According to Porter, a new entrant plays a big role in shaping the competitive dynamics of any industry. In the process, the entrant affects the ability of the existing firms to make a profit. The threat of new entrants in an industry is a serious issue that existing players should tackle carefully.
If some form of barriers to entry exist in an industry, there’s little chance of an entrant entering a competitive environment that a business operates. That means, when there are low barriers to entry, there will be higher threats of new entrants, and consequently, the profit potential in the whole industry will be lower.
That is, as more competitors fight for the same amount of business, market share and sales will be redistributed, which may eventually affect pricing and product quality. Some of these barriers include high investment requirements, strict regulations, and the need for specialized knowledge.
However, if there is profit potential in the market, but few obstacles exist on the way to achieve it, then it is unlikely for new companies to enter the market.
Means of Entry Into the Market
New firms can enter the market in several ways, which include:
- A new business can come into the market by expanding the original market for products of the existing firms. A common strategy used by businesses undergoing sales decline or stagnation.
- Take-over: An outsider company can take over an existing firm and avoid all the traditional entry barriers within the business. Such a company, through expertise and innovation, can change the competitive dynamics of the industry for everyone.
- Competitive advantage: A firm can come up with an innovation that gives it an edge over other firms in the industry.
- Demand: New entrants can capitalize on an increase in demand for a product to offset any high market entry costs.
- Control: Instead of trying to stop any new competitor from entering the market, an existing business may decide to control how new firms get into the market.
Types of Entry Barriers
Barriers are conditions within the competitive environment that determines a firm’s choice to enter the market or not. Though they aren’t present in all markets or industries, barriers make it easy or difficult for a business to enter and establish itself in the market where they exist. In some environments, barriers exist, but their enforcement isn’t strict.
A business should analyze the potential barriers and weigh out its options before joining the market. The barriers include:
- Economies of Scale
As companies sell on a large scale, per unit cost of products falls, giving them a cost advantage. This means that, if a business produces more in quantity, it benefits more. Read more about free slots no deposit required. For that reason, a new entrant has to match the large-scale production to achieve similar cost advantage and compete with the existing firms. New entrants may not match the large quantity production, thus giving existing businesses a barrier advantage.
- A Differentiated Product
When businesses command strong brand loyalty or sell highly differentiated products, a strong barrier to entry will emerge. A new entrant’s only chance is to come up with products with better quality or uniqueness than those present in the older company. But then again, they will have to break the existing brand loyalties and sway customers to their new company, which won’t be easy.
- High Capital Cost
Some businesses need massive capital investment to start. Only those who can match the huge cost will attempt to enter into the market. The cost barrier discourages many potential entrants from getting into the competitive market.
- Other Cost Advantages
The existing established businesses which might already be reaping from economies of scale advantage, also enjoy other cost benefits. The benefits are:
- Technological knowledge
- Understanding of existing materials and knowledge of their quality
- Possession of essential and necessary patents
- Access to the best suppliers.
- Many years of industry experience
Lack of cost advantages may prevent potential new entrants from joining and competing in the market.
- Cost of Switching
If it is difficult for consumers to switch from one company or product to another, a new entrant will find it difficult to sell its products in that market. High switching costs force the new firm to spend on creating an advantage to counter the switching costs or avoid the market completely.
- Distribution Network
The existing market may have a strong relationship with distributors across the established distribution channels. Potential entrants will have to spend extra to create their distribution network that can compete.
When suppliers are loyal or have long-term contracts with the existing firms, persuading them to join a new company is quite a task.
- Legal and Government Created Barriers
The requirements, like licenses and business permits, are costly. Some government requirements may conflict with what a business stands for; hence, decline to join the market.
- Barriers to Exit
A company would want to leave the market if things fail to work out, but exit barriers may become a hindrance. If a business will have to stay in a market even when it wants to quit, then it would prefer not to join.
How to Analyze Entry Barriers
Before carrying out analysis, remember that some entry barriers won’t affect some businesses. Note that the presence of barriers doesn’t mean you shouldn’t enter into the market.
Existing industries should constantly assess the market dynamics to anticipate new entrant threats, and strategize to counter them. Below are some questions to ask during the analysis.
- Is the brand name strong and well recognized?
- Is high initial capital investment necessary?
- Are there any significant switching costs for customers?
- Does profitability require economies of scale?
- Are the products generic and undifferentiated?
- Is it possible to access and align with the existing distribution channels?
- How complicated are the government requirements?
- Is the location a problem?
- Are existing firms likely to retaliate? If so, then to what extent?
How to Respond to The Threat of New Entrants in an Industry: Strategic Entry Deterrence
It’s all about strengthening the barriers, making them too tight for potential incomers to get in. Here are some activities to follow.
A company can invest in developing a lasting relationship with customers by creating strong market visibility, strong brand loyalty, and promotions. The relationship helps retain clients by making switching difficult.
A firm can create a larger output of products at a lower price to deter new entrance. This only works for companies with the means to produce on a large scale consistently.
Another strategy is to price below your actual profits to drive competitors out of the market or discourage entry into the business. After achieving this, you can now raise prices to cover up for the previous losses. Though extreme, aggressive, and can bring social repercussions, this method can deter future threats and ensure long-term profit generation.
The Threat of Entrants: An Example of Google
In the search engine environment, there is a moderate cost of doing business. Which means several companies are capable of joining and competing. Again, the high capability to meet statutory requirements should attract new firms to compete.
However, high brand development cost in the industry makes many entrants fail to maintain operations in the industry. Google has monopolized the internet industry for a long time, thanks to its valuable brand. With 80% of the global’s search engine market share and over 85% of internet search revenue, Google has established itself as the giant of the industry. Google’s strong brand and loyal customer base make even the close competitors, Yahoo and Microsoft’s Bing, to find it difficult to compete amidst their vast resources.
Therefore, the threat of new entry is a moderate issue in Google’s long-term strategic growth.