Exercise 4: New Entrants — How Easy Is It to Join the Game?
Most beginners stumble when analyzing the threat of new entrants by focusing only on visible competitors, missing the subtle but powerful barriers that keep others out. This creates a false sense of security and leads to flawed strategic decisions. The real insight lies not in counting how many players are in the market, but in asking: What would it actually take for a new business to enter this space? That shift—from counting to questioning—is what transforms a surface-level analysis into a strategic one.
I’ve reviewed hundreds of student analyses over the past two decades, and the most common error? Treating “low threat” as “no threat,” when in fact, the absence of new players often signals strong barriers—like brand loyalty, high startup costs, or regulatory hurdles—that are invisible to the untrained eye.
This exercise guides you through identifying and evaluating those invisible walls. You’ll learn to spot real barriers using relatable examples. You’ll gain tools to assess market entry risk and make smart decisions about competition. By the end, you’ll see not just who’s in the market—but who’s kept out—and why that matters.
What Exactly Is the Threat of New Entrants?
It’s a measure of how easily new competitors can enter a market and challenge existing players.
When entry is easy, profits tend to fall. When it’s hard, incumbents can maintain pricing power and stability.
This force isn’t about big corporations or headlines—it’s about the potential, not the actual. Even if no new player has arrived yet, the *threat* can still shape strategy.
Why This Matters for Beginners
Many think a new business must be a startup with a website and a crowdfunding campaign. But real market entry can come from a local bakery expanding to a new city, a tech firm pivoting to a new service, or even a government policy enabling new entrants.
What determines whether that change happens? The barriers.
Understanding these barriers helps you anticipate competition, not after it arrives—but before.
Key Barriers to Entry: The 5 Core Factors
Not every market has the same level of difficulty for new entrants. These five factors explain why.
1. Economies of Scale
When larger players have lower average costs per unit, it becomes hard for small, new firms to compete on price.
For example: In the airline industry, buying hundreds of planes and staffing thousands of workers requires massive capital. New airlines can’t match the cost per seat.
Ask: Do existing firms have a clear cost advantage because of size?
2. Brand Loyalty and Customer Switching Costs
When customers are emotionally attached to a brand—or face real costs to switch—new entrants struggle to gain traction.
Consider: A customer who’s used Apple’s ecosystem for years might hesitate to switch to a Samsung phone, even if it’s cheaper. The time, data migration, and learning curve are switching costs.
Ask: Would customers feel pain if they changed? What would it take to win them over?
3. Capital Requirements
Some industries require huge upfront investment—more than most new startups can afford.
Think: Car manufacturing. Building a factory, designing models, passing safety tests—this isn’t a side project. The barrier is financial and logistical.
Ask: Is there a major capital outlay needed to start? Can a small business realistically afford it?
4. Access to Distribution Channels
Even if you have a great product, you need a way to reach customers.
Example: If a new energy drink wants to sell in supermarkets, it must convince store managers to stock it. Major brands already occupy shelf space. New entrants may face rejection or high fees.
Ask: Are distribution channels already controlled by incumbents? Can a new firm break in without paying huge fees?
5. Legal and Regulatory Barriers
Government rules can protect existing businesses. Licenses, patents, and certifications act as filters.
Example: In pharmaceuticals, a new drug must go through years of clinical trials and FDA approval. This deters quick entry.
Ask: Does this market require special permits, licenses, or approvals? Is there intellectual property protection?
Step-by-Step: How to Assess Threat of New Entrants
Use this checklist when analyzing any industry.
- Identify the industry. Be specific—“coffee shops” is broader than “premium cold brew delivery services in urban areas.”
- Ask: Who are the current players? List dominant firms and their market share.
- Examine the five barriers:
- Are economies of scale significant?
- Is brand loyalty strong?
- Are capital demands high?
- Do distribution channels favor incumbents?
- Are there legal protections?
- Score each barrier. Use: Low, Medium, High threat.
- Draw the conclusion. Are barriers strong enough to deter new entrants?
This isn’t guesswork. It’s a repeatable framework.
