Why it is essential for strategy to investigate barriers to entry

Why it is Essential for Strategy to Investigate Barriers to Entry

Starting a new business or introducing a new product or service to your current business? Before embarking on either, strategic consideration should be given to potential barriers to entry into 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 a strategy and ascertain whether your business may achieve success and profitability in a specific 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 startup expenses such as equipment, premises, distribution, and so on? 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 and the cost of buying an operating license.

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. 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 tried and trusted one. Marketing costs could also prove expensive.

Cost Advantages of large businesses can help them to 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 the lower prices. Could you afford to enter into a price war with the bigger players? Remember, they will probably 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 the threat of substitutes