Competitive Strategies:

Sustainable Competitive Advantage

Barriers to Entry

Solving Problems and Creating a Competitive Advantage

By: Vadim Kotelnikov

Founder, Ten3 Business e-Coach Inspiration and Innovation Unlimited!

 

Barriers to Entry as a Source of Competitive Advantage

  • Economies of scale

  • Proprietary product / service differences

  • Proprietary technologies / processes

  • Synergistic strategic alliances with owners of complementary competences

  • Brand identity

  • Switching costs

  • Capital requirements

  • Access to distribution / marketing / selling channels

  • Government policies / regulations

  • Expected retaliation

  • Absolute cost advantages

    • Proprietary low-cost product design / processes

    • Preferential access to necessary inputs

    • Proprietary learning curve

     

     

     

Competitive Strategies

Sustainable Competitive Advantage

Surprise To Win

3Ss of Winning in Business

Strategies of Market Leaders

Blue Ocean Strategy

Effective Competing

Your Competing Skills

Competitive War Games

80/20 Theory of the Firm

Role of IPR in the Promotion of Competitiveness of Enterprises

Winning Customers

Differentiation Strategies

Developing a Differentiation Strategy: 4 Steps

Positioning

10 Commandments of Positioning

Creative Marketing

Differentiating With Different Types of People

Barriers to Entry: New Entrant's View

Barriers to entry are circumstances particular to a given industry that create disadvantages for new competitors attempting to enter the market. There are many examples of these barriers; anything deterring competitors from entering the market is a barrier to entry. These may include internal corporate capabilities, government regulations, intellectual barriers, economic and market conditions, and competitors' reactions. Barriers to entry almost always exist and almost anything can serve as a barrier to entry: difficulties related to new product development, a patent owned by a competitor, high upstart costs,  cultural differences, or unstable economic conditions.

 

Economic conditions include a cost of producing, marketing and selling which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry. They emphasize the asymmetry in costs between the incumbent firm (already inside the market) and the potential entrant. The existing businesses might have developed a cost advantage over potential entrants due to their economies of scale. Further, if start up cost of making a product is, say, $3 million this cost barrier can prevent many inventors and companies from developing this product. The cost acts as a barrier to entry

Competitor's reactions may take various forms of marketing warfare. For instance, incumbent firms may erect tactic barriers and cut prices if and when new suppliers enter the market, moving away from short run profit maximization objectives but designed to inflict losses on new firms and protect their market position in the long run.1

 Jack Welch's 5 Strategic Questions

Sunk costs are costs that cannot be recovered if a businesses decides to leave an industry. Some industries have very high start-up costs or a high ratio of fixed to variable costs. Some of these costs might be unrecoverable if an entrant opts to leave the market. High sunk costs (including exit costs) act as a barrier to entry of new firms (they risk making huge losses if they decide to leave a market). Examples of sunk costs include capital inputs that are specific to a particular industry and which have little or no resale value, and money spent on advertising / marketing / research which cannot be carried forward into another market or industry.

International trade and investment restrictions such as tariffs and quotas should also be considered as a barrier to the entry of international competition in protected domestic markets.1

Erecting Barriers to Entry: Incumbent Firm's View

Sustainable growth, the cornerstone of a successful enterprise, requires the constant erection of barriers to entry to keep your competitors at bay. Barriers to entry have the effect of making a market less contestable. They are designed to block potential entrants from entering a market profitably. They seek to protect the monopoly power of existing (incumbent) firms in an industry and therefore maintain supernormal profits in the long run.

The most prominent barriers to entry are market share, competition, strategic alliances and intellectual property protection.

Building market leadership and developing consumer loyalty by establishing branded products can make successful entry into the market by new firms much more expensive.

 3 Strategies of Market Leaders

 Surprise To Win: 3 Strategies

 Blue Ocean vs. Red Ocean Strategy

Incumbent firms may also adopt predatory pricing policies by lowering prices to a level that would force any new entrants to operate at a loss. They may function as barriers to entry when they prevent some lower cost producers from entering the market by negotiating long-term contracts with buyers.

Effective strategic alliances will save time and resources by allowing you and your partners to focus on your core competencies and provide you with the competitive advantage crucial to the success of your company.

Heavy spending on research and development can act as a strong deterrent to potential entrants to an industry. R&D spending goes on developing new products and allows also firms to improve their production processes and reduce unit costs. This makes the existing firms more competitive in the market and gives them a structural advantage over potential rival firms.1

Both incumbent firms and new entrants may use various intellectual rights protection methods to protect their inventions under the law and thus erect a formidable barrier to entry against their competitors. Three kinds of intellectual property rights exist and can be used in different combinations: copyright, patents, and trademarks. Patents, for example, offer a 20-year barrier to entry for any new product disclosed to the public. Once a product is patented, no other person or company can profit from the idea. Inventors can use their barrier to entry as a competitive advantage, therefore receiving payment for innovation.2

 

References:

  1. "Barriers to Entry", tutor2u

  2. "Inventor's Handbook: Easing the Trip to Market," Eric McMillan

  3. "Contracts as a barrier to Entry. American Economic Review, Steffen Ziss

  4. Winning Customers, Vadim Kotelnikov

  5. 3 Strategies of Market Leaders, VVadim Kotelnikov