New digital threats and the lowering of barriers to entry

New digital threats

New digital threats and the lowering of barriers to entry – Micheal E. Porter describes the Five Forces of industry competition from the perspective of an incumbent (those businesses already operating in the industry).

One of the uses of the framework is to determine whether a new business should enter an industry. It can also be used to determine if such a business can compete successfully with the incumbents.

New digital threats and the lowering of barriers to entry

The five (traditional) forces of industry competition are:

1. The threat of new entrants (competitors)

2. The threat of substitutes (products and services)

3. The bargaining power of buyers

4. The bargaining powers of suppliers

5. The intensity of rivalry among existing competitors

The digital world is changing the rules of competition. In this article, we’ll explore how the digital business model is disrupting the traditional notion of industry competition. Specifically, the threat of new entrants.

New digital threats – new entrants

A profitable industry is one where businesses earn profits in excess of the cost of capital.

Therefore, the threat of new entrants is the extent to which new businesses are attracted to the industry. It is a threat to the incumbents because of the potential loss of profits.

Before the digital disruption, some industries were difficult to enter because of the barriers to entry and the reactions of existing competitors.

Threat of new entrants was minimized by creating barriers using strategies such as: large economies of scale, capital requirements, product differentiation, high switching costs, and strong customer loyalty.

Increasingly, digital business models are helping to create a level playing field.

Now, new entrants can rush in with fewer barriers to entry. In some cases, new players have competitive advantage over the incumbents right from inception as a result of the digital business model.

New digital threats – ways barriers to entry are being lowered in the retail industry

Here are some simple ways barriers to entry are being lowered in the retail industry – shared by Tej Lalvani, CEO of Vitabiotics .

Presently, if you want to set up a business in the retail industry, you don’t need to go and beg a retailer to get your product listed and pay listing fees.

Not only can you go ahead and approach customers online, you can also control your inventory.

In the past, with a retailer, you don’t know who is buying your product. Now, you can build relationship directly with your customers.

In addition, the cost barrier has also been lowered drastically. You don’t have to spend a lot using TV, radio or print.

With social media, many businesses are able to connect with customers directly. They can test what’s working and what return on investment they are getting.

Also, with only a few clicks, you can set up your company and open a bank account.

Digital business – the new digital threats

Digital business lowers the traditional barriers to entry by changing the rules.

A digital business model requires less capital and can enjoy large economies of scale.

The digital threat now comes from the new entrants from outside the industry, equipped with digital business model and value proposition.

New digital threats – Payment Service Banks

New digital threats and the lowering of barriers to entry

An example of the digital threat by a new entrant with a digital business model can be seen with the entry of MTN (a mobile phone operator) into Fintech.

The Momo PSB is a fintech company and an example of how digital business model is disrupting the traditional banking industry in Nigeria.

Their core value proposition is that they offer payment (product) through wallets, that is easy to sign up and use, using mobile phones.

One of the key advantages is “frugal innovation” – the ability to reuse existing infrastructure, skills sets, networks and technologies to jumpstart some of their operational activities.

This helps them with smooth transaction capabilities.

They are also challenging incumbents (traditional banks – First Bank, Zenith Bank and GTBank etc) on the basis of higher customer engagement and volume driven metrics.

Mofoluke Akiode