Michael E. Porter, a leading theorist of competitive strategy, developed a five forces model to explain competition in an industry. List these forces and describe the impact of the threat of new entrants

What will be an ideal response?

The five forces in the model by Porter are the threat of new entrants, the threat of substitute products or services, the bargaining power of buyers, the bargaining power of suppliers, and the competitive rivalry among current members of the industry. New entrants to an industry bring new capacity, a desire to gain market share and position. They also bring new approaches to serving customer needs. New players mean prices will be pushed downward and margins squeezed, resulting in reduced industry profitability in the long run. According to Porter, there are eight major sources of barriers to entry, the presence or absence of which determines the extent of threat of new industry entrants. 1. Economies of scale, which refers to the decline in per-unit product costs as the absolute volume of production per period increases. Although the concept of scale economies is frequently associated with manufacturing, it is also applicable to R&D, general administration, marketing, and other business functions. 2. Product differentiation is the barrier that depends on the extent of a product's perceived uniqueness. Differentiation can be achieved as a result of unique product attributes or effective marketing communications, or both. 3 . Capital requirement is another barrier. This may include fixed as well as the working capital. Some industries require enormous capital for various activities. 4. The one-time switching costs caused by the need to change suppliers and products are another barrier. These might include retraining, ancillary equipment costs, the cost of evaluating a new source, and other related aspects. 5. The access to distribution channels is another barrier. If channels are full or unavailable, the cost of entry is substantially increased because a new entrant must invest time and money to gain access to existing channels or to establish new channels. 6. Government policy is frequently a major entry barrier. 7. Established firms may also enjoy cost advantages independent of scale economies that present barriers to entry. Access to raw materials, a large pool of low-cost labor, favorable locations, and government subsidies are several examples. 8. Competitor response can be a major entry barrier. If new entrants expect existing competitors to respond strongly to entry, their expectations about the rewards of entry will certainly be affected.