Barriers to Market Entry pg.2 | Sample Business Plan

What Are Barriers to Market Entry?


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The decision to locate in a particular area creates barriers as a result of the surrounding infrastructure and distribution channels. Additionally, considering the resources that are required for the production of goods is important with location decisions as well. A company would not want to enter the sugar industry if it was going to establish a processing facility in northern Alaska. Being located in a geographical location that facilitates both the production and movement of goods is critical. The benefits gained from distribution efficiencies help minimize cost, which in turn allows pricing opportunities and opportunities to allocate those cost savings to other areas of the business, such as advertising.

 

Vertical integration occurs when a company produces an input related to their end product. This allows the company to contain/regulate input costs (avoiding cost fluctuations that may occur when those inputs are outsourced). The decision to vertically integrate also gives control to the integrated company in that it controls a part of the production process that others desiring to enter the market would require. This would force the company to either invest in the necessary assets to become integrated as well, or outsource, which may require costs too high to enter the market competitively. An example of this would be if Coke decided to bottle their soft drinks. They would be vertically integrated if they built a bottling facility, rather than outsourcing this production step. This would allow them to gain some control of the bottling process expense, however an important consideration is that their focus would no longer be committed to just manufacturing soft drinks. Vertical integration creates a barrier due to the reduced costs of manufacturing and the increased control.

 

Intellectual property and patent rights create a barrier when an organization owns the idea, process or product rights. This prevents other companies from entering the market because they are not legally allowed to reproduce that product/process.

 

Brand recognition is a barrier that is created from within as a result of advertising, providing a solid product, and time. When a company can establish their product as "the first product that comes to mind" for their target market, they have achieved brand recognition. This makes it difficult for a new competitor to enter that market, due to the high cost of advertising that will be required to reconstruct the established image that the consumer already maintains for products within that specific industry (phew, that was a long sentence).

 

Governmental policy creates barriers as a result of legislation, subsidies, or other regulations that will facilitate or prohibit market entry. Deregulation and trade agreements facilitate market entry, while increasing tariffs can prohibit entry. Additionally, in an international setting, some countries forbid foreign competitors from entering a market, while others may pay subsidies to enter an industry. In some cases markets can be limited by policy. An example of this is a taxi drivers licenese or a license to distribute liquor. Some municipalities, or cities, limit the number of businesses or individuals that are allowed to conduct business in these markets. It is always a good idea to conduct research on the political environment of any area before venturing forward.

 

Capital requirements can make market entry prohibitive. For example, the capital required to start up a pharmaceutical company is generally prohibitive without some serious financial backing. The cost of employees, research and development, facilities, marketing, resources, etc. requires billions of dollars and this large initial investment, in addition to the risk involved, makes it extremely difficult to enter this market.

 

Distributor and supplier agreements can completely lock out market entrants. A distributor agreement establishes a relationship between a supplier and a distributor (such as a wholesale outlet). This agreement can vary, but it generally gives the distributor exclusive rights to sell the suppliers product within a particular area. This means the distributor cannot sell other products similar to those within the supplier's agreement, which limits the ability to enter the market. In general any sort of exclusivity agreement in a market within an area will create a barrier to entry and limit the number of competitors.

 

While this article isn't all inclusive, it provides a foundation for understanding market barriers to entry and areas of consideration when making a decision to enter a market. It's a competitive business world out there and the odds for a startup are unfavorable, with approximately 3 in 5 businesses failing within the first 5 years, every bit of knowledge that will equip you for success is vital.


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