BARRIERS TO ENTERING AN INDUSTRY

Launching a business is a process fraught with hurdles. Many innovations never hit the market at all, due to
what economists call “barriers to entry” – obstacles that prevent new competitors from entering an industry,
thus cornering the market for existing businesses (think high start-up costs). Depending on the industry,
emerging businesses may face obstacles that are relatively straightforward to overcome (low barriers to entry),
those that are impossible to overcome without extensive resources (high barriers to entry) – or both.

It’s easy to see how, in searching for answers to the question of what are barriers to entry, many business
owners understandably come to believe that they must achieve perfection (i.e. complete funding, a fully-staffed
team and perfect economic conditions) in order to compete. Although ideal conditions make entering an
industry easier, it is not conditions or circumstances that ultimately create market entry barriers. It’s
your mindset, and the biggest barriers to entry stem from your own fears. 

By working diligently to refine your business vision and the passions that inspire you, you’ll discover a sense of
certainty that will propel you past any barriers to entering an industry you may encounter.

ENTRY BARRIERS AND THE OTHER 4 PORTER COMPETITIVE FORCES

1- Customers or buyers

The bargaining power of buyers will determine the degree of competitiveness of an industry. By nature, buyers
want to receive the maximum benefits possible by paying the lowest price.

Thus, the greater the bargaining power of buyers, the lower the competitiveness of a company competing in that
market.
2- Suppliers

Conversely, suppliers expect to charge as much as possible and deliver as little as they can. In situations of
monopoly or oligopoly, for example, when there is only one supplier or few of them, their bargaining power is
very high, reducing the competitiveness of companies in this sector.

3- Substitute products or services

This is more important than it was in the past when it comes to strategic planning for a business.

Substitute products are those that supply the same need that your company provides to the market, but belong to
another segment.

4- Current competitors

The level of rivalry between the current competitors of a market, when very high, diminishes the
competitiveness of the companies that operate in this sector.

Those who work in the beverage or banking sectors are subject to a strong rivalry, which diminishes the
profitability of competitors who are constantly reacting to or anticipating the actions of others.

5- New entrants

New entrants are competitors who want to establish themselves in a market to which they did not previously
belong. They’re not substitute products or services, but from other companies wishing to provide the same
products or services of the brands which are already established in the market.
8 EXAMPLES OF ENTRY BARRIERS
1- Trademarks consolidated in the market

Entering a market with prestigious and established brands is extremely difficult to establish. It is this type of
challenge that Chinese automobile brands pass when trying to enter international markets.

2- Patents

A traditional entry barrier is the existence of patents. It is only after the expiration of this legal protection that
other competitors will be able to manufacture a product or provide that service in much the same way as the
patent holder.

3- Government policies

To open a bank, for example, a number of legal requirements and licenses must be obtained. These rigid
government regulations for some areas are examples of typical entry barriers.

Unlike opening a restaurant or a network of hotels, some market segments such as insurance companies and
hospitals, in addition to the financial institutions already mentioned, need better oversight to protect society,
which makes entry into these markets more difficult.

4- Mastering cutting-edge technologies

It’s easier to manufacture lawn mowers than cars, as these are easier to produce than airplanes.

The mastery of certain technologies can also be a good example of barriers to entry.

5- Economies of scale

When entering a market, a new entrant will hardly be able to produce the same quantities as already established
competitors. Fixed production costs can make it very difficult to overcome this initial stage, making the arrival
of new competitors impossible.

6- Learning curve

Some industries are characterized by complex operations or demand training’s which aren’t always easy to
learn. Luxury restaurants and fashion labels are a typical example where entry of new competitors often only
happens when a chef or a stylist has already learned enough in the company where they were and decide to open
their own business.
7- High capital requirements

The energy industry is one of the most obvious examples of this type of entry barrier. Imagine the amount of
capital needed to build a nuclear power plant or an oil rig!

