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.