Real-World Examples: Market Entry Analysis in Action
Let’s apply this to real markets. These examples show how barriers vary—and why.
Example 1: Fast-Food Chains (High Threat of New Entrants)
| Barrier | Assessment | Reasoning |
|---|---|---|
| Economies of Scale | Low | Small chains can thrive. Franchising models help new entrants. |
| Brand Loyalty | Medium | Customers switch based on price and convenience. |
| Capital Requirements | Low to Medium | Opening a small storefront is affordable. |
| Distribution Access | Low | Only needs a physical location. |
| Legal/Regulatory | Low | Permits are standard and easy to obtain. |
Conclusion: Low barriers. New entrants can enter easily. The threat is high.
Example 2: Cloud Computing (Very High Threat of New Entrants)
| Barrier | Assessment | Reasoning |
|---|---|---|
| Economies of Scale | Very High | Amazon Web Services and Microsoft Azure have massive infrastructure and global reach. |
| Brand Loyalty | High | Enterprise clients trust established names. |
| Capital Requirements | Extremely High | Building data centers costs billions. |
| Distribution Access | High | Requires global network infrastructure. |
| Legal/Regulatory | High | Compliance with data privacy laws (GDPR, HIPAA) is complex. |
Conclusion: Extremely high barriers. The threat of new entrants is minimal. Incumbents have strong defensibility.
Example 3: Organic Food Retail (Medium Threat of New Entrants)
While the core business of selling food isn’t high-barrier, the “organic” label and certification process create some hurdles.
Local farmers can enter. But large chains dominate distribution. Certification can take time and cost money. Brand trust is still building.
So, the threat is medium—enough for innovation, but not fast enough to overwhelm large players.
Ask: Are you seeing new organic brands? Are they staying in business? That’s a signal of real market entry dynamics.
Common Mistakes to Avoid
Even experienced analysts slip up. Here are the most frequent beginner errors.
- Confusing threat with reality. Just because no new players have entered doesn’t mean the threat is low. Barriers may be holding them back.
- Overlooking indirect barriers. Brand loyalty isn’t just about name recognition—it includes customer trust, service quality, and emotional connection.
- Ignoring scale differences. A new entrant might be small, but if it can grow fast and leverage digital tools, the threat can emerge quickly.
- Assuming all industries are the same. A food delivery startup’s entry is easier than a new airline. Context matters.
Final Tip: Think Like a Gatekeeper
When evaluating threat of new entrants, ask: “If I wanted to start a business in this space, what would stop me?”
Write down the top three obstacles. Then ask: Could someone overcome them with enough time and money?
That’s not a question about current players. It’s about potential future competition.
That shift—from reacting to anticipating—is what turns analysis into strategy.
Frequently Asked Questions
How does the threat of new entrants affect pricing?
If new entrants can easily enter the market, incumbents face pressure to keep prices low. This reduces profitability. When entry is difficult, incumbents can maintain higher prices.
Can digital platforms reduce barriers to entry?
Yes—platforms like Amazon, Shopify, or YouTube lower capital and distribution hurdles. But brand loyalty and customer acquisition costs remain. The threat is higher than in physical-only industries, but not unlimited.
Does a high threat mean the market is unprofitable?
Not necessarily. High threat can signal opportunity for agile, innovative entrants. But sustained high threat often leads to lower long-term profits. It’s a trade-off between opportunity and stability.
How do I know if a barrier is truly high?
A barrier is high if it costs more than 6–12 months of gross profit to overcome. Or if it requires regulatory approval, major partnerships, or a network effect to succeed.
Are there cases where the threat of new entrants is low despite no clear barriers?
Yes. Network effects—like in social media or marketplaces—can create de facto barriers. Even without legal or financial hurdles, a platform with millions of users is hard to replace. New entrants must offer something dramatically better.
How often should I re-evaluate the threat of new entrants?
Reassess every 1–2 years, or when major changes occur: a new regulation, a disruptive tech breakthrough, or a shift in customer behavior. The market is never static.
