Competition in today’s industries spreads far beyond today’s directcompetitors. As per Porter, an organization’s competitive standing isdetermined by 4 important factors apart from industry rivals: customers,suppliers, potential entrants, and substitute products. The extendedrivalry that results from all five forces defines an industry’s structure andshapes the nature of competitive interaction within an industry. Thus inthe long run the combination of these factors drives competition andprofitability rather than where the product is in its life cycle. Whether thecompany earns attractive returns on investment or incurs losses hingeson whether these forces are intense or benign.
THREAT OF NEW ENTRY
The threat of entry in an industry depends on the entry barriers in theindustry and the reaction entrants can expect from incumbents. If entrybarriers are low and incumbents are unlikely to react much the threat of entry is high. Such a threat of entry is adequate to moderate profitabilityin the industry. It does not matter whether entry actually occurs or not. The 7 major barriers to entry are:1. Supply-side economies of scale- As the volumes produced by a firmgrow it enjoys scale economies which reduces per unit costs. They alsobenefit by spreading technology and marketing costs over larger volumes.2. Demand-side benefits of scale- This benefit is usually seen in industrieswhere the ‘network effect’ exists.3. Customer switching costs- Switching costs can be a major factor thatcan deter new players. If the users of the product face high switchingcosts they are unlikely to shift to a new vendor especially a new entrant tothe market.4. Capital requirements- If the capital required to be invested is high tobegin a new venture the industry is likely to face a minimal threat of newentry. However this barrier stands weakened if the returns are high andexpected to remain so.5. Incumbency advantages independent of size- some incumbents mayenjoy advantages such as proprietary technology, preferential access tothe best raw material sources and established brand identities. Suchadvantages may prove to be significant entry barriers.