04-03-2021 05:15 AM
market entry barriers: what are market entry barriers and complete explanation ?
What are market entry barriers?
Barriers to market entry in business are all objective(independent of the will of the management and subjective depending on the will of management obstacles and difficulties that arise for an enterprise when entering new sales markets. After all, the formal ability to produce and sell some goods and services often faces insurmountable or difficult to overcome obstacles, such as legal or customs barriers, sanitary or regulatory barriers, the need to purchase licenses or patents, and others. Any of these obstacles can greatly complicate the activities of an enterprise, and in some cases simply make it impossible to enter this market.
Non-strategic barriers - this can be any of the following factors or a combination of them:
➨limited demand or limited purchasing power of buyers in the market,
➨additional capital expenditures or investments (in machinery, equipment, product modernization, product differentiation or the need to create product varieties, investment advertising, etc.)
➨absolute or relative cost advantages (for example, old market participants may have cheap channels for the supply of raw materials, components or other necessary components for doing business)
➨the quality of the goods, the reputation of the enterprise (everything that is earned from years),
➨access to market infrastructure (it may be more streamlined for older firms),
➨administrative and criminal barriers. It is known that in many areas, either administrative or economic barriers may be of greatest importance for newly created companies entering the market.
It is interesting how firms themselves assess the significance of these barriers. Thus, many companies declare that the greatest administrative barriers for them are