Threat of New Entrants

New entrant into an industry will bring extra capacity and more competition.

The strength of this threat varies from industry to industry and depends on two things (barriers to entry):

(a) The strength of the barriers to entry. Barriers to entry discourage new entrants.
(b) The likely response of existing competitors to the new entrant.

Barriers to Entry

(a) Scale economies – high fixed costs implies a high breakeven point, and a high breakeven point depends on a large volume of sales. If the market as a whole is not growing the new entrant has to capture a large slice of the market from existing competitors and this is expensive.

(b) Product differentiation – existing firm in the industry may have built up a good brand image and strong customer loyalty over a long period of time. Promote a large number of brands to crowd out the competition.

(c) Capital requirements – Capital requirement is high is a strong barrier against new entrants, particularly when the investment is possibly high-risk.

(d) Knowledge requirements – Knowledge and know-how are barrier to entry. It is more enter difficult to Industry which requires significant specialist knowledge and skills are required.

(e) Switching costs – Costs (time, money, convenience) that a customer would have to incur by switching from one supplier’s products to another’s. Although it might cost a consumer nothing to switch from one brand of frozen peas to another, the potential costs for the retailer or distributor might be high.

(f) Access to distribution channels – Distribution channels carry a manufacturer’s products to the end buyer. New distribution channels are difficult to establish, and existing distribution channels hard to gain access to.

(g) Cost advantages of existing producers, independent of economies of scales include:
a. Patent rights
b. Experience and know-how
c. Government subsidies and regulations
d. Favoured access to raw materials

Entry barriers might be lowered by the impact of change:
a. Changes in the environmen
b. Technological changes (including the internet)
c. New distribution channels for products or services (including the internet)


(source: BPP Learning Media)



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