of customer loyalty to particular brands.
5. 5. No government regulations impede entry.
6. 6. There are low barriers to distribution channels and supply chains.

A clothing designer selling their merchandise on an online platform may face a high threat of new entrants from other small businesses who may enter the market and sell similar designs at a comparable price. The industry is not necessarily capital intensive, customers may be keen to buy from new brands with slightly different aesthetics, the technology is not proprietary, and designs may be hard to patent.

When there are high barriers to entry, there’s greater potential for existing companies to make higher profits. A low threat of new entrants may occur when:

1. 1. Popular brand names have strong brand loyalty.
2. 2. There is a need for significant capital investment up front.
3. 3. There are high barriers to supply chains and distribution channels.
4. 4. Government regulations impede entry.
5. 5. Existing competitors retaliate.
6. 6. Proprietary technology is necessary to enter the industry.

Telecommunications is an example of an industry with a low threat of new entrants. Telecom companies are capital intensive, own proprietary technology and distribution channels, and have to comply with government regulations. Additionally, established companies may make it difficult for existing customers to switch providers, further impeding the ability of a new company to gain market share.

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