It is surprising how much companies underestimate the impact that is likely to be placed on their own profitability if a new competitor enters the market. In fact, the disruption can be quite severe, leading to decreased market share or even leading to a price war that can cause damage an entire industry. Porter’s New Entrants force gauges the likely potential impact of new entrants in a given field, as shown in the following airline industry examples:
1. How much do economies of scale help protect existing participants? While certain efficiencies from having established, large-scale operations benefit existing airlines, new carriers may effectively be able to target limited, high-value niche markets, such as high-traffic commuter routes, where the lack of scale is less of an issue.
2. Are there significant barriers to entry? The cost and risk associated with starting an airline are substantial, and those factors do tend to limit the accessibility of the market for new participants to compete with existing air-travel carriers.
3. How easily can new participants get access to distribution channels? A start-up airline may find it difficult to obtain access to gates and other needed resources at main airports, although they may have better success in secondary markets, many of which may be actively trying to attract airlines to operate from their airports.
By Sean Campbell
By Scott Swigart
