Barriers to entry are hurdles for businesses looking to break into a new target market. Overcoming these hurdles is what defines a successful market entry. Barriers to entry also act as indirect indicators that help assess market potential and competition prior to entry. However, it is crucial to note that barriers to entry can arise due to several factors, including market dynamics, changing regulations, and trade laws. Some examples of barriers to market entry include sunk costs, regulatory barriers, economies of scale, access to scarce inputs, and long-term exclusive contracts.
Analyzing the difference between strategic and structural barriers to entry
Conditions that constitute market entry barriers may be structural or strategic. In this article, our experts analyze the differences between the two to help you better understand how they can impact your business.
Strategic barriers to entry are intentionally created and enhanced by leading market players. Therefore, the effectiveness of strategic barriers depends on the attributes of the market structure. These barriers may arise from behavior that can deter market entry. As such, it can be substantially more challenging to measure the difficulties that such behavior can inflict than it is to measure the impact of structural barriers. Also, it is not easy to determine whether strategic behavior should be viewed as growth nurturing or a limiting factor. This is mainly because some strategic barriers to entry may be designed to thwart competition, which can also help existing businesses to enhance their market shares. On the other hand, structural barriers to entry are closely associated with dynamic factors like cost and demand. It could also exist due to economies of scale and network effects that vary from industry to industry and cannot be regulated.
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Strategic barriers to entry in global markets
Barriers to entry that are deep-rooted in the market structure are likely to prompt businesses to react tactically. Strategic barriers such as predatory pricing, contracts, licenses, and switching costs can act as threats that deter market entry.
High switching costs
Switching costs comprise all the direct and indirect costs incurred by a customer while switching suppliers. The direct costs include purchasing and installing new equipment, loss of service during the period of change, whereas the indirect costs include the efforts involved in finding new suppliers or learning about a new system.
Contracts, patents, and licenses
Contracts, patents, and licenses owned by players in the new market make it difficult for new entrants to establish their presence. For example, contracts between retailers and suppliers can pose a major challenge for other retail companies looking to enter the market.
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Predatory pricing and acquisition
An existing market player might deliberately lower prices or take over a potential rival by purchasing sufficient shares to gain an edge in the market. As with other methods that further reinforce the barriers, regulators may prevent this to reduce competition.
Structural barriers in global markets
Barriers that cannot be prevented but occur naturally are considered structural barriers to market entry. It includes the impact of networks, capital costs, economies of scale, network economies, and many more.
A network effect describes the effect that multiple users have on the value of a product or service. Hence if several customers already exist for a particular product, it might limit the chances of new entrants to create a positive network effect by capturing a fair share of the market.
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External economies of scale
New entrants are deterred if a market has significant economies of scale that the incumbent players have already exploited.
High R&D costs
The allocation of resources for research and development by leading market players, especially in markets like pharma ad chemicals, makes it crucial for new players to exceed or match the current spending level, often preventing them from entering a market.
Initial set-up costs and marketing & advertising costs are sunk costs that cannot be recovered. This has a significant impact on the evolving structural barriers since the high unrecoverable expenses can prevent an organization from entering a new market.
Brand value and loyalty
Brand value and customer loyalty are intertwined. Loyal customers are more like brand advocates, discouraging new firms who wish to gain market share.
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