BARRIERS TO ENTRY INTO A SECTOR

Accelerate your business with these tips "Barriers to entry in a sector". Analyse and discover this TIP!

Barriers to entry are a type of competitive advantage (+) that we entrepreneurs must know how to find in order to protect our company. These are obstacles of various kinds that complicate or hinder the entry of other companies as our competitors.

In other words, these barriers are all those barriers that complicate or prevent new competitors from participating in our sector with competitive superiority. There may be barriers of an economic or legal nature, or even barriers related to areas such as ethics or public image.

Michael Porter developed the concept of barriers to entry as one of the most important barriers to entry. five competition forces (see TIP). It is one of the variables that determines whether it is profitable for your company to enter an industry and maintain a good competitive position. Similarly, Porter analysed the difficulties of exiting markets. This is known as exit barriers.

It should be noted that entry barriers are related to two important factors to study in an industry: the level of competition and profitability. The existence of high barriers slows down the emergence of new competitors, protecting the incumbents and thus preserving their profit expectations.

Barriers to entry generally relate to a number of important issues. These can be the size of the sector, the main distribution channels (+) o the necessary preparation for the staff involved and that needs to be recruited.

MAIN BARRIERS TO ENTRY

The main barriers to entry in an industry are the following:

Economic barriers: Initial capital is required to enter a market. This includes, for example, spending on advertising to raise awareness of the new company and its products. Similarly, there is investment in technological development and innovation needed in a large number of sectors.

• Economies of scale: This is a condition that is fulfilled when the higher the volume of production, the lower the cost of each additional unit produced (economies of scale). This is an advantage for companies that are already in the market. It is very difficult to compete against companies that have managed to create highly scalable business models (see TIP scalability).
• Economies of scope: In order to save costs, the same resources can be used to develop more than one good or service (economies of scope). This is a disadvantage for a new enterprise if it only offers one product.
• Product differentiation: It occurs when established firms have brand reputation or an established customer base. This forces new entrants to invest heavily, e.g. in advertising.
• Significant start-up capital requirements: In some cases, large investments are required to start competing from the very beginning. These include, for example, capital requirements for research and development (R&D) or to cover large start-up losses.
• Legal barriers: There are various administrative licences, ranging from the most common to exclusive licences to enter certain markets. It is also sometimes necessary to acquire patents and permits related to intellectual property in order to avoid irregular practices in terms of competition.
• Concentration of strategic assets: Another factor limiting the entry of new competitors is that the dominant firm has favourable access to raw materials or has logistics centres in strategic areas.

Practical examples of competitive advantages gained by creating barriers to entry

Barriers to entry are barriers that make it difficult or impossible for new firms to enter a market or industry. These barriers can be a source of competitive advantage for existing companies by protecting their market position and reducing competition. The following are practical examples of competitive advantages achieved through barriers to entry:

1. Economies of scale: Walmart is an example of a company that has achieved a competitive advantage through economies of scale. Its large size allows it to buy products in bulk and negotiate lower prices with suppliers, which enables it to offer lower prices to customers. This cost advantage creates a barrier to entry for smaller competitors that cannot match Walmart's low prices.
2. Patents and intellectual property: Pharmaceutical companies, such as Pfizer and Merck, often gain competitive advantages through patents and intellectual property protection. Patents give them exclusive rights to produce and sell drugs for a certain period of time, preventing other companies from entering the market and competing with them.
3. Strong brand and customer loyalty: Apple is an example of a company that has created a competitive advantage through a strong brand and customer loyalty. The Apple brand is synonymous with quality, design and user experience, which makes customers loyal and less likely to switch to competitors. This customer loyalty creates a barrier to entry for other companies trying to enter the consumer electronics market.
4. Control of key resources: De Beers, a diamond company, used to control a large part of the world's supply of rough diamonds. By controlling access to this key resource, De Beers created a barrier to entry for other companies trying to enter the diamond market, allowing them to maintain a competitive advantage for a long time.
5. Government regulations: Utilities, such as electricity and water companies, often enjoy competitive advantages because of government regulations that limit market entry. These regulations may include exclusive licensing or infrastructure investment requirements that make it difficult for new firms to compete in the market.
6. Exclusivity of the distribution network: Coca-Cola has a competitive advantage in the beverage market because of its extensive and unique distribution network. This network allows Coca-Cola to reach more customers and at a faster rate than its competitors, creating a barrier to entry for companies trying to enter the beverage market.

These examples show how entry barriers can help firms establish and maintain competitive advantages by protecting their market position and making it difficult for new competitors to enter.

Barriers to entry into a sector

Barriers to entry are obstacles that make it difficult or impossible for new firms to enter a market or sector. These barriers can be of different types and vary by industry or sector.

