Porter's Five Forces – Barriers to Entry

Michael Porter's five forces model identifies threat of new entrants as one of those things you need to contend with in your competitive environment. The more firms come in to compete in your selected industry, the less chances you have to dominate it. The factors that contribute the most to the possibility of entry of competitors are called barriers to entry.

Barriers to entry refer to those factors that will make it difficult for other companies to come in and compete in a given business environment. The higher the barriers are, the more difficult it will be for new players to come in. Conversely the lower the barriers are, the easier it will be for competitors to come in.

What are these barriers to entry you need to be aware of? Here are some of them:

1. Capital requirements. The higher capital requirements are, the more it will be difficult for competitors to come in. In establishing a business, you can choose between a business with low capital requirement but with the prospect of more competitors or one with high capital requirement but with less potential competitors.

2. Technology involved. The more sophisticated and complex the technological requirements are, the more difficult it will be for other entrepreneurs to enter that kind of business. If you possess that kind of technology, then you can capitalize on it in controlling your chosen industry. It can become your niche that others can not just enter into.

3. Skills requirement. If a business requires particular skills that the labor market does not easily produce, then that becomes a high entry barrier. Do you possess or are you in a position to harness that kind of rare skill for a particular business? That will be your competitive edge. It will be difficult for others to just come in and compete with you.

4. Taxation. Some governments give tax incentive on certain businesses prior to encouraging competition. The reverse can also be true. There are businesses with high tax levies, such as luxury goods. Factor the tax aspect in your long-term business plans.

5. Other barriers may come in the form of economic, political, cultural and social factors prevalent in specific business communities. The relative ease or difficulty with which you can successfully adapt to these factors will indicate whether the entry barriers are relatively high or low for you.

Make an inventory of your possible entry barriers when you start a business. Doing this will better prepare you to accelerate ahead and hurdle obstacles along the way.