The Five Forces Model (Threat of New Entrants)

Threat of New Entrants
In general, industries are more attractive when the threat of entry is low. This means that competitors cannot easily enter the industry to copy what the industry incumbents are doing. There are a number of ways that firms in an industry can keep the number of new entrants low. These techniques are referred to as barriers to entry. A barrier to entry is a condition that creates a disincentive way for a new firm to enter an industry.8
Let’s look at the six major sources of barriers to entry:
Economies of scale:
Industries that are characterized by large economies of scale are difficult for new firms to enter, unless they are willing to accept a cost disadvantage. Economies of scale occur when mass-producing a product results in lower average costs. For example, Intel has huge microchip factories that produce vast quantities of chips, thereby reducing the average cost of a chip. It would be difficult for a new entrant to match Intel’s advantage in this area. There are instances in which the competitive advantage generated by economics of scale can be overcome. For example, many microbreweries have successfully entered the beer industry by brewing their beer locally and relying on a local niche market clientele. By offering locally brewed, high-quality products, successful microbreweries counter the enormous economies of scale (and the lower price to consumers they permit) of national brewers such as Anheuser-Busch and MillerCoors.
Product differentiation:
Industries such as the soft-drink industry that are characterized by firms with strong brands are difficult to break into without spending heavily on advertising. For example, imagine how costly it would be to compete head-to-head against Pepsi or Coca-Cola. Another way of achieving differentiation is through product innovation. Apple is an example of a company that has differentiated itself in laptop computers by regularly improving the features on its line of MacBooks. It does this to not only keep existing customers and win new ones, but to deter competitors from making a big push to try to win market share from Apple in the
laptop computer industry.
Capital requirements:
The need to invest large amounts of money to gain entrance to an industry is another barrier to entry. The automobile industry is characterized by large capital requirements, although Tesla, which launched in 2003, was able to overcome this barrier and raise substantial funds by winning the confidence of investors through its expertise and innovations in electric car technology.
Cost advantages independent of size:
 Entrenched competitors may have cost advantages not related to size that are not available to new entrants. Commonly, these advantages are grounded in the firm’s history. For example, the existing competitors in an industry may have purchased land and equipment in the past when the cost was far less than new entrants would have to pay for the same assets at the time of their entry.
Access to distribution channels:
Distribution channels are often hard to crack. This is particularly true in crowded markets, such as the convenience store market. For a new sports drink to be placed on a convenience store shelf, it typically has to displace a product that is already there. Similarly, Element Bars would find it difficult to gain sufficient shelf space in grocery stores where a large number of offerings from major producers are already available to consumers.
Government and legal barriers:
In knowledge-intensive industries, such as biotechnology and software, patents, trademarks, and copyrights form major barriers to entry. Other industries, such as banking and broadcasting, require the granting of a license by a public authority.