Porters Five Forces - Competitive Analysis

The Threat of New Entrants

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Introduction to the Threat of New Entrants

An analysis of the threat of new entrants will discover how high the entry barriers are in your industry. An industry with high barriers to entry will have less risk from new competitors than an industry with low barriers to entry.

You will find that new entrants to an industry tend to increase the competitive rivalry of the industry.

Why does competitive rivalry increase when a new competitor enters your industry?

A new competitor to an industry has no existing customers, if they intend to survive in the industry they will need to quickly gain market share. To do this they will generally adopt an aggressive growth strategy.

As they start to poach customers the existing competitors respond to protect their business. This response tends to reduce margins across the industry.

The exception to this is when an industry is in rapid growth, in this scenario the new entrants growth comes from growth in the industries customer base.

Now, let’s find out how you can use Porters Five Forces to assess the the threat of new entrants to your industry.

Analyzing the threat of new entrants

Your analysis of the threat of new entrants seeks to identify the “barriers to entry” or the things about your industry that will make it harder for a new entrant to shift into your industry.

To analyses the threat of new entrants to your industry, you will need to consider the following factors,

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Analysis Criteria

Description

Economies of scale

Refers to the total size of an industry and the level of concentration within that industry

A large industry dominated by a few high volume competitors is going to be harder for a new entrant to enter than an industry with a large number of small to medium competitors.

Proprietary product differences

Refers to tangible product differences with either your product or your services that your customers value

Are products in your industry seen as a commodity, interchangeable, or do unique differences between products?

Brand identity

Refers to an intangible quality about your product or service that your customer’s value, the question you seek to answer is

Is your industry dominated by competitors that have brands that customers prefer to use?

Switching costs

Refers to any cost incurred by your customers to switch to another or a new competitor

Capital requirements

Refers to the total up front capital investment required for another organization to setup in competition with you.

The more start-up capital that is required the less likely additional competitors will enter the market. If limited capital is required then additional new entrants could be expected.

Access to distribution

Refers to the ease with which a new entrant could gain access to distribute their products or services.

You will have developed methods to distribute your products to your customers, the harder it is for new entrants to replicate this distribution system the less likely new entrants are to enter and remain in your industry.

Absolute cost advantage

Refers to the cost of producing your product or service

Do you have a good location, long term arrangements for access to raw materials or unique production or distribution system that makes it hard for anyone to compete with you?

Government policy

Refers to a government regulation or policy which prevents or prohibits others from entering your industry

If a permit or licence is required this will make it less likely that you will have new competitors in your industry. Commercial fishing, logging and mining, banking and insurance are a few examples where in some countries regulation will act as a barrier to entry.

Expected retaliation

Refers to the response existing competitors may take to the emergence of a new competitor.

Types of retaliation include dropping prices, offering increased incentives to buy, offering additional service for the same price.

The greater the profitability of an industry the more likely retaliatory action will be.

Industry Profitability

The more profitable your industry the more attractive it will be to new competitors.

The less profitable your industry the less likely there will be a new competitor to your industry.

Do not assess your profitability it is the profitability of your industry that you need to look at. If your business is a poor performer or a star in your industry it does not matter, you need to focus on the industry average.

Stage in industry life cycle

If an industry is new or emerging you will expect to see an increase in the number of competitors in that industry, however if an industry is mature or in decline you are less likely to see new entrants.

For example: The Internet is making it possible for more people to produce and distribute music, this is re starting the music distribution life cycle and is increasing competitors for the major recording labels.

Template to Assess the Threat of New Entrants

Analysis Criteria	Risk Rating
Analysis Criteria	High	Medium	Low
Economies of scale
Proprietary product differences
Brand identity
Switching costs
Capital requirements
Access to distribution
Absolute cost advantage
Government policy
Expected retaliation
Industry Profitability
Stage in industry life cycle
Overall Risk Rating

Alternative Template for the Threat of New Entrants

The following free strategic planning template can be used to determine if each of the factors that affect the threat of new entrants has a positive or negative risk.
You can then give an overall rating for this force.

Analysis Criteria	Comments	Rating
Economies of scale
Proprietary product differences
Brand identity
Switching costs
Capital requirements
Access to distribution
Absolute cost advantage
Government policy
Expected retaliation
Industry Profitability
Stage of Industry Life Cycle
The threat of new entrants overall rating

Porters five forces Templates from What Makes a Good Leader are all provided free!

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After completing your Analysis

After completing your analysis you should transfer the key highlights to your SWOT analysis. Generally, you only need to add high level commentary to your SWOT.

Given that Porters five forces is an industry analysis technique you will only need to update the opportunities and threats in your SWOT analysis.

Why not take 5 minutes to learn how to use all of Porters Five Forces to ensure you can analyze and understand the nature of competition in your industry.