Entry barriers

economic-dictionary

Market entry barriers are various types of obstacles that complicate or hinder the entry of new companies, brands or products.

That is, these barriers are all those fences that complicate or prevent new competitors from participating in an industry.

There may be economic, legal or even barriers related to areas such as ethics or public image.

Michael Porter developed the concept of barriers to entry as one of the five forces of competition. That is, it is one of the variables that determines whether it is profitable for a firm to enter a sector.

Similarly, Porter analyzed the difficulties in exiting the markets. This is known as exit barriers.

It should be noted that entry barriers are related to two important factors to study in an industry: the level of competition and profitability.

The existence of high barriers slows the appearance of new competitors, protecting those already installed and thus preserving their profit expectations.

Barriers to entry are generally related to different important points. These can be the size of the sector, the main distribution channels or the necessary preparation for the participating personnel and that it is necessary to hire.

Main barriers to entry

The main barriers to entry in an industry are the following:

  • Economic barriers: Initial capital is required to enter a market. We refer, for example, to spending on advertising focused on publicizing the new company and its products. Likewise, there is an investment dedicated to the development and technological innovation required in a large number of sectors.
  • Economies of scale: This is a condition that is met when, at a higher production volume, each additional unit manufactured costs less (economies of scale). This circumstance means an advantage for companies that are already in the market.
  • Economies of scope: In order to save costs, the same resources can be used to develop more than one good or service (economies of scope). This is a disadvantage for a new company if it only offers one product.
  • Product differentiation: Occurs when established companies have brand prestige or an established client portfolio. This forces new competitors to invest heavily, for example in advertising.
  • Important capital needs: In some cases large investments are required to start competing from the first moment. We refer, for example, to capital requirements for research and development (R&D) or to cover large initial losses.
  • Legal barriers: There are various administrative licenses, from the most common to exclusive ones to enter certain markets. It is also sometimes necessary to acquire patents and permits related to intellectual property to avoid irregular practices in terms of competition.
  • Concentration of strategic assets: Another factor that limits the entry of new competitors is that the company that dominates the market has favorable access to raw materials or has logistics centers in strategic areas.

Barriers to entry and public image

Another example of a barrier to entry has to do with the company's public or external image. In other words, the new company must first study from an ethical point of view whether entering a sector benefits it publicly or not.

For example, imagine that a corporation that has always been committed to freedom of expression seeks to enter a new market. However, that country has begun to exercise strict control over the content of the media.

So, for the company it would be contradictory to enter this nation where there is censorship and at the same time defend values ​​such as freedom that, in theory, are part of its organizational culture.

Tags:  comparisons culture accounting 

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