Barriers to Market Entry– Build a Great Wall, Prepare the Moat, Defend Your Market: Dissuade the Barbarians at the Gates…

A critical component for an effective competitive strategy is a comprehensive plan for– market entry, market position, market defense… sustainable business growth is the cornerstone of a successful enterprise, and it requires constant market defense by building barriers-deterrence to manage competitive entry…

Barriers to entry affects a market by making it less contestable… that is, barriers seek to protect-defend the power of a market ‘incumbent’ and establish a defensible competitive position, in order to dissuade potential market ‘entrants’…

Strategic market entry deterrence are actions taken by an incumbent business seeking to block-discourage potential ‘entrants’ from competing in a market even when it impacts profitability, in the short-run… According to Michael Porter; there are six major deterrence, namely; economies of scale, differentiation, capital requirements, cost considerations, access to distribution channels, government policy… and later he added; demand-side benefits, customer switching costs, expected retaliation… One of the most important strategic elements is the ‘timing’ of market entry… 

According to K. Gurumurthy and R. Gurumurthy; management must be prepared to consider the following business issues: Should a business be first to enter a market? Is it better to wait and learn from experiences of first entrant? What is proper balance between risks and rewards? If you are an incumbent, what can be done to prevent share erosion when a new player enters the market? If you are a later entrant, what strategies should you adopt to make entry successful? Studies show, in most cases, that first market entry provides a significant and sustained market-share advantage over later entrants…

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Also, it’s important to note that barriers-deterrence to market entry change-evolve over time… many of these so-called barriers become ineffective, vulnerable… and do little to dissuade potential entrants… however, the classic competitive strategies, such as; market leadership, consumer loyalty, branding… can deter potential entrants and make entry– very expensive, risky… these strategies that limit entry are some times called; a ‘moat’– capacity of a business to raise ‘moats’ (barriers to entry) will directly impacts a business’ competitive position and sustainability…

According to Robert Smiley; in survey businesses were asked whether they employed techniques to deter market entry: More than half of the respondents thought that entry considerations were at least as important as other strategic marketing and production decisions. Only 13% felt that market entry issues were unimportant… 

In the article Barriers to Entry by IES writes: Barriers to market entry are those aspects of a market that make it more difficult for a new company to enter a market profitably. Typical barriers to entry include– brands, patents, large assets required to achieve economies of scale, regulation, network effects, control of scarce resources… Economic theory states that without any barriers to market entry, incumbent businesses cannot earn sustainable profit beyond their cost of capital, because new entrants are attracted and will compete for profits down to the cost-of-capital. The stronger the barriers, the higher the economic profit potential…

Barriers to entry feature prominently in Michael Porters industry analysis; as a key determinants of industry profitability alongside competitive behavior and supplier-customer balance of power… When a business is crafting a business strategy; it’s important to ask: How will this strategy build barriers to deter competitive entry into our markets? For example, Coca Cola has built a huge barrier to entry through cumulative advertising over a hundred years. According to Warren Buffet; Coca-Cola has a deep ‘moat’ around their business and if you gave me $100 billion and said; Take away the soft-drink leadership of Coca-Cola, globally– I’d give it back to you, and say it can’t be done… 

When you are entering new markets the concept is critical: How to overcome barriers to market entry? In order to identify effective barriers to entry, put yourself in the shoes of a business that wants to enter your market… Then ask: What must I do to enter successfully? When you map out all steps, identify the ones most challenging, e.g.; costs, time, skills, culture… However, barriers can become vulnerable, e.g., a competitor’s ‘disruptive’ business models may completely change the dynamics of a market, bypassing the traditional barriers…

In the article Barriers to Entry, Profit, & Price by friedman writes: A high barrier to entry is one signal for the existence of a monopoly or oligopoly power… Normal profits cover the average cost of a business, whereas the existence of abnormal profits means the business can reinvest profits into R&D, increase the wages of workers, pay-out to shareholders… Also, abnormal profits may indicate existence of monopoly or oligopoly market structure… and, the market is less competitive, which means that the business has the potential to become a price setter…

For example; a barrier to market entry having leverage on prices, profits… can be identified in the automotive market for hatchbacks in Europe: Volkswagen is notable for their immense economies of scale, therefore posing a high barrier to entry for their share of the market… Also, their main rival PSA Peugeot Citroën is also able to create automobiles of a similar standard quality, price…

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Therefore, due to their market power, these companies have developed a high barrier to market entry, and in doing so Volkswagen and PSA have created an oligopoly like structure relationship in the hatchback car market… Now, for example, enter another auto company like, Kia; clearly to enter this market Kia would be in a very difficult competitive position– e.g., high marginal costs, restricted quantity of units, other structural costs… also, Kia lacks the same brand recognition as PSA or Volkswagen…

