Note:  Porter's Five Forces is a technique that will help leaders to analyze the nature of competition in their industry, this process is often referred to as an industry analysis. Now you can discover how to improve your business performance using this technique. Click here for an industry analysis overview.

"How likely is it that a new competitor will steal your customers?"
Determine if a new competitor is going to be attracted to your industry and find out what you can do about it.
Written by Ian Pratt

On this page you will learn how to assess the "threat of new entrants" to your industry.

Introduction to the Threat of New Entrants

The number of competitors in your industry has an impact on how competitive your industry will be, as the number of competitors grows so does the degree of competition.

When a new competitor enters your industry they are likely to choose an aggressive growth strategy, which will force you as an existing businesses to defend your territory or market position, often at the expense of your profit.

Lets discover how to assess the the threat of new entrants to your industry using porters five forces by identifying your industries barriers to entry.

Management Tip: The greater the barriers to entry the less likely it is that a new competitor will emerge. 

Example of the threat of new entrants:

Imagine a suburban domestic cleaning business, can you think of anything that may prevent someone else starting another domestic cleaning business near by in direct competition?

Yes

No

Now lets consider the other extreme, there are many reasons why a new oil company is unlikely to startup and commence refining oil. 

Completing Your Analysis

To analyses the threat of new entrants to your industry, you will need to consider the following factors, click on each for more details and ignore those not relevant to your industry.

• 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 

What makes a good leader has provided strategic planning templates for each of Porter's five forces. The Threat of new entrants template is at the bottom of this page, take me there

Porters Threat of New Entrants in Detail

Learn how to complete your porter's five forces analysis and understand the nature of competition in your industry.

Economies of scale

What is the total production output of your industry? or, Is your industry high or low volume?

The higher the volume production of your industry the less likely a new competitor will emerge and survive.

Management tip: Compare your industry volume to the volume of soft drink or baked beans sold to see if you are high volume industry. Don't make the mistake of thinking that if your industry produces 1,000 widgets a month that it is a high volume industry.

If you and your existing competitors are all high volume producers then it will be harder for someone else to enter the market. (they will need to produce and distribute a high volume of products to be sustainable and that will be hard to do)

However it does depend a little on the stage in the product life cycle, if demand is growing then economies of scale will be less of a barrier than if demand was flat or in decline. 

An example: If you produce 10 boats a month and there are 1,000 boats built in year in your region each year and your customers have to wait 4 months for a boat due to strong demand, then maybe another serious competitor may enter the market.

However if you produce 100,000 tins of baked beans per month and the industry produces 1,000,000 then it will be a lot harder for a serious competitor to enter your industry. (they will need to generate a huge interest in their product quickly - which is very hard to do)

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Proprietary product differences 

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

If your customers perceive that your products or services are different to your competitors and your customer values that difference then new competitors are less likely to be a threat to your business.

If your customer perceives that your products/services are essentially the same then new competition is more likely.

Examples: If you are in the business card printing industry then, try as you might, it could be hard to differentiate your product.

However, if you offer short turn around times, low cost, online ordering systems and an innovative online design tool for your customers to use. You might have a difference in your service that your customer values.

On the flip side if you package your business cards in a uniquely designed box before distributing them to your customer, you may find that the customer does not care about the box. In this case your uniqueness is no advantage and will not deter new competitors from entering your market.

Leadership tip: Do not make the common mistake of thinking a quality that you like about your product is also valued by your customers.

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Brand identity

Do you have a brand that people prefer to use?

Consumers tend to only be concerned with brands if the brand is consumed in public or the benefit is visible to others, such as clothing or electronic products like an Apple ipod or iphone.

If your brand has a unique position in the market then you are less likely to have new competitors competing in your industry, or if you do, they will have minimal impact.

For example: What is the probability that someone will enter into the cola market and make a difference to Coke or Pepsi. (However these two brands maybe concerned about alternative products). 

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Switching costs

Does your customer incur any costs to switch to one of your competitors products?

If your customers incur a switching cost then it is less likely for a new competitor to join the market as it will be difficult to attract your customers away from you.

Examples: Many major corporations could save money by switching to a lower cost "office suit" however the high cost of training people in the new systems and the existence of sometimes hundreds of Microsoft templates and spreadsheets they tend to stick with Microsoft. 

(Although the recent emergence of extremely similar products will reduce this barrier and be a real threat to some Microsoft products)  

Or, if you have an apple ipod and a ipod docking station in your car and an ipod docking station in your kitchen then, when it comes time to upgrade your ipod, you will probably get another ipod.

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Capital requirements

How much capital does it take to set up in competition with you?

The more startup capital that is required the less likely additional competitors will enter the market. If limited capital is required then additional new entrants should be expected.

There are two reasons why this is a deterrent, firstly you have to have access to a lot of cash to purchase the up front capital, then you will need to have high sales volumes to deliver a return on your investment.

The only variation from this rule is that global companies who do not operate in your region may expand into your region.

Example: It is unlikely that a group of investors will get to together to start a new car company, however a foreign company may move into your region and start selling their cars.

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Access to distribution

Will a startup businesses have access to distribution channels?

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.

For example: if you make coffee and you give coffee shops a free coffee making machine as long as they buy your coffee, it will be hard for others to replicate your distribution system.

If you have a series of exclusive distribution contracts in place say you sell break pads for cars and have several national repairer franchises lock in with contracts, then a new entrant will not be able to access these customers.

Apple have a distribution advantage with their itunes store and their ipods. Whilst it is possible to replicate their model it will be hard to so.

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Absolute cost advantage

Absolute cost advantage other than through scale

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?

An example: Apple have an advantage, due to their size they can influence the price they pay for music. To compete with apple on price you would need to access the music at the same price and to do that you will need the promise of volume sales.

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Government policy

Do you require a permit or licence to be in 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.

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Expected retaliation

How likely is retaliation by existing members of the industry to the emergence of a new player to the industry.

Note: Retaliation reduces profit, the more profitable the industry the more likely there will be retaliation

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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.

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

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Stage of 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.

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Porter's Five Forces Exercise

The threat of new entrants to your industry

Select which of the following barriers to entry apply to your industry

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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.

Porter Model Templates from What Makes a Good Leader

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Porter Model Links

How would you like to learn about all of porter's five forces? If so please follow the links below, or return to our Porter's Five Forces home page.

Each page includes a free strategic planning template complete with the common factors for you to consider when completing your analysis. 

The Bargaining Power of Suppliers

Threat of Substitute Products

Industry Rivalry

The Bargaining Power of Your Customers

Why not review all of porter's five forces.

The Threat of New Entrants into your Industry

The Bargaining Power of Suppliers

Threat of Substitute Products

Industry Rivalry