Powerful Barriers

For a new player, to overcome such powerful barriers is quite tough. The firm may have to create a niche position for itself in the market or seek to compare by cutting price.

Capital requirement:

Competing in a new industry requires huge investments in physical facilities, production and marketing activities and other critical areas such as Research & Development, customer credit, advertising etc. Even though competing in a new industry is attractive the huge initial capital needed for successful market entry may dampen the spirits and prevent the potential entrants to give it a try. Some years ago, Xerox cleverly created a capital barrier by renting its copiers rather than only selling them. This move increased the capital needs for new entrants.

Look at the huge market entry costs:

1) Rupert Murdoch’s Sky TV incurred almost $1 billion in capital costs in operating losses in Britain
2) Start up costs for franchised Fast Food restaurants are about $2,80,000 for a Wendy’s and $8,00,000 for a Burger King [Entrepreneur January 1996]
3) Coke and Pepsi have pumped nearly $1347 million so far in the Indian market over the last couple of years without any returns so far.

Cost Disadvantages Independent of Size: In some cases established companies have cost advantages that new entrants cannot duplicate. Consider the following:

1) Favorable access to raw material (South based Cement units)
2) Assets brought at pre-inflation prices (Reliance).
3) Favorable locations (McDonald’s Public sector Oil Companies)
4) Government subsidies (for units set up in backward areas),
5) Patent protected technology related benefits (Polaroid’s monopoly on instant photography).
6) The learning or experience curve effect [the tendency for unit costs to decline as a firm gains experience producing a product or service]. For instance any firm trying to enter the integrated circuit business faces a tremendous challenge to learn how to be cost competitive in a market where experienced incumbents are already producing millions of products.

Access to Distribution Channels:

This can be a very strong entry barrier or new entrants because of the space constraints faced by distributors. Therefore, new entrants have to entice distributors through price concessions, cooperative advertising allowances, or sales promotions. Each of these actions would reduce profits. Further existing players might have developed excellent relationships with distributors over a period of time meaning that the new entrant must create a new channel of distribution to get ahead. Firms that enter the soft drink business for example in India – have found access to distribution channels a major barrier because most bottlers are already aligned with an incumbent producer [Pepsi or Coke in the United States and Britain, food and drink processors are increasingly required to make lump sum payments to leading supermarket chains in order to gain shelf space for a new product].

Switching cost:

Switching cost are the one time cost customers incur when buying from a different supplier. If a buyer were to change his supplier from an established supplier to a new comer costs may have to be paid in the form of new handling equipment, employees training etc. For example software providers possess bargaining power over the firms that need their operating systems to run computers and other applications. Switching from one software provider to another will require buyers to undergo expensive modifications on their computer systems. When switching costs are high buyers are often reluctant to shift their loyalties and buy from a new supplier.

Government Policy: Through licensing and permit requirements, the government can control entry into any Industry. For example, the government still regulates the entry of players into sectors such as banking (foreign banks can’t expand their network by setting up branches freely; there are entry restrictions for private players), atomic energy, defence equipment, small industry (where exclusive reservation of certain areas is still there) etc in India.

Source: Strategic management