MSP 5 Forces Analysis: Threat of Entry & Capital Requirements

The post is meant to delve into Capital Requirements as a factor in creating Barriers to Entry for new firms to join the industry.

According to Porter, below is a list of factors determining the Threat of Entry from new providers:

  • Economies of scale
  • Product Differentiation
  • Capital Requirements
  • Switching Costs
  • Access to Distribution Channels
  • Cost Disadvantages Independent of Scale

Here is what Michael Porter has to say about Capital Requirements as a factor in creating Barriers to Entry in his book Competitive Strategy:

“The need to invest large financial resources in order to compete creates a barrier to entry, particularly if the capital is required for risky or unrecoverable up-front advertising or research and development (R&D). Capital may be necessary not only for production facilities but also for things like customer credit, inventories, or covering start-up losses. Xerox created a major capital barrier to entry in copiers, for example, when it chose to rent copiers rather than sell them outright which greatly increased the need for working capital. Whereas today’s major corporations have the financial resources to enter almost any industry, the huge capital requirements in fields like computers and mineral extraction limit the pool of likely entrants. Even if capital is available on the capital markets, entry represents a risky use of that capital which should be reflected in risk premiums charged the prospective entrant; these constitute advantages for going firms.”

> agraph –>

Leave a Reply

Your email address will not be published. Required fields are marked *