1 Key Factor to Note for All Your Investments

Previously, I wrote about competitive rivalry within an industry, a factor within the Five Forces framework developed by Michael Porter, a Harvard Business School professor. The framework, which is used to study a business’s competitive strengths and weaknesses, is widely taught in business schools and commonly used by analysts.

In this article, I would like to move on to the second factor within Porter’s Five Forces – the threat of new entrants.

Scary new competitors

As opposed to worrying about current competitors within an industry for a company, as investors, we should also consider possible new competitors – or entrants – into the firm’s industry.

On the threat of new entrants, factors to consider might include capital requirements, economies of scale, branding, and switching costs.

Lately, Boustead Singapore Limited  (SGX: F9D) was on the receiving end of new competitors to its real estate solutions division. According to a report from The Edge:

“Boustead used to be one of only three players in the field, besides Ascendas and Bovis, a unit of Lend Lease. Bovis has since switched its focus to commercial real estate, but companies such as Soilbuild Construction Group and Figtree Holdings are now “claiming to be design-and-build” contractors as well, according to Brenda Ong, an executive director at Colliers International.”

The impact of new entrants may have been felt when Boustead Singapore reported lower profits in the past quarter due to an “unusually low margin” real estate project.

The increasingly competitive environment may also have prompted Boustead Singapore to form a strategic alliance with the Abu Dhabi Investment Council (ADIC) in August 2014. With the partnership, Boustead Singapore stands to gain from taking on larger projects and receiving better financial terms with ADIC’s name.

The larger scale and branding may serve to differentiate Boustead Singapore from the rest of the pack, and crucially, from any new entrants.

The strategic alliance may have started to bear fruit. Over the past week, new projects for the partnership involving a major pharmaceutical company and an aerospace facility were announced by Boustead Singapore.

Foolish takeaway

The threat of new entrants is a useful consideration for all your investments.

Do you have good reason to believe that your vested company can fend off new competitors? Does it have a strong enough reputation or brand? Or does the industry it operates in have high barriers to entry?

You may want to ask yourself these questions before you invest.  Check back for more on Porter’s Five forces.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.