What are Barriers to Market Entry?
The business environment is as challenging as... people are fickle, technological advances are perpetual, and the only certainty is that change is inevitable. Having an understanding of the business environment and barriers to market entry will help entrepreneurs confront the challenges of establishing a new venture with a little more confidence; knowing they have utilized another tool in the entrepreneurial toolbox. As with all endeavors, this will require thorough research and analysis to gain a full understanding of the market, but the time spent here will pay dividends in the future as you will be able to leverage your knowledge and make stronger business decisions that will ensure your business prospers. There are a number of barriers, which fall within the first of five categories known as Porter's Five Forces, as follows:
1) Threat of New Entrants,
2) Industry Rivalry,
3) Bargaining Power of Buyers,
4) Bargaining Power of Suppliers and
5) Threat of Substitutes.
Barriers to entry generally generate obstacles, prohibiting businesses from entering a market; however, once a business is established their existence is welcome, and often created by an organization, as they help to insulate a business from rivalry or competition.
As every industry is unique, barriers don't universally apply with equal consideration. Additionally, some barriers are created as a result of internal resources while others occur as a result of external forces. The following are barriers that are created from internal components of an organization; 1) Product Differentiation, 2) Economies of Scale, 3) Location Decisions, 4) Vertical Integration 5) Intellectual Property & Patents, and 6) Brand Recognition. Barriers that are created from external forces are; 1) Governmental Policy, 2) Capital Requirements and 3) Supplier/Distributor Agreements.
Product differentiation consists of those elements that set your product or service apart from other providers within your industry. High quality items can demand a higher price and generally capture a segment of the market that is willing and able to pay that premium, while a lower quality product/service will have a lower price (not to be confused with cost, which will be discussed in economies of scale), capturing another segment of the market. From these two extremes, two companies in the same industry may not be competing; however it is the central segment of the market where differentiation has its greatest impact. An example of this scenario is Bose headphones and Coby headphones. While Bose boasts of superior quality and a hefty price tag, Coby is lesser quality with a very affordable price tag. Bose captures the high end of the market while Coby captures the lower end, leaving the middle market that is on the verge of either spectrum with a decision. The ability of either company to sell how it differentiates itself from the other, and convinces the middle market to buy their product, lives another day in business (all thing being equal and without considering any other factors). Differentiation occurs as a result of internal decisions, to include advertising, which can bear significant weight on consumer buying decisions.
Economies of scale have a direct impact on cost. Economies of scale refer's to a point where product volume is maximized at the least cost to the company. It is generally used to refer to production or the movement of goods. In terms of production, the point where a widget is produced at an optimal level and the cost of production is at its lowest point, allows that company to maintain an edge on pricing. Keep in mind that while the cost of production may be optimal, there are other costs to consider, such as; warehousing, product life and cycle, and distribution. Companies strive to achieve economies of scale. This reduced cost can make it prohibitively expensive for another competitor to enter the market due to the lack of necessary volume (or demand) required to move the product, as well as the lack of experience, knowledge, branding, etc.
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