Barriers to entry are what ultimately causes the formation of monopolies or oligopolies, which then can have a significant impact on prices, profits… in a certain market (i.e., possible increase), and the overall competitive nature of the market… There are various methods of getting around the high barriers to entry, but it would require a firm to either; create disruptive innovation or significant investment to launch and compete in the market, for example; Kia could offer autos with newer technology, better engines, greater fuel efficiency, lower price… in attempt to win market share, but, issues between risk and reward still remain…

Overtime high barriers to entry can be mitigated as greater symmetry in the market develops, and the introduction of new technologies, tools…

In the article Corporate Sardines–How Incumbent Firms Pack Markets by Economist writes: Some firms may be cramming markets in order to keep rivals out… One of the first studies on the way firms compete for shelf space in store outlets was published in 1929 by Harold Hotelling: He showed that many businesses face important trade-offs in deploying assets, for example; locating outlets too near rivals and ferocious competition will impact profit. Or, edge too far away and large chunks of the market are lost… Hotelling’s theory explained why firms in some industries– ‘cluster’ while others ‘scatter’ their store outlets…

When businesses own multiple store outlets, new tactics are possible and new trade-offs arise, for example; if a franchise adds a new outlet it will ‘cannibalize’ the profits of existing ones, pinching its own customers, as well as, rivals’. But there are upsides, deploying more outlets soak up more demand, which preempt the competition… When there are big start-up costs, preemptive can keep rivals out… This helps explain not just a physical proximity of some businesses’ outlets, but also similarity of products, services… sold by a business…

Breakfast cereals are an example: in 1950 America’s six big producers offered around 25 types of cereal; by 1972 it was around 80 types; today it’s well over 100 types… Clearly, the underlying motive is to keep rivals out… In markets where customers value proximity over brand, outlets mushroom; however, when shoppers like more options, differentiated brands proliferate… To keep rivals out, a business must mop-up demand. That means give customers what they want…

In the article Impact of Competitive Entry on Market Expansion and Incumbent Sales by Vijay Mahajan, Subhash Sharma, Robert D. Buzzell write: A central issue, in much of the earlier research on market entry, is about explaining market share–how much is achieved by new ‘entrants’ or retained by ‘incumbents’. By contrast, very little attention is given to issues related to the effect of entry on market size and the growth potential of incumbents.

These issues encompass questions, such as: (1) Under what conditions does entry of a new competitor lead to market expansion, and by how much? (2) Does entry of new competitor affect the sales potential of incumbents and, if so, by how much? It would seem reasonable to expect that the entry of a new competitor into a market might result in expansion of the market, diversion of demand from incumbent competitors, or some combination…

The addition of entrants should expand total market size, since market entry is usually accompanied by increases in product, services… variety, promotional activity, distribution, reductions in prices… These changes usually attract new buyers and that leads to market growth, expansion… In an evolving markets, new entrants create additional demand and therefore, contribute to overall expansion of the market…

Market expansion also creates opportunities for incumbents to appeal to new potential buyers… In addition, when new entrants don’t contribute to market expansion, their main strategy is to appeal to buyers of incumbents, usually in established markets where brands often cannot be significantly differentiated… There, new entrants attempts to divert buyers of  incumbent’s products, services… through heavy promotion, price reductions… However, it may be argued that a most likely scenario in where new entrants contributes to both; market expansion and also diverts the potential buyers of incumbents…

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Understanding markets, anticipating future trends, directions… provides the knowledge base required to react, defend, control… a competitive position… According to Kenneth J. Cook; in markets that are easy to enter, sources of competitive advantage tend to wane quickly, whereas, in markets that are difficult to enter, sources of competitive advantage last longer… The ease of market entry depends on two factors: 1. Reaction of incumbents to new entrants… 2. Type of barriers that prevail in the market…

According to Steven D. Peterson; if the business is entering a new (to you) market, expect to face some barriers as you seek to compete with already-established businesses. At the same time, think about building some barriers of your own in an effort to up-the-ante for competitors seeking to follow you into the market

All businesses strive to develop some competitive advantages, barriers… but, relatively few are successful over the long periods… Innovation is almost always followed by waves of imitation… and relatively few first ‘movers’ are able to maintain their initial market position…

The simple truth is that most large expenditures designed to create competitive advantage, barriers… are unlikely to be successful, over the long-term, unless the advantage can be sustained… Market entry barriers are structural features of markets that enable incumbent companies to enjoy a ‘temporary’ competitive advantage…