What is Threat of New Entrants?
The Threat of New Entrants, one of the forces in Porter’s Five Forces industry analysis framework, refers to the threat that new competitors pose to current players within an industry. It is one of the forces that shape the competitive landscape of an industry and helps determine the attractiveness of an industry. The framework was developed by Michael Porter at Harvard University.
The other forces are a competitive rivalry, bargaining power of buyers, the threat of substitutes, and the bargaining power of suppliers.
The Threat of New Entrants Explained
The Threat of New Entrants exerts a significant influence on the ability of current companies to generate a profit. When new competitors enter into an industry offering the same products or services, a company’s competitive position will be at risk. Therefore, the threat of new entrants refers to the ability of which new companies can enter into an industry.
Barriers to New Entry
The Threat of New Entrants depends on the barriers to entry. The barriers refer to the existence of high costs or obstacles that can deter new competitors from entering into the industry.
Barriers to entry include:
- Brand loyalty: Customers in the industry show a strong preference for the products and/or services of existing companies.
- Cost advantages: Existing companies can easily produce and offer their products and/or services at a lower cost/price than that of new entrants.
- Government regulations
- Capital requirement: A high fixed cost to enter into an industry, i.e. telecommunications.
- Access to suppliers and distribution channels: Existing companies own exclusive rights to suppliers and distribution channels.
- Retaliation: Existing companies may collude and deter new entrants.
High Threat of New Entrants When:
- Low brand loyalty in the current industry
- Current brand names are not well-known
- Low initial capital investment
- Access to suppliers and distribution channels are easy
- Weak government regulations
- No threat of retaliation
- Proprietary technology is not required
Low Threat of New Entrants When:
- High brand loyalty in the current industry
- Brand names are well-known
- High initial capital investment
- Little to no access to suppliers and distribution channels
- Strong government regulations
- Threat of retaliation from existing competitors
- Proprietary technology is required to be successful
Barriers to Entry and the Threat of New Entrants:
A low threat of new entrants makes an industry attractive – there are high barriers to entry. Therefore, existing companies are able to enjoy increased profit potential.
A high threat of new entrants makes an industry less attractive – there are low barriers to entry. Therefore, new competitors are able to easily enter into the industry, compete with existing firms, and take market share. There is a reduced profit potential as more competitors are in the industry.
Let us consider whether JetBlue, a company in the airline industry, faces a high or low threat of new entrants.
New entrants to the airline industry pose a very low threat to JetBlue. First, the barriers to entry are remarkably high, as several airplanes are required to compete in the airline industry. Operating costs are massive and there are major government regulations for companies in the industry. Therefore, it is safe to say that the threat of new entrants in the airline industry is low as barriers to entry are high.
However, the threat of new entrants alone does not determine the overall attractiveness of an industry. The remaining forces (bargaining power of buyers, rivalry among existing competitors, bargaining power of suppliers, and the threat of substitutes) must be taken into consideration when determining overall industry attractiveness.
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