Porter’s 5 Forces: Potential Entrants
In a previous blog on Porter’s Five Forces, we explained how this strategy can be harnessed by businesses and organisations to ensure they are competitive.
In this blog we are focusing on the first of Porter’s Five Forces: potential entrants.
What are potential entrants’?
These are new or existing organisations that are not currently competitors, but could potentially enter the market that your company operates in.
Potential entrants are also sometimes described as:
- New entrants
- Threat of new entrants
- Threat of new potential entrants
- Risk of entry by potential competitors
Why might other organsiations enter your industry?
Companies might look at moving into the industry or sector that you operate within for a number of reasons. These include low barriers to entry, for example:
- Easy access to suppliers
- Ease of distribution
- Customers are not particularly brand loyal
- Low cost for customers to switch brands
- Economy of scale is quickly and easily achieved
- Government legislation has made it easier to enter the sector
If an industry offers fast or large potential returns, there will always be potential entrants ready to provide you with competition.
Some industries are easier to enter than others. For example, there are usually fewer barriers for a company entering service industries than those operating in manufacturing.
What should you look out for from potential entrants?
First you should see if there is any risk that they might take over ground held by your organisation. For example:
- Do they offer cheaper goods in an industry where price is an important factor?
- Could they replace your products or services with better, more saleable ones?
- Do they have a technological advantage over your company?
- Are they investing in a marketing campaign that could encourage your customers to purchase from the new entrant instead of your company?
How to respond to threats from potential entrants
Multi-nationals can use strategies based on their scale – for example, starting a price war – to help block new entrants to their industry.
For smaller players, options include focusing on building customer loyalty, so that customers won’t switch, even if a new company is offering a cheaper product or service. This can be linked to offering specialist knowledge, through hiring staff with a high level of expertise and/or ensuring current staff receive regular training and CPD (continual professional development).
Every company should carry out detailed forward planning so that it is aware of threats to its future success, such as potential entrants, and has a strategy to combat them.
You might also find it useful to look at our blog on Management Models – SWOT analysis.