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Barriers to Entry: New
Entrant's View
Barriers to entry are circumstances particular
to a given industry that create disadvantages for new competitors attempting
to enter the market.
→
Sustainable
Competitive Advantage
There are many examples of these barriers; anything
deterring competitors from entering the market is a barrier to entry.
These may include internal
→
corporate
capabilities,
government regulations, intellectual barriers, economic and market
conditions, and competitors' reactions. Barriers to entry almost always
exist and almost anything can serve as a barrier to entry: difficulties
related to new product development
, high
upstart costs,
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cultural differences
,
a
patent
owned by a competitor, or unstable economic conditions.
Economic conditions include a
cost of producing,
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marketing and
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selling which must be borne by a firm which
seeks to enter an industry but is not borne by firms already in the
industry. They emphasize the asymmetry in costs between the incumbent firm
(already inside the market) and the potential entrant. The existing
businesses might have developed a cost advantage over potential entrants due
to their economies of scale. Further, if start up cost of making a product
is, say, $3 million this cost barrier can prevent many inventors and
companies from developing this product. The cost acts as a barrier to entry
Competitor's reactions may take
various forms of
marketing warfare.
For instance, incumbent firms may erect tactic barriers and cut
prices if
and when new suppliers enter the market, moving away from short run
→
profit maximization objectives – but designed to inflict losses on new firms and
protect their market position in the long run.1
→
Jack Welch's
5 Strategic Questions
Sunk costs are costs that cannot be recovered if a
businesses decides to leave an industry. Some industries have very
high start-up costs or a high ratio of fixed to variable costs. Some
of these costs might be unrecoverable if an entrant opts to leave
the market. High sunk costs (including exit costs) act as a barrier
to entry of new firms (they risk making huge losses if they decide
to leave a market). Examples of sunk costs include capital inputs
that are specific to a particular industry and which have little or
no resale value, and money spent on
advertising /
marketing / research which
cannot be carried forward into another market or industry.
International trade
and investment restrictions such as tariffs and quotas
should also be considered as a barrier to the entry of international
competition in protected domestic markets.1
Erecting Barriers to
Entry:
Incumbent Firm's View
Sustainable
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growth
, the cornerstone of a successful enterprise, requires
the constant erection of barriers to entry to keep your competitors at bay.
Barriers to entry have the effect of making a market less contestable. They
are designed to block potential entrants from entering a market
profitably.
They seek to protect the monopoly power of existing (incumbent) firms in an
industry and therefore maintain supernormal profits in the long run.
The most prominent barriers to entry are market
share, competition, strategic alliances and
intellectual property
protection.
Building
market leadership and developing
consumer loyalty by establishing
branded products can make successful entry into the market by new firms
much more expensive.
→
3 Strategies of
Market Leaders
→
Surprise To Win:
3 Strategies
→
Blue Ocean
vs. Red Ocean Strategy
Incumbent firms
may also adopt predatory pricing
policies by lowering prices to a level that would force any new entrants to
operate at a loss. They may function as
barriers to entry when they prevent some lower cost producers from entering
the market by negotiating long-term contracts with buyers.
Effective
strategic alliances will save time and resources by allowing you and
your partners to focus on your
→
core competenciess and provide you with the
sustainable advantage
crucial to the
→
success of your company.
Heavy spending on research and development can
act as a strong deterrent to potential entrants to an industry. R&D spending
goes on developing new products and allows also firms to improve their
production processes and reduce unit costs. This makes the existing firms
more competitive in the market and gives them a structural advantage over
potential rival firms.1
Both incumbent firms and new entrants may use
various
intellectual rights protection methods to
protect their inventions under the law and thus erect a formidable barrier
to entry against their competitors. Three kinds of intellectual property
rights exist and can be used
in different combinations: copyright,
patents, and trademarks.
Patents,
for example, offer a 20-year barrier to entry for any new product disclosed
to the public. Once a product is patented, no other person or company can
profit from the idea. Inventors can use their barrier to entry as a
competitive advantage, therefore receiving
payment for
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innovation
.2
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