Threats of new entrants

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Threats of new entrants.

The force examines how easy or difficult it is for new competitors to join the market
place in the industry being examined. New entrants to an industry bring new
 capacity to gain market share. This eventually puts pressure on prices, costs and the
rate of investment necessary to compete favorably. When the threat is high then the
incumbents must lower their prices and this interferes with the profits.
However, there are barriers to entry into an industry. Incumbents exploit these
advantages to retain dominance and discourage new competitors from entering the
market.

Barriers to entry:
i) Economies of scale.
These economies arise when firms produce in large volumes at the same time
enjoying low cost per unit through the use of efficient manufacturing technology.
Established companies that have heavily invested in manufacturing, marketing,
distribution will likely hold an absolute cost advantage over potential new entrants.

Should Dayka be planning to venture into a new market, they should take
into consideration, the incumbents’ technology, marketing strategies,
distribution efficiency.
If Dayka is an incumbent in a market , it should set measures of having cost
advantages over potential new entrants, they should invest adequately in
manufacturing technology that will ensure that they enjoy absolute cost
advantage, marketing and establish effective and efficient distribution
models.

ii) Product differentiation.

Well established firms enjoy brand recognition and customer loyalty. As such, new
entrants are likely to spend a lot trying to capture market share. This is true
irrespective of the size of the entrants.
Popular coffee house brand java has enjoyed almost exclusive domination in the
Kenyan market. It is so popular, songs have been done by artists recognizing the
brand. A few years ago a fairly competitive brand ‘Kaldi’s’ coffee’ made its way into
the market with a few outlets in Nairobi. Despite kaldi’s coffee being fairly
established, it doesn’t enjoy recognition in Kenya as much as Java would.

Dayka should consider the following:

Customers are only interested in how well a firm meets their needs. To have
customer loyalty Dayka should strive to meet the customer’s needs rather
than its needs for expansion or venturing into new markets (biggest is not
necessarily best, but best can get you to biggest).
If Dayka is a new entrant in a market, they should consider adequately
investing in brand recognition measures.

iii) Capital requirements.

 The need to invest large financial resources in order to compete favorably
discourages new entrants. This varies in different industries. For example oil, real
estate, automotive industries necessitate high capital hence there exists a barrier for
potential new entrants.
Capital is however necessary for not only fixed facilities but also for funding start-up
losses, marketing, servicing customer credit facility.
It is recommended that Dayka sets aside not only capital for establishing fixed
facilities but also adequate working capital to cater for losses, credit, marketing,
promotion of brand.

iv) Customer switching costs.

v) Unequal access to distribution channels.

The more limited the wholesale and retail channels are and the more existing
competitors have dominated them, the tougher entry into an industry will be.
Access to distribution channels is so high a barrier that new entrants must strive to
bypass distribution channels or create their own altogether.

Dayka should find suitable retail and wholesale channels for their products
this is if they are venturing into a new market.
If possible they should build their own distribution channels if they are
incumbents in the market and are well established.
vi) Government policy.
Industries such as breweries, mining, and air transport are highly checked by the
government. The standards set by the government may many times be too high for
new entrants to comply with. Strict regulations have to be observed, failure to which
firms risk being shut-down.

Dayka should put effort to ensure that they comply with all government
regulations.
If dayka plans to venture into a new market it should invest in ensuring the
recommended quality standards for products are met.