Industry Profitability

What determines the profitability in an industry?

Michael Porter provides several answers to this important question.  Today we will deal with one of the answers, the threat of entry.

Threat of entry

When examining the threats of entry into an existing or potentially new market, the following questions need to be raised:

• How easy is it for newcomers to break in?

Can anybody enter?

Think of the example of another pizza parlour opening up in your neighbourhood. All of a sudden the market has more vendors than before, with everyone fighting for the same size of the pie .

• Do  newcomers need to fear sharp retaliation from incumbents? Can the incumbents drive the newcomers out?

• Is a minimum size required for entry? Does this provide the incumbents with a cost advantage that the newcomers cannot match?

• Do incumbents possess  a strong brand identification? Have they created powerful customer loyalty, or will the newcomers have no difficulty taking customers away?

Whether you are already in an industry or contemplating entry, consider the above, and evaluate the threats.

You may need to re-examine your business model.

Considering New Markets?

When considering new markets answer the following questions:

Does the market have high potential?

Is the market dominated by strong competitors or is it fractured among many small businesses?

Is the market easy to enter or are there strong barriers to entry? Will fresh competition find it easy to attack you ?

What is the profitability in the market? Is  it dependent on raw material costs that you have no control over and that cannot be passed on to the customer ?

Right  answers to the above will greatly enhance a successful entry into a new market.