- Threat of new entrants
- Threat of substitutes
- Bargaining power of customers
- Bargaining power of suppliers
- Industry rivalry
For this installment, I want to discuss the threat of new entrants, which is highly relevant to companies in the AV channels. We’re in a period right now where there is a growing overlap between channels and disciplines, AV/IT being perhaps the most obvious.
What do we mean by threat of new entrants? It’s the challenge incumbent businesses face when new competitors enter their market. Like the circle of life, the potential for profits in a specific market will attract new entrants. If the barriers to entry are low, it’s easy for new competitors to get involved. Possible consequences of this are either dilution of market share; the pie gets sliced into smaller pieces or lower profit margins as competition devolves to battling over price.
At the risk of stating the obvious, while the increased likelihood of new entrants can increase competition and negatively affect the profitability of incumbents, a low likelihood of new entrants decreases competitiveness and can protect the profitability of incumbents.
As great as that might sound for the incumbents, there are other downsides to a lack of competitiveness in a market, and that can give rise to other challenges, which are addressed in some of the other Five Forces. What determines whether or how new competitors enter a market are called the barriers to entry.
A barrier to entry is any factor that increases the expense or difficulty of entering a new market. That can be a large up-front capital expenditures to get started — or high economies of scale, the need for production to be high in order to reach profitability. Lack of access to resources, locations or technology can also hamper new entrants. Other considerations are high switching costs for the end-user customer, or government regulations or subsidies that are adverse to new entrants.
Conversely, the opposite of those situations, low barriers to entry will entice newcomers to enter an existing market: Low initial investment, low economics of scale and ready access to resources, locations or technology, or government regulations or subsidies that encourage new entrants.
While many barriers to entry boil down to money and resources, other barriers can be more ephemeral. The strength of existing brands and their customer relationships and the clear differentiation of their products from competitors can also act as effective barriers to entry. It makes sense then that the converse, weaker brands and undifferentiated products would attract new entrants that seek to take market share from incumbents perceived as weak.
When evaluating your company’s position, whether as an incumbent who needs to defend against new entrant, or whether you’re considering becoming a new entrant yourself, it’s necessary to conduct an analysis of the relevant factors.
Bear in mind, the picture you paint of the market factors will seldom be a clear cut ‘Yes’ or ‘No.’ There will be gradations and nuances to consider. That’s why it’s helpful to itemize the relevant factors, describe them and check them off to help make the picture more clear.
Here, let’s break it out into a table:
How all those factors balance out will help you to complete your analysis and inform your conclusion.
As an incumbent looking to protect your business, there are factors you can control and ones you can’t. The most obvious to me is the need to ensure that you have a strong brand, well differentiated products and services, and foster strong relationships with your end-users to ward off attempts to woo them away from you by new entrants.
And if you’re considering moving into another channel, all these factors need to be weighted in order to can insight into whether or not it’s feasible or even desirable to do so.