Business Strategy – Barriers to Entry

Starting a new business? Introducing a new product or service to your current business? Before embarking on either, strategic consideration should be given to potential barriers of entry to the market – and how you will position yourself and develop a competitive strategy to overcome them. Porter’s 5 forces model of industry analysis is an excellent tool that could help you decide on strategy and ascertain whether your business may achieve success and profitability in a particular industry.

Potential barriers to entry to be considered include:

• Capital Expenditure
• Brand Loyalty
• Cost Advantages

Capital Expenditure can scupper businesses before they even start. Do you have the capital necessary to penetrate your industry of choice? The size and scope of your business will play its part here. How much will it cost in start up expenses, e.g. equipment, premises, distribution, etc.? If you are entering a low barrier industry, such as setting up an after-school activity, capital expenditure will be minimal. Setting up a bus company on the other hand, would be considered a high barrier to entry as a great deal of capital expenditure will be required to buy buses, employ drivers, mechanics and other staff members, the cost of buying an operating licence, and so forth.

Brand Loyalty can make it very difficult to penetrate established industries even if you consider your product or service to be superior to that already offered in the market. However, customers can be extremely loyal to their favourite brand. They may need a great deal of persuasion to even try your product never mind abandon their favourite tried and trusted one. Marketing costs could prove expensive!

Cost Advantages of large businesses can help sustain their competitive advantage in the industry. Capable of mass production and/or providing services to a huge client base,they can easily undercut new businesses by lowering their prices, thus effectively thwarting potential new entries to the industry. New businesses are deterred because they have little hope of being profitable trying to match or beat these lower prices. Could you afford to enter into a price war with the bigger players? Remember, they will in all probability have the resources and the capacity to absorb any short term losses they might incur until you can no longer compete.

When considering your business potential and strategy, bear in mind that ‘Barriers to Entry’ is just one of Porter’s 5 forces of industry analysis and should not be considered in isolation from the others: competitive rivalry, supplier power, buyer power, and threat of substitutes.