Which of the following is an industry barrier for new entrants in an established market?

In analyzing the structure of an industry, there is the term ‘the threat of new entrants’. This term is used to determine competitive position or factors that drive the level of competition in an industry. Hence, what exactly is the explanation of the threat of new entrants?

In the process of strategic planning, when a firm wants to establish a competitive strategy or to enter a new industry, firstly a planner must conduct an analysis of the attractiveness (newcomers perspective) or an analysis of the level of competition (existing companies perspective) in an industry by identifying threats of new entrants. In this article, I will look at the threat of new entrants through two perspectives, namely from the perspective of newcomers and from the perspective of existing companies. The new entrant's point of view will be seen from the level of barriers that exist in an industry, while the point of view of existing companies will be seen from the threat of potential entrants.

The threat of entry (new entrants) is one of the five competitive forces that shape a strategy and that can be a factor driving the level of competition in an industry. In general, the threat of new entrants can be interpreted as a threat to existing companies that currently compete against new entrants. Newcomers will bring new capacity and desire to gain market share that can put pressure on prices, costs, and the level of investments needed to compete. The threat of entry in an industry depends on the entry barrier and the response expected by the entrants from existing competitors. The higher the entry barrier, the more difficult it is for new entrants to join, conversely, the lower the entry barrier, the easier it is for new entrants to join. In this article, I will describe what factors become entry barriers and how to see this from the point of view of newcomers and existing companies.

Porter explained in his book entitled ‘Competitive Strategy’ (1998), there are several factors that become a barrier to entry:

Economies of scale

The economic scale is related to cost advantage, which is a condition where there is a decrease in the cost/unit of a product. The economic scale becomes a barrier to entry because it encourages potential entrants to enter on a large scale and causes a very strong reaction from existing companies that are currently in the industry or enter on a small scale but accept cost disadvantage. Both of these options are unfavorable conditions for potential entrants.

Product Differentiation

Differentiation creates a barrier to entry because it forces potential entrants to incur large costs in order to win the hearts of consumers who are currently loyal to companies that already exist in the industry.

Capital Requirements

To enter an industry, a large amount of capital is needed. The need for a large capital will create a barrier to entry into an industry because entrants must compete with existing companies by conducting advertising or research and development (R&D) processes at a large cost.

Cost Disadvantages Independent of Scale

Companies that already exist in an industry tend to have a cost advantage compared to companies that want to enter (Potential Entrants). Cost advantage can be obtained from the ease of accessing raw materials as well as the learning process or experience that is owned by the companies that currently exist. If this can be well maintained, then the effect will be a barrier to entry. Companies that have just entered an industry without experience are likely to endure difficulties in obtaining equality of costs against existing companies.

Government Policy

Government policies become a barrier for entrants because many regulations must be met and a limited number of companies may be involved in an industry.

Then, why is this threat of new entrant analysis important to do? As mentioned at the outset, this analysis is conducted to see the extent of the threat or competitive position of a firm in an industry and to facilitate the company in the process of making a strategy. It is easier for companies to see the level of profitability in the long run by understanding both the level of threat of entry and the level of entry/exit barrier in an industry.

Porter (1998) explains the relationship between barriers and profitability in a matrix: According to Porter, the best scenario for profitability in an industry is when the entry barrier is high, but the exit barrier is low. Under this condition, barriers to enter the industry are high, so the threat to potential entrants is low, and competitors will tend to leave this industry. Contrarily, the worst scenario is when the entry barrier is low and the exit barrier is high. Under this condition, the potential entrant threat becomes high, and it will be effortless to enter for competitors so competition will become tight and the profitability will be-low.

In general, entering a new industry is one part of the diversification strategy. Companies that are able to see the level of attractiveness (potential market) of industry tend to enter it and in this condition will become a threat to existing companies. Therefore, both existing companies and new entrants must have a strategy in order to obtain/maintain competitive positions. By identifying/analyzing the level of competition or attractiveness, a company that wants to enter a new industry will easily determine its strategy to get a competitive advantage. Then, what about the existing company? What strategies can be used to overcome the threat of new entrants? The higher the barrier level of an industry, the higher the level of attractiveness/profitability and the lower the level of threat of new entrants. Therefore, in order to increase barriers, companies must aggressively maintain their competitive position. One of the industries that has a low entry barrier is the coffee industry. For example, to maintain its competitive position, Starbucks must aggressively invest in renewing/modernize its outlets and menus, so those will create a barrier for new entrants to compete in the industry. So, what is the strategy that can be applied to a company that wants to enter the new industry? On the basis of the above explanation, it is known that industries whose level of attractiveness/profitability are high have a high entry barrier. If a firm wants to enter a new industry, then it can use a strategic acquisition or joint venture. The acquisition or joint venture strategy of the existing company is chosen because new entrants can minimize the costs required in order to obtain a competitive position in an industry.

References :

Porter, M. E.1998.Competitive strategy.Free Press.New York

Porter, M. E.2008.The Five Competitive Forces That Shape Strategy.Harvard Business Review

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