Have you ever tried to evaluate the attractiveness and profitability of an industry? Porter’s five forces model helps us do this. In his article ‘The five competitive forces that shape strategy’ published by Harvard Business Review in 2008, he explains his theory.

The first force we are looking at is the threat of new entrants.

When new players enter the industry, incumbents ( = organisations already populating the market) tend to lower the prices or increase investments to deter new competitors. Entry barriers depend on the following factors:

• supply-side economies of scale: incumbents produce at larger volumes and at lower costs per unit, which might be a cost disadvantage for new entrants
• demand-side economies of scale: buyers tend to buy a product from an organisation which is already well-known and sells to many other buyers, which might be a disadvantage for new entrants
• customer switching costs: when a buyer who switches supplier is obliged to change product specifications, embark on a retraining programme for the employees or adopt new processes or IT systems, we can say that switching costs are high and for this reason, it is hard for new entrants to get customers
• capital requirements: a capital may be needed to extend customer credit, build inventories, fund start-up losses. The higher the capital requirements, the higher the entry barriers. However, if the industry returns are attractive, new entrants will populate the industry
• incumbency advantages independent of the size: let us consider proprietary technology, preferential access to best raw materials, geographic locations, established brand identities
• unequal access to distribution channels: this is sometimes such a high barrier that new entrants are obliged to bypass already existing distribution channels and create their own channels (e.g. online low cost airlines)
• restrictive government policy: government policy can amplify or hinder entry barriers
• expected retaliation: how incumbents may react will also influence the new entrants’ decision whether to enter or stay out of a market

All in all, the challenge is to discover ways to enter the industry overcoming all these barriers without eroding the profitability of participating in the industry.