Threats of new entrants tends to be high when the industry is very profitable, entry barriers are low and expected relations from the existing firms is not serious. New entrants to an industry bring new capacity, the desire to gain market share and substantial resources. As a result competition in the industry is intensified. However =, the following act as barriers to entry :
Ecnonmies of Scale : Economies of scale restrict entry by forcing the new entrants to come on a large scale or to accept a cost disadvantage. Small players are kept out and large players are discouraged due to heavy risk. The economies of scale may be in the areas of production, marketing, financing and research, etc.
Product Differentiation : Brand image, customer loyalty and unique product attributes create a barrier by forcing new entrants to spend heavily to quite high such as in the case of bathing soaps, soft drinks, cosmetics and other personal products.
Capital Requirements : The need to invest large financial resources and high risks due to capital intensive nature of an industry creates a barrier to entry. For example, the minimum sized urea fertilizer plant requires a capital outlay of more than Rs. 1,000 crores with a gestation period of 7-8 years. Many firms cannot cope with these requirements.
Cost Disadvantages Independent of Size : The existing firms in an industry may enjoy certain cost advantages which are not available to new entrants irrespective of their size or scale. These advantages may accure from the effects of the learning curve, proprietary technology, access to the best sources of raw materials, assets acquired at low prices, favorable location. etc. New competitors, therefore, suffer cost disadvantages.
Access to Distribution Channels : The new entrants may not have access to distribution channels enjoyed by the established firms. The new entrants may gain access to the distributors at higher costs and may not remain competitive. This barrier will be high when the channels are limited and have tied up with the existing players. Sometimes this barrier is so high that a new entrant ahs to create its own distribution system as happened with Reliance Industries Limited.
Government Policy : Sometimes, government policy and regulation act as a significant barrier to entry. Reservation of industries for public sector and small scale sector, industrial licensing, import restrictions, control on foreign capital and technology are some strong entry barrier.