Michael E. Porter introduced the threat of new entrants as one of Porter’s Five Forces that shape the competitive environment in a particular industry or market and impact the profitability and longevity of a particular business or firm. The other forces are the threat of substitutes, the bargaining power of buyers, the bargaining powers of suppliers, and the intensity of the competitive rival or level of competition in the industry.
How Do New Entrants Affect a Business and an Entire Industry? What Will Happen if Many New Businesses Enter an Industry or Market?
Porter explained that new entrants or new businesses entering an industry or market can pressure existing businesses to reexamine their costs, the prices of their goods or services, their rate of investment, and other business strategies and tactics.
The threat of new entrants fundamentally represents the degree to which a particular industry or market and the existing businesses can be affected by the arrival of new players. It also describes the level at which these new players can exert pressure on these existing firms.
New entrants affect a business by heightening the level of competition which could lead to a more intense competitive rivalry. It also affects a particular industry by increasing the bargaining power of customers and the bargaining power of suppliers.
It is also important to note that this threat also determines the attractiveness of a particular industry or market. The arrival of new entrants is an indicator that there is a huge potential in an existing market or that the industry remains underserved by existing firms.
Hence, apart from the possibility of exerting direct pressure on existing businesses, the threat of new entrants can also interact with and influence the three other forces of Porter’s Five Forces. This threat also represents the ability of new firms to enter into an industry or market.
What Are the Determinants or Factors that Determine the Level of Threat of New Entrants? When Does A High Threat From These New Entrants Occur?
Of course, the arrival of these new businesses would not readily threaten existing firms. There are factors that can determine the degree or level of threat of new entrants. These determinants or factors are collectively represented by the so-called barriers to entry.
These barriers correspond to the obstacles that can deter or prevent new businesses from entering a particular industry or market. A low threat of new entrants means that the barriers to entry are high. On the other hand, a high threat indicates low entry barriers.
Below are some of the notable and specific factors and examples of barriers to entry that can determine the level of threat of new entrants:
• Brand Equity and Brand Loyalty: A market with a sizeable portion of customers loyal to products or services from a particular company has a high barrier to entry and would be difficult to penetrate. New entrants and aspiring ones need to spend resources in implementing marketing strategies and activities not only to build brand awareness but also to attract and retain potential customers.
• Cost Advantage and Cost Leadership: Some businesses have established cost leadership because of their superior manufacturing or production processes, technological capabilities, time-honed relationships with suppliers, management expertise, access to capital or funding, and strong branding. They can produce and deliver goods or services more efficiently than new entrants. The presence of these firms is an indicator of a high barrier to entry and a low threat of new entrants.
• Economies of Scale: Similar to cost advantage, another factor that can determine the level of threat of new entrants is the existence of firms that have taken advantage of economies of scale. Firms that are capable of mass-producing or securing raw materials at bulk, as well as those that can sustain a huge workforce have economies of scale. New and aspiring entrants need to scale up to compete against these firms.
• Geographical and Regional Considerations: Geographical barriers can also be an obstacle. Prime locations can make it difficult for smaller startups to put up their storefronts due to high rent costs. A small-sized local manufacturer would not be able to export its products to another country with homegrown manufacturers in the same market. Of course, in some cases, geographic proximity can lower the barrier to entry, especially in areas with established trading and logistic routes.
• Regulations and Policies: The ease of doing business in a particular country or jurisdiction is another factor that influences the level of threat of a new entrant. Locations with stringent business regulations and policies have high entry barriers that translate to lower threat while those with more relaxed regulatory environments have low entry barriers and a higher level of threat from new and aspiring entrants.
• Access to Distribution Networks: Some firms can also have complete control over established distribution networks. An example would be large food and beverage companies that can readily place their products on the shelves of major grocery stores and supermarkets in a particular country or region. Smaller producers would have a hard time tapping these distribution networks because either their brands are unfamiliar to the local market or they do not have solid logistics capabilities.
• Capital Requirement: High startup costs and operational expenses collectively correspond to a high entry barrier. The telecommunication industry is an example. An aspiring entrant would need to invest heavily in building network infrastructure and deploying technological capabilities such as more recent cellular network technologies including Sub-6 GHz 5G and mmWave 5G networks.
From the aforesaid examples of barriers to entry and factors that determine the level of threat of new entrants, such a threat is low if there is low brand loyalty and brand equity in a particular market, there are opportunities to minimize costs and capital requirement is low, the geographic and regulatory environments are conducive for a startup, and if there is an opportunity to easily build economies of scale and distribution networks.