2.2.4 How do I implement this Analysis Method?

This section provides a detailed overview of Porter´s Five Forces as well as questions and definitions which can help you analyse them.

Threat of new Entrants

New entrants are always a potential threat to existing companies. This could result in a possible decline in prices and a possible loss of market share which can put pressure on established companies. Competitors can try to establish their position and generate customer loyalty by employing various strategies. A higher capacity for innovation, franchising and brand differentiation are only a few ways helping which you can establish yourself in the sector in which your company operates. As the entrance of a new competitor is a potential risk for established businesses, it is likely that they will defend their market position against a potential new competitor (Grant 2002).

Keep in mind that, if you are a new competitor you will be always confronted with entrance barriers. These barriers can be divided into two categories: existing barriers and reactions of established companies in the sector:

  • Economies of scale: This occurs when production technology generates high fixed costs in relation to the running costs. As your company increases production costs will be much lower and hence, you can produce more profitable products than a small company.
  • Product differentiation: Product differentiation means that your products differ greatly in comparison to the products of the competitors. This can happen through differentiation in aspects such as the technology employed, materials used, product appearance and equipment.
  • Capital requirements: Here you should be especially aware of sunk costs. Sunk costs are past costs which can´t be recovered if a company decides to leave the market. You also have to observe sector specific issues.
  • Switching costs: Switching costs apply to your customers when they consider switching from your product.
  • Access to distribution channel: Existing relationships and agreements between manufacturers and key distributors in a market may also create barriers to entry. Companies aspiring to enter a market may look for a unique distribution channel to provide market access as well as to differentiate their products.
  • Cost disadvantages independent of size: Established companies often bear advantages because of production technologies employed, access to low priced resources, advantageous locations or subsidies.