8- Access to distribution channels

Many suppliers require exclusivity from their distributors or they’re already satisfied with the profitability that
traditional brands offer and prefer not to take a risk on new entrants.

TYPE OF MARKET
LEVEL OF BARRIERS TO ENTRY
STRUCTURE

Perfect competition Zero barriers to entry

Monopolistic competition Medium barriers to entry

Oligopoly High barriers to entry

Monopoly Very high to absolute barriers to entry

 USE HIGH BARRIERS TO ENTRY TO YOUR ADVANTAGE

1. Leverage an existing brand

To overcome high barriers of entry, you often need to look at ways you can leverage existing brands to enter a
new market. This could mean developing a strategic partnership or even acquiring another business that is
already well-established in the market.

2. Out-innovate the competition

The needs of consumers are constantly changing, and if your business concentrates on constant, strategic
innovation, you can beat out competition that has become stagnant or has not developed new technology.
3. Use a disruptive pricing model

To be a disruptor in an industry with high barriers to entry, you need to do something different. If you’re
entering a market where all your competitors have one type of pricing model – say, long-term membership –
consider using something different like freemium subscriptions or one-time payments. This can be enough to set
you apart and overcome the barrier.

4. Plan for the long-term

Some businesses who enter marketplaces with high barriers of entry must simply accept that they are in it for
the long haul and that short-term losses are necessary to realize long-term gains. Though this strategy takes deep
pockets, it can pay off in the long run.
USE LOW BARRIERS TO ENTRY TO YOUR ADVANTAGE

1. Advertising and marketing

Your well-established competition likely has the financial resources to swamp the market with advertising and
drown out new entrants to the market. To combat this, carefully craft your marketing strategies so that you
successfully reach your target market.

2. Economies of scale

Unlike startups, established businesses enjoy “economies of scale” – cost structures that benefit large,
established firms in a market. As a result, established firms are likely to have competitive access to materials or
resources that streamline their production processes. Careful financial planning is your best defense against
these types of barriers to entry.

3. Pricing

It’s common for new businesses to under-price their products in an effort to eclipse the competition. This
approach can actually backfire if the price attracts what economists call “insensitive customers” – customers
who do not respond to price incentives. Cigarette smokers are a clear example, since they do not generally
respond to cigarette price increases by reducing their cigarette consumption.

If you attract customers unswayed by your pricing, the demand for your product cannot be predicted and you’ll
be unable to steer demand through strategic pricing. To counteract this effect, carefully consider who your
market is as you create your pricing strategy.
4. Customer loyalty

Customer engagement and retention is your point of strongest leverage. If you don’t have a plan for recruiting
loyal customers, finding answers to the question of what are barriers to entry will not keep you afloat. Unlike
economic forces, which are largely beyond our control, customer relationships are one of the most malleable
factors of running a successful business. Loyal customers are your bridge over barriers to entry, so take strategic
action to create raving fans.

OVERCOME YOUR FEARS TO OVERCOME MARKET ENTRY BARRIERS

As a small business owner working to overcome barriers to entering an industry, it is essential to remember that
high or low barriers to entry are not necessarily a bad omen. Don’t let your fear of failure stop you. When you
use tips to grow your business like utilizing a business map, determining the business you’re really in and
concentrating on your origin story, you can turn potential roadblocks into possibilities.

Though opting to avoid barriers to entry by searching out a new, untapped market may be tempting, this isn’t
always the best plan of action. It’s understandable to think that a lack of competition would allow you to secure
an uncontested monopoly, but if there is not an established market for your product, there may be a lack of
demand. Working to overcome market entry barriers may actually be your path of least resistance. Rise to the
challenge and learn to empower yourself for success. Take action today to overcome barriers to entry with Tony
Robbins’ 7 Forces of Business Mastery, where you’ll gain the skills you need to optimize your business, hone
your competitive advantage and create raving fans for life.
 EXAMPLES OF BARRIERS TO ENTRY

 Tap water – Economies of Scale. This means as firms produce more their average costs fall. Therefore,
it is difficult for new, small firms to enter the market and be competitive. For example, a market like tap
water is a natural monopoly. There is no point for a new firm to create the national infrastructure of a
rival system of water pipes.