THE FOLLOWING ARE SOME COMMON BARRIERS TO ENTRY THAT CAN BE FOUND IN VARIOUS SECTORS:

1. Economies of scale: In some industries, firms can take advantage of economies of scale to reduce their production costs as their production volume increases. This can create a barrier to entry for new firms that cannot match the low production costs of established firms.
2. Required capital: Some sectors, such as the automotive or energy industry, require significant investment in infrastructure, machinery and equipment to start operations. This high initial investment can be a barrier to entry for companies that do not have the necessary financial resources.
3. Access to key resources: In certain sectors, control of key resources, such as raw materials or prime locations, can be crucial to success. If established firms control these resources, it can be difficult for new firms to gain access to them, creating a barrier to entry.
4. Expertise and experience: In highly specialised or technological sectors, such as biotechnology or semiconductor manufacturing, companies may need specific expertise and experience to compete effectively. This specialisation can be difficult for new firms to acquire, creating a barrier to entry.
5. Government regulations: In some sectors, government regulations can make it difficult for new companies to enter the market. For example, pharmaceutical companies must comply with strict regulations and obtain approval from health authorities before they can market their products. These regulations can be costly and time-consuming, creating a barrier to entry.
6. Patents and intellectual property: Patents and other types of intellectual property protection can be barriers to entry in sectors where innovation and research are critical to success, such as technology or pharmaceuticals.
7. Brand loyalty and switching costs: In sectors where consumers are loyal to established brands or where switching costs are high, it can be difficult for new entrants to attract customers and gain market share. For example, in the mobile industry, customers may be reluctant to switch providers because of the hassle of changing numbers or the loss of benefits associated with their current plan.
8. Distribution networks and market access: In some sectors, having access to an efficient and effective distribution network is critical to reach customers and compete successfully. Established companies may have exclusive agreements with distributors or control the distribution infrastructure, making it difficult for new entrants to enter the market.

These are just some of the barriers to entry that can be encountered in different sectors. Identifying and overcoming these barriers is a key challenge for new companies seeking to enter and compete in an existing market.

In the Porter's 5 forces (+), to protect ourselves from new 'entrants', what arises is the need to create barriers to entry.

• Investment expenditure: especially in industries with large economies of scale or natural monopolies.
• Market regulation: in extreme cases they can make market entry impossible by establishing a legal monopoly.
• Dumping: the competitor sets a price below cost at a loss that the entrant cannot afford. Illegal in many cases, but difficult to prove.
• Intellectual property: patents give the legal right to exploit a product for a period of time.
• Economies of scale: experienced and large firms produce at a lower cost than small and newly established firms and can therefore set a price that new firms cannot afford to pay
• Globalisation: The entry of global competitors into a local market makes it difficult for local competitors to enter.
• Consumer loyalty: Consumers may be reluctant to change a product they are used to.
• Publicity: Established firms can make it difficult for new entrants by making extraordinary advertising expenditures that new entrants cannot afford.
• R&D: Some markets, such as microprocessors, require such a high level of R&D investment that it is almost impossible for new companies to reach the level of knowledge of established ones.
• sunk costs: investment that cannot be recouped if one wishes to exit the market increases the risk of market entry.

For example, the quintessential barrier is patentability, isn't it? Yes, but... what the hell good is it for a startup (at least for one that is not heavily capitalised or outside the pharma/health sector)? When we talk about patents, we must not only take into account their initial cost... but also the need to establish defensive strategies in case of possible litigation.

And this is typically where a small-cap startup is sold out: a litigation process in which a large company attacks the startup's patent can kill it, even if it has all the rights and arguments (it's not just about who is "right", but who has enough money to prove it).

How can an entrepreneur create barriers to entry to gain a competitive advantage?

An entrepreneur can create barriers to entry to protect his business and gain a competitive advantage in his market.

HERE ARE SOME STRATEGIES THAT AN ENTREPRENEUR CAN USE TO ESTABLISH BARRIERS TO ENTRY:

1. Innovation and product development: Developing innovative and patentable products or services can be an effective barrier to entry. Patents and other types of intellectual property protection can prevent competitors from directly copying a company's innovations and technologies.
2. Establish a strong brand: Building a strong and recognised brand can be a significant barrier to entry. When consumers have strong brand loyalty, it is more difficult for new competitors to enter the market and capture significant market share.
3. Exclusive access to key resources: If an entrepreneur can secure exclusive access to key resources, such as raw materials, prime locations or suppliers, it can make it difficult for competitors to enter the market.
4. Economies of scale: If a firm can achieve economies of scale and reduce its production costs as its production volume increases, it can make it more difficult for smaller or new competitors to compete on price.
5. Distribution networks and commercial relations: Establishing exclusive or preferential agreements with distributors and suppliers can make it difficult for new competitors to enter the market. This may include exclusive distribution agreements, long-term contracts with key suppliers or licensing agreements that limit competition.
6. Experience and expertise: In highly specialised or technological sectors, experience and technical knowledge can be a barrier to entry. If an entrepreneur can hire or partner with experts in his field, he can make it difficult for competitors to imitate his product or service offering.
7. Company culture and management: Creating a unique corporate culture and strong internal management can be a barrier to entry. The ability to attract and retain talent and foster a working environment that promotes innovation and commitment to quality can be a competitive advantage that is difficult to replicate.
8. Regulatory compliance and licensing: In some sectors, complying with government regulations and obtaining the necessary licenses can be costly and time-consuming. If an entrepreneur can efficiently navigate these requirements and obtain the necessary licences, it can create a barrier to entry for other competitors who are unwilling or unable to comply with regulations.

By creating effective barriers to entry, an entrepreneur can protect his business from competition and maintain a competitive advantage in his market. This can contribute to a sustainable growth and the long-term success of the company.