The Five Strategic Market Forces

Competition Watchdog

Michael Porter's Five Strategic Market Forces

Yuval Levy's submission to the World Wide Panorama: Markets, March 2005

Barriers to entry

  • Barriers to entry are obstacles on the way of potential new entrant to enter the market and compete with the incumbents.
  • The difficulties of entering a market can shelter the incumbents against new entrants.
  • Incumbents' profits are potentially higher than in a truly competitive market, at the expenses of their suppliers and buyers.
  • The higher the barriers to entry, the more power in the hand of the incumbents.

The two most important barriers to entry are:

  • Capital requirements
  • Government policy and regulations

There are plenty of other potential barriers that might scare new entrants away:

  • Proprietary products and knowledge
  • Access to inputs and distribution
  • Economies of scale and other cost advantages
  • Switching costs and brand identity

 

Examples

Industries with high barriers of entry:

  • Car making: high upfront capital investment in manufacturing equipment; compliance with safety and emission rules and regulation, access to parts suppliers, development of a network of car dealerships, big marketing campaign to establish a new car brand with consumers.
  • Mining: access to inputs restricted through natural distribution and government licenses, very specific/proprietary exploration knowledge, big investment in machinery.

Industries with low barriers of entry:

  • Computer Hardware retailing: everybody can start a home-based mail order business for computer parts. It takes little government permits, wholesaler are open for every reseller, there is no need to keep large stock, information is freely available on the internet.
  • Photography Services: little initial capital investment, no regulation, no economies of scale (the limiting factors are the photographer's time and his geographical location).

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