Startup founders come up with great ideas for their businesses, but what is to prevent others from copying their ideas? This is where barriers to market entry come in. Barriers to entry like patents, government regulations, innovative skill set etc help startups in obtaining an initial headstart and grabbing a sizeable piece of the market share before new entrants get on their feet.
The level of barriers depends upon a lot of things including the type of market an organisation is entering into. For instance, an oligopoly market (a market having a few sellers) has a considerably greater level of barriers preventing new organisations from making an entry. The best examples of such markets are the automotive industry, the smartphone manufacturing industry and the telecommunication industry. On the other hand in a monopolistic competition (a market having a large number of buyers and sellers) there aren’t many barriers for new entrants.
Irrespective of the kind of market, organisations always seek to maintain or create a certain level of barriers to prevent the industry from getting oversaturated and draining their profits. Further in case of fundraisings, investors always show interest in startups/industries having a high level of barriers.
In this article, we will look at the different ways in which organisations can erect barriers to sustain themselves.
Intellectual property rights: Intellectual property rights consist of trademarks, copyrights, patents, trade secrets and more. Out of these, patents directly help an organisation in preventing other organisations from entering into the industry. Patents are, by definition, the exclusive rights granted to an organisation to sell or manufacture certain products and services. This is done to encourage new innovations from springing up. But, for justified reasons, patents are only granted to truly innovative inventions, products and services.
Innovative inventions: Innovations are in themselves barriers to entry and disruptors of existing barriers. Not everyone can come up with them and they are certainly eligible for patents. All of history’s great inventions have almost always chosen the path of patents. For example, and perhaps the most notable one, Thomas Alva Edison was granted a patent in 1878 for the invention of electric light bulbs.
Economies of scale: Economies of scale refer to the benefits that accrue to an organisation due to an increase in the size of its business. They mostly come in the form of reduced per-unit cost and greater returns on investment. They accrue due to many reasons including better distribution of the fixed costs, increased specialisation of labour and machinery etc. There are various reasons why an organisation can choose to increase its size. For instance, there may be untapped markets within an industry or an organisation can choose to make its business global.
Brand awareness: Organisations devote a large amount of resources to create awareness for their brands. The more people that know about an organisation and its products the better it is for the organisation, irrespective of whether such people are the potential customers. Well known brands are in a way barriers preventing new entry into the industry.
Competitive pricing: With economies of scale and sound financials organisations are even known to have used price as a technique to eliminate competition. One example of such predative pricing can be found in the oil industry. OPEC is a major player in the oil industry, it can easily increase or decrease the supply of oil to control prices. Moreover, it is even common to witness price wars in the oil industry.
High switching cost: In some cases, high switching costs work in favour of organisations by preventing loss of customers. Switching costs refer to the cost incurred by a person/customer in switching from one company to another. For example, it includes installation costs incurred in switching, efforts made in search of new suppliers, loss of service during the period of change etc.
Customer loyalty: Another technique that can be used as a barrier to entry is developing customer loyalty and giving customers little reason to even think about switching to a new company. This requires a better understanding of the customers’ needs, staying vigilant of any new developments in the industry, constantly striving to innovate and an excellent customer support department.
There is a saying in the marketing philosophy, according to which a customer is ten times more likely to share his/her negative experience with an organisation than he/she would with a positive one. Therefore organisations always strive to deliver their best.
Well established distribution networks: Organisations that have better and streamlined distribution channels enjoy a certain amount of clout. It takes time for new entrants to come up with their own distribution channels and they are certainly at a disadvantageous position compared to large organisations with excellent distribution channels that can reach out to a wider customer base.
Apart from these, there are some naturally occurring barriers that are present in certain industries. For example, huge capital requirements, limited access to requisite materials, the requirement of high-quality skill sets etc deter the entry of new organisations.
Irrespective of the level of barriers in the industry, organisations always stay alert of any new disruptive developments and constantly strive to improve their services and products so that they remain relevant in an ever-changing world.
For more extensive analysis and Market Intelligence reports feel free to approach us or visit our website: Venture Capital Market Intelligence Reports | VCBay.
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