By Dr. Wesley Carter
Stella stood with her hand resting gently on the whiteboard in the conference room. She had been in the office most of the night and all morning, working on a report for her father, the owner of a small business. Stella’s father had asked her to identify the barriers to entry for potential new competitors, or entrants, into their market. With a supportive pat on the back, her father had posed the question last night.
Stella was intent on convincing her father that she was ready to take over the reins of the family business. She absent mindedly twirled the dry erase marker between her fingers and mentally reviewed what she had learned about barriers to entry in business school and from years of experience in the family business.
New companies must be able to enter the market before they can actually become competitors. Creating strategic barriers is an excellent strategy to stave off competitors and deter entry into a market. Stella’s father posed the challenge to evaluate how the business would fair under Stella’s leadership. Her father’s faith in her ability motivated her to provide a thorough assessment.
Stella recalled Michael Porter’s five strategic market forces regarding barriers to entry for potential competitors. She quickly went through her mental checklist and scribbled her ideas on the whiteboard. Economies of scale can pose a barrier to entry when potential competitors must make large investments to compete in the same market as an established business. Typically, new market entrants will be forced to enter the market on a large scale to threaten an entrenched and established business in a particular geographical area. The access to proprietary technology, an advantageous location, or government subsidies can make it difficult to enter a new market.
Product differentiation creates a barrier to entry when customer loyalty for a particular product or service is strong enough to threaten businesses attempting to enter a new market. Customer loyalty can result from customer service, brand identification, or the status associated with a particular product or service. However, product differentiation is only a barrier to entry for the potential competitor if they do not have access to the capital required to compete.
Capital requirements can make it very difficult for potential competitors to enter the market of an established business. The capital requirements can result from the need for large start-up costs, heavy certification fee requirements, or research and development. Basically, when an industry requires a new entrant to make a large capital investment to enter the market, those capital requirements represent a barrier to entry.
Cost can also represent a potential barrier to entry. When established companies achieve either a lower “cost of doing business” or product/service price advantages, cost becomes a threat to a new company entering the market. If an established company is fortunate enough to operate profitability at a lower cost than a new company entering the same market, the established company has a cost advantage.
Established companies often have greater access to distribution channels than new companies entering the market. Access to distribution channels poses a barrier to entry for a new company if it will be difficult to gain access to similar or more efficient distribution channels.
Government policy and regulations have the potential of posing a tremendous barrier to entry. Industries such as liquor retailing, coal mining, or trucking are examples of government policy interfering with entry into the markets. The government can enact a barrier to entry by limiting the number entrants into a particular market such as public utilities or garbage collection.
The issue is not whether a potential competitor will enter the market, but “how long it will take a competitor to enter and challenge the market space of an established business?” Stella quickly wrote the potential barriers to entry for the family business, took a step back, and admired her work. She smiled with confidence as she prepared for a very positive discussion with her father. She looked forward to hearing her father’s feedback during their lunch meeting. The white board was white, no more.
WESLEY CARTER DM, authors an advice column that leverages leadership and management strategies to solve common business problems. Carter holds a Doctor of Management (DM) degree with an emphasis in Organizational Leadership, an MBA, and a B.A. in Management. Carter is a partner at KRS Consulting, LLC in Charlotte, NC. If you have a question, email email@example.com. All submissions become the property of Wesley Carter. Call (704) 992-1211 or email to book an engagement. This article originally appeared in “The Charlotte Post”.