Entry Barriers
Entry Barriers refer to obstacles or constraints that new companies or competitors face when attempting to enter a particular market or industry. These barriers serve as defensive measures for existing companies to maintain their market share and prevent competition from new entrants. Entry barriers come in various forms, including economic, technological, legal, and competitive obstacles.
Main Types of Entry Barriers
Economic Barriers
Economies of Scale: When existing companies conduct large-scale production or sales, it is difficult for new entrants to compete at the same cost.
Example: Companies that achieve cost savings through mass production.
High Initial Investment: Entering a new market requires significant capital, especially in capital-intensive industries.
Example: Industries like automotive and aerospace, where equipment investments are substantial.
Difficulty in Raising Funds: New entrants may find it challenging to secure necessary funding.
Example: Startups that struggle to obtain loans from financial institutions.
Technological Barriers
Patents and Technology Protection: When existing companies hold unique technologies or patents, new entrants cannot use those technologies.
Example: Patent protection in the pharmaceutical industry.
Accumulated Technical Know-how: It is difficult for new entrants to quickly acquire the technology and know-how that existing companies have accumulated over the years.
Example: The semiconductor manufacturing industry, which requires advanced technology.
Legal and Regulatory Barriers
Government Regulations and Licensing: Some industries have stringent regulations and licensing requirements that new entrants must clear.
Example: Approval processes in the medical device or food industries.
Monopolies or Cartels: When existing companies hold a monopolistic position, new entrants find it hard to enter the market.
Example: Public utilities like electricity and railways.
Competitive Barriers
Brand Strength: It is challenging for new entrants to compete with established brands that have strong customer loyalty.
Example: Global brands like Coca-Cola or McDonald's.
Securing Distribution Channels: When existing companies control distribution channels, it is hard for new entrants to secure similar channels.
Example: Contracts to distribute products in major supermarkets.
Market Practices
Customer Switching Costs: Costs incurred by customers when switching from existing products or services to those of new entrants.
Example: Learning costs and data migration costs associated with switching software.
Advantages and Challenges of Entry Barriers
Advantages
Protection of Existing Companies' Profits
: High entry barriers make it easier for existing companies to maintain their market share and secure profits.
Market Stability
: Less intense competition prevents price wars and excessive competition, stabilizing the market.
Challenges
Suppression of Innovation
: High entry barriers can slow down innovation and technological advancements.
Limitation of Consumer Choice
: In markets with less competition, consumers have fewer product and service options, which can lead to higher prices.
Summary
Entry barriers are crucial for preventing excessive competition in a market. However, they can also restrict innovation and consumer choice. Companies need to understand the existence of entry barriers and strategically consider how to utilize or overcome them.