Six major sources of barriers to market entry

In the landmark book Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael E. Porter identified six major sources of barriers to market entry.

 

  1. Economies of scale. Economies of scale occur when the unit cost of a product declines as production volume increases. When existing competitors in an industry have achieved economies of scale, it acts as a barrier by forcing new entrants to either compete on a large scale or accept a cost disadvantage in order to compete on a small scale. There are also a number of other cost advantages held by existing competitors that act as barriers to market entry when they cannot be duplicated by new entrants—such as proprietary technology, favorable locations, government subsidies, good access to raw materials, and experience and learning curves.
  2. Product differentiation. In many markets and industries, established competitors have gained customer loyalty and brand identification through their long-standing advertising and customer service efforts. This creates a barrier to market entry by forcing new entrants to spend time and money to differentiate their products in the marketplace and overcome these loyalties.
  3. Capital requirements. Another type of barrier to market entry occurs when new entrants are required to invest large financial resources in order to compete in an industry. For example, certain industries may require capital investments in inventories or production facilities. Capital requirements form a particularly strong barrier when the capital is required for risky investments like research and development.
  4. Switching costs. A switching cost refers to a one-time cost that is incurred by a buyer as a result of switching from one supplier's product to another's. Some examples of switching costs include retraining employees, purchasing support equipment, enlisting technical assistance, and redesigning products. High switching costs form an effective entry barrier by forcing new entrants to provide potential customers with incentives to adopt their products.
  5. Access to channels of distribution. In many industries, established competitors control the logical channels of distribution through long-standing relationships. In order to persuade distribution channels to accept a new product, new entrants often must provide incentives in the form of price discounts, promotions, and cooperative advertising. Such expenditures act as a barrier by reducing the profitability of new entrants.
  6. Government policy. Government policies can limit or prevent new competitors from entering industries through licensing requirements, limits on access to raw materials, pollution standards, product testing regulations, etc.

 

 

It is important to note that barriers to market entry can change over time, as an industry matures, or as a result of strategic decisions made by existing competitors. In addition, entry barriers should never be considered insurmountable obstacles. Some small businesses are likely to possess the resources and skills that will allow them to overcome entry barriers more easily and cheaply than others. "Low entry and exit barriers reduce the risk in entering a new market, and may make the opportunity more attractive financially," Glen L. Urban and Steven H. Star explained in their book Advanced Marketing Strategy. But "in many cases, we would be better off selecting market opportunities with high entry barriers (despite the greater risk and investment required) so that we can enjoy the advantage of fewer potential entrants."

 

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