The threat of new entrants into the market is an important concept to understand for the success and sustainability of any business venture. New entrants can have a drastic effect on the competitive landscape, and the impact of their entrance into the market could be either positive or negative. For businesses already in the market, it is important to understand the potential risks and opportunities that could come from new entrants. Companies need to be prepared to respond to the potential new entrants and any changes in the market that could come from their entrance. In this blog post, we will explore what the threat of new entrants is and how it can affect existing business strategies. We will look at how companies can protect themselves and their existing strategies to ensure their longevity in the market. By the end of this blog post, you will have a clear understanding of the threat of new entrants and how to create a response plan in the event of their entrance.
When new competitors enter into an industry offering the same products or services, a company’s competitive position will be at risk. Therefore, the threat of new entrants refers to the ability of new companies to enter into an industry.
Threat of new entrants explained
New competitors can alter the competitive landscape and have a big impact on how much money existing businesses make. The cost of goods decreases as more businesses enter the market in an effort to compete for customers. Companies also face high costs to raise their entry barriers. Profitable industries draw more competitors, but if there are many entry barriers, new entrants are often reluctant to start a business. Some ways a new entrant may appear include:
What is the threat of new entrants?
The risk a new competitor poses for existing businesses in a given industry is known as the threat of new entrants. This happens when a new business starts offering a comparable good or service to an established business. For instance, if a business began selling vegan dog food, other dog food businesses that also sell vegan dog food would face competition. The threat of new entrants is one of the Porters Five Forces, a model developed by Harvard Business School professor Michael Porter to assess the level of competition in a particular industry.
Characteristics of high threats of new entrants
When the following circumstances exist, businesses may experience high levels of threats from new competitors:
Barriers for new entrants
There are frequently obstacles that prevent new competitors from entering the market. Some barriers for new entrants include:
Characteristics of low threats of new entrants
When the following traits exist, the likelihood of new entrants emerging is least likely:
What are some ways a business can respond to new entrants?
There are several steps an existing business can take to prevent the entry of new competitors into their industry if they anticipate it will happen. To make it harder for a company to enter, these involve raising the entry barriers. There are four main ways for a company to react to new competitors:
Limit pricing
Limit pricing is a business strategy where a company produces more goods at a lower cost than a competitor could sell their goods for. When implemented effectively, this strategy can assist a company in serving a larger portion of the market, reducing the opportunity for competition. Products can be priced more affordably if a company is making higher profits than usual.
Preemptive deterrence
By interacting with their customers and making the switch seem less appealing, businesses can stop new entrants from succeeding. This compels potential competitors to offer comparable incentives, which may deter them from entering the market. Some ways to create a preemptive deterrence include:
Signaling
Sending signals that may have an impact on competitors’ decisions to enter the market is another strategy for preventing new entrants. For instance, a current business might emphasize the significant entry-level challenges. Due to the high startup costs, this may cause potential competitors to be reluctant to enter the market.
Predatory pricing
When a business temporarily lowers the price of its goods or services to reflect its true losses, this practice is known as predatory pricing. When they eliminate rivals, they return to their previous price increases. This strategy might result in a loss of profits, but it might also deter new competitors in the future, which would increase profits.
Examples of new entrants
Here are some examples of scenarios where the threat of new entrants is present or absent:
Example 1
Austin’s Readers World bookstore faces a serious threat from new competitors. This is due to the low initial startup costs and the dearth of well-known bookstores in Austin’s downtown. Existing businesses probably wouldn’t take much offense if a new bookstore opened up, and switching would be reasonably inexpensive for customers.
Example 2
Since department stores don’t have to pay for store overhead costs, an online retailer selling reflective dog collars faces little competition from them. Additionally, they have a sizable customer base, which fosters brand loyalty. Since their collars are distinctive, they can differentiate their products, which makes it challenging for rivals to compete in their industry.
4.2 The threat of new entrants
FAQ
What is threat of new entrants example?
For instance, a company with a high risk of competition from new entrants might decide to patent its technology, reduce costs to make its product more affordable, or find ways to stand out from the competition by emphasizing its special features and advantages.
What are the factors of threat of new entrants?
Existence of entry barriers, economies of product differentiation, brand equity, capital requirements, access to distribution, absolute cost advantages, learning curve advantages, and government policies all pose a threat from new competitors.
