What are the types of entry barriers?

Written by marissa nicole
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New businesses face a variety of entry barriers that must be overcome or adapted to in order for a business to gain a foothold within any given marketplace. Entry barriers are the result of competitive behaviour by existing businesses within the marketplace. There is no limit to the barriers a particular business may face.

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Significance

Businesses attempt to prevent new competitors from entering their market because they could lose business and profits. High entry barriers present a difficult challenge for new businesses to overcome to be profitable in the market. If the barriers are too high, incumbent businesses in the market have a distinct advantage over any new entrant which can prevent the new business from being a significant threat to their market position.

Types

According to the Journal of Business and Industrial Marketing, the most common entry barriers are: absolute cost advantages of the existing business, economies of scale, customer loyalty, the level of firm concentration, market-entry capital requirements, customer switching costs, distribution channel access and government policy. For example, an existing company is able to cope with new competitors by manufacturing a large quantity of a product at a lesser cost than a new company. The cost and capital disadvantages are entry barriers for the new company.

Ways to Enter Markets

The level of firm concentration is an entry barrier and an asset if a new business is able to enter the market that is undersupplied by the dominant companies within the marketplace. Larger competitors in a market are bound by their economies of scale and are not able to selectively produce their particular product easily. An example can be found in the computer manufacturing market. The dominant computer companies in the US, as of 2009, are Dell, Apple, Compaq and HP. These companies have established supplier and distributor networks that provide them with immense economies of scale. There are niches in terms of personalisation, customisation and localisation which none of these large companies can adequately address. These are areas that typically favour new market entrants, particularly those of small businesses.

Characteristics of Markets with Low Entry Barriers

In some instances, one might happen upon an industry, such as hair care, where there are many competitors. These markets exist in fields where a service is rendered, rather than a product being produced. Service-based industries have lower entry barriers as there is less cost involved in doing business. As a result, businesses must differentiate themselves from the field in order to remain profitable.

Definitions

Absolute cost advantages: A company has unique advantages over its competitors such as being the patent-holder for a new product or access to cheaper raw materials. Economies of scale: Production costs decrease as a company increases production volume as a result of production costs being spread out. Level of firm concentration: An industry is more concentrated the fewer number of competitors that exist within a particular market. Market-entry capital requirements: Product development, facility and other preliminary costs required for a company to prepare to compete in a new market. Customer switching costs: The cost to a customer of switching from an existing company's product to a new market-entry's product. Distribution channel: The relationship with wholesalers, logistics companies and sales companies that producers rely on to transport and market their products to consumers. Government policy: Regulations, laws and licensing requirements that are required by national and local governments.

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