Potential Entrants can be a threat to firms already competing in an industry, by entering that industry; new firms can take market share away from current competitors. Potential Entrants also pose a threat to existing competitors because they bring additional production capacity. If this additional production leads to over capacity in the industry, prices for consumers will be reduced but will cause lower returns for industry firms. The one positive outcome of new entrants is that it may force competing firms to learn new ways to compete within the industry. Entry barriers make it difficult for new firms to enter an industry and often place them at a competitive disadvantage even when they are able to enter. Therefore, existing competitors try to develop barriers that new firms must face when deciding whether to enter an industry. Economies of scale: without economies of scale, potential new entrants are likely to be at a cost disadvantage relative to established competitors with economies of scale. Capital requirements- if the amount of financial capital needed isn’t available a firm may not be able to enter an industry at all , or may lack the resources to compete against an established competitor. Switching cost- a firm thinking of entering a industry would want to determine how costly it would be for an industries customers to buy from a new firm compared with continuing to buy from a established competitor. Differentiation- if customers decide that an established firms product uniquely meets their needs, then it may be difficult for a new firm to enter that segment of the market. Access to distribution channels- if established firms have developed relationships majority of distribution channels, potential entrants may find it difficult to gain access because a change may create switching costs for a distributer. Government policy – some industries are more regulated than others and require a government license or permit before business can be conducted, entry then becomes more difficult. .