4.2 The threat of new entrants

Summary

The video explores the first of Porter’s Five Forces: the threat of new entrants in an industry. It explains that high profits attract new competitors, posing risks to existing companies. To counter this, businesses can create legal barriers such as cost advantages, economies of scale, strong brand differentiation, access to distribution channels, government regulations, and expected retaliation. Examples like Saudi Aramco, Coca-Cola, and P&G illustrate these strategies. By proactively establishing such barriers, companies can protect their market share, minimize the impact of new entrants, and maintain a competitive edge, ensuring long-term profitability and industry stability.

Takeaways

• 💰 High industry profits attract new entrants, as companies see opportunities to earn similar returns.
• ⚠️ The threat of new entrants increases competition and can reduce market share for existing firms.
• 🛡️ Companies can create barriers to entry to protect themselves from new competitors.
• 🏭 Cost advantages, such as access to cheaper raw materials or government subsidies, can deter new entrants (e.g., Saudi Aramco).
• 📈 Economies of scale act as a barrier because new entrants face higher unit costs without large-scale operations.
• 🥤 Strong product differentiation, like Coca-Cola's brand recognition, makes it harder for new entrants to compete.
• 🏪 Access to distribution channels is crucial; established firms often have an advantage over newcomers.
• 🌐 The internet can reduce distribution barriers by allowing new businesses to sell directly online.
• 📜 Government regulations, such as licensing requirements in telecoms, can limit new entrants.
• 🚨 Expected retaliation from existing firms, such as aggressive promotions and advertising, can discourage new competitors.
• 🧩 Strategically creating barriers before competitors enter is more efficient than trying to compete afterward.

Q & A

What is meant by the 'threat of new entrants' in an industry?

The threat of new entrants refers to the risk that new competitors will enter an industry, increasing competition and potentially reducing the market share and profits of existing firms.

Why are high profits in an industry a magnet for new entrants?

High profits signal opportunity. When companies in an industry are doing well, potential competitors are motivated to enter and try to capture a share of those profits.

How can cost advantages act as a barrier to entry?

Companies with access to cheaper resources, government subsidies, or localized advantages can produce at lower costs, making it difficult for new entrants to compete on price.

What role do economies of scale play in preventing new entrants?

Economies of scale reduce per-unit costs as production increases. New entrants starting at small scale face higher costs, which can discourage them from entering the market.

How does product differentiation protect a company from new competitors?

When a company creates a product perceived as unique or highly recognized, customers are more likely to remain loyal, reducing the threat posed by new entrants. Coca-Cola is an example of this.

Why is access to distribution channels important in creating barriers to entry?

Established firms often have strong relationships with retailers or distributors, making it difficult for new entrants to place their products and reach customers. Online sales can sometimes reduce this barrier.

How can government policies serve as a barrier to entry?

Governments can regulate the number of companies in certain industries, require licenses, or impose restrictions, which limits the ability of new firms to enter the market.

What is the impact of expected retaliation from existing firms on new entrants?

If new entrants anticipate aggressive actions such as increased advertising or special promotions from existing firms, they may be discouraged from entering the market due to the higher risk and cost of competition.

Why is it more efficient for companies to create barriers before new competitors enter?

Preemptively establishing barriers can prevent competition from arising, avoiding the need to fight for market share after new entrants appear, which is often more costly and challenging.

How has the Internet changed traditional barriers to entry?

The Internet allows new businesses to bypass traditional distribution channels and reach customers directly online, reducing some barriers like shelf space in retail stores.

Can barriers to entry be both legal and strategic?

Yes. Barriers can be legal, such as regulations and licensing, or strategic, such as cost advantages, brand loyalty, and economies of scale, all designed to protect existing firms from new competition.