 Current industry demand is 10,000. At this Q, average costs are just £9.
 If a new firm enters at Q of 3,000, then average costs will be higher at £17.
 Soft drinks – brand loyalty. Some firms have high degrees of brand loyalty. This means consumers are
loyal to the existing brand and firm. It means that a new firm would have to spend a lot of money on
advertising to create its own brand loyalty. For example, Coca-Cola has a marketing budget of $4bn a
year (2016). Coca-Cola has been very successful in creating very strong brand loyalty. Other barriers to
entry are relatively low. Supermarkets often bring out their own brand colas at relatively low cost. In
blind tastings, people often cannot even distinguish Coca-Cola. However, the brand loyalty and power
of marketing means that new entrants have often failed to make a dent in the market. For example,
Virgin Cola was introduced by Richard Branson in 1994. However, by 2002, the company had fallen
into administration and the brand ended.
 Gold – Geographical barriers. Some industries are specific to a certain area. This means that new firms
cannot enter unless they have access (e.g. mining industries) The presence of gold is purely
geographical. Some regions are quite high in gold, but, if you don’t have access to these gold mining
regions, you cannot effectively enter the industry.
 Pharmaceutical drugs / patents. Many drugs are protected by legal patents. Therefore, another drug
company cannot produce – even if it would be very profitable to do so. It is an effective way to prevent
competition.
 Printer ink cartridges. Some makes of printers try to prevent other companies selling cheaper
replacement ink cartridges. The printing companies place chips in their printers, so they can check with
cartridges are compatible. This is a strong barrier to entry for selling re-usable cartridges. Printers do this
to make monopoly profits on ink – often happy to sell the actual printer at a loss.
 Major airlines with landing slots at major airports. At major airports such as Heathrow, landing slots are
all taken by the main airline carriers. Therefore, even if you wanted to set up a business flying London
to New York, you are unable to get access to a popular airport. This creates a strong barrier to entry.
 Facebook – The first firm to gain a foothold in an industry. With a company like Facebook, they have
come to dominate the market for social media/personal profiles. It is hard for a new social media
company because a key aspect of the industry is the network effects – the most logical step is to join a
network with the most users. A new company with a very limited number of users – is the least
successful. New firms can enter if they appeal to a particular niche group. But, it is hard to displace
Facebook from their position of dominance. It is a similar situation for a company like Uber – being the
first firm helps create brand loyalty and create a framework which is more difficult for new firms to
enter.
Which industries would be difficult to enter and why?

Another way of thinking about barriers to entry – is why would it be difficult to enter a particular industry?

 Newspapers – readers have strong brand loyalty to existing papers. Also, the industry is in decline and
not very profitable. There are also economies of scale in producing a national paper. You have to pay
journalists and printers – even with small national circulation.
 Trains between major city. Here the barrier to entry is the huge cost of investment before any revenues
can be earnt.
Which industries would be relatively easy to enter and why?

 Clothing. Clothing is an industry where firms can exploit a niche market. Therefore, the need for
economies of scale is less. Brand loyalty is important, but it doesn’t necessarily come from expensive
advertising campaigns. Good designs can lead to word of mouth and personal recommendations which
help to create a better brand image than mass-advertising.
 Coffee shop. Lower entry costs. A firm can rent a building and there are limited fixed costs in setting up.
Some customers will be attracted by smaller independent labels. Brand loyalty isn’t everything.
Customers who are picky may get fed up of big chains like Starbucks for being too commercial.
Conclusion
Barriers to entry generally operate on the principle of asymmetry, where different firms have different
strategies, assets, capabilities, access, etc. Barriers become dysfunctional when they are so high that incumbents
can keep out virtually all competitors, giving rise to monopoly or oligopoly.