ANALYSING COMPETITION:Threat of new entrants
The threat of new entrants can increase competitive activity in a market. Outsiders will be tempted to enter a market or an industry if they feel that the opportunity is sufficiently appealing in terms of profitability and sales. Markets which have grown to a substantial size become potentially attractive to large powerful firms provided that the level of competitive activity enables them to achieve the kind of market share and profits and sales volume they expect.
This provides an incentive for the firms already operating in the market to make the prospects appear less attractive to would-be entrants by increasing the level of competitive activity. For example, lowering price levels would increase the competition between firms within the market and it might also deter other firms from entering because it would be more difficult to obtain high profitability levels. Much depends, however, on the cost structure of a would-be entrant.
Where a market is seen to be profitable, it may attract new entrants. Suppliers may expand downstream, or buyers may move upstream. This can cause increased competition and a likely reduction in margins. Methods to discourage entry include raising the cost of entry into a market. This may be achieved by developing new products through R&D which the competition find hard to match, or introducing new marketing initiatives, such as long- term contracts with customers, or raising the cost of entry through economies of scale. Raising the cost of entry has long been practised within many industries. In such cases, larger, more expensive plants are continually built to gain competitive advantage.