Barrier Strategies for Entry: Definition, Classifications, Illustrations
In the competitive landscape of business, established companies often employ strategic entry barriers to deter new players from entering their market. These barriers, also known as artificial barriers to entry or strategic entry deterrence, are actions taken by incumbents to maintain their dominance.
One industry where such barriers are prevalent is the financial services industry. High startup costs and regulatory compliance create significant sunk and fixed costs that deter new entrants. Regulations, especially around banking, impose strict entry standards that established firms have already absorbed, making competition difficult for newcomers.
The oil and gas industry also presents formidable entry barriers. High capital investment, ownership of essential resources, patents, environmental and technological regulations, and fixed operating costs collectively limit the ability of new companies to enter and compete.
In the pharmaceutical industry, the requirement for lengthy and expensive FDA approvals creates a significant barrier. The approval process can take up to 37 months with uncertain outcomes, significantly restricting market entry.
Regulatory and institutional barriers often limit the number of terminal operators and service providers in the seaport and port services sector. State ownership of port services can introduce implicit guarantees and enable predatory pricing to deter competition, along with constrained licenses and concessions that limit newcomers.
In the consumer goods market, such as the Brazilian ice cream market, contracts offering exclusive sales rights, discounts, and bonuses for privileged shelf space can prevent competitors' access to points of sale. This was exemplified in a case where Unilever restricted competitor access, thereby limiting competition.
These barriers generally preserve the market power of established firms by imposing high costs, regulatory hurdles, or exclusive control over critical resources or distribution channels. They limit the number of competitors, reduce market contestability, and often result in higher prices or less innovation.
Entry barriers may lead to predatory practices by incumbents, such as pricing below cost or controlling access to key infrastructure, deterring potential entrants and weakening competition incentives. In some cases, strategic adaptation such as local partnerships or tailored products can overcome cultural and regulatory barriers but not the structural ones like capital costs or patents.
High advertising spending by incumbents creates a strong brand image, making it less likely for newcomers to enter the market. Examples of strategic entry barriers include limit pricing, product differentiation, loyalty schemes, acquisition, signaling, advertisement, brand, contracts, patents, and licenses, and switching costs.
Strategic entry barriers can sometimes come under government scrutiny because they fall into the anti-competitive category. Predatory pricing is similar to limit pricing, but involves incumbents setting the selling price very low, below average variable cost, to drive current competitors out of the market and create barriers for new players to enter. Specialized loyalty schemes help incumbents maintain customer loyalty, deterring new entrants from gaining market share. Acquisitions are another way of creating and increasing the credibility of barriers to entry, as the incumbent takes over a potential rival by buying enough shares to gain a controlling interest or acquiring another company in one production chain.
The longer it takes for new players to reach a profit and break-even, the less likely they will enter the market. Newcomers may offer low prices to attract customers, but high intermediate costs can outweigh the difference in price between the entrant and the incumbent.
In conclusion, strategic entry barriers vary by industry but commonly affect competition by restricting new entrants, enabling incumbents to maintain dominant positions, and shaping market dynamics accordingly. Understanding these barriers is crucial for both new and established companies to navigate the competitive landscape effectively.
References:
[1] Porter, M. E. (1980). How Competitive Forces Shape Strategy. Harvard Business Review.
[2] Geroski, P. A. (2000). Strategy and Competitive Position. Oxford University Press.
[3] Bhide, A. (2000). The Origin and Evolution of New Businesses. Harvard Business School Press.
[4] Tirole, J. (1988). The Theory of Industrial Organization. MIT Press.
[5] Krugman, P. (1991). Strategic Trade Policy and the New Trade Theory. MIT Press.
In the realm of finance, the high startup costs and complex regulatory compliance make it challenging for new investors to enter the market, creating formidable barriers.
The oil and gas sector also employs various strategic entry barriers, such as high capital investment, patents, and environmental regulations, which severely limit the potential of new businesses in the industry.
Plus, for the consumer goods market, contracts offering exclusive rights and controlled access to key distribution channels can deter competition, preserving the market power of established companies.
