Threat of new entrants
How easily newcomers can enter an industry and compete its profits away. Low where barriers such as scale, capital requirements or regulation are high; one of Porter's five forces.
Where you will meet it
Threat of new entrants appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Analyse an industry through the five competitive forces
“Industry profitability is shaped by the threat of new entrants, which depends on barriers such as scale, capital requirements and regulation; the bargaining power of suppliers and of buyers, each stronger when concentrated or when switching is easy for them and hard for the other side; the threat of substitutes performing the same function differently; and the intensity of rivalry among existing competitors, which rises with fixed costs, slow growth and undifferentiated products.”
- Show how inflation and a firm's competitive standing shape sales and cost forecasts
“Porter's five forces are the threat of new entrants, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers and rivalry among existing competitors.”
- Set out the questions an industry and competitive analysis should answer
“The first question is how attractive the industry is for long-run profitability, which depends on rivalry, the threat of new entrants and substitutes, and the bargaining power of suppliers and buyers.”
- Analyse the outside forces acting on an industry with the PESTLE framework
“Porter's Five Forces explains profitability through competitive pressure: rivalry among existing firms, the threat of new entrants, the threat of substitutes, and the bargaining power of suppliers and of buyers.”
See also
Practise it
Practise threat of new entrants until it is automatic: questions that explain every wrong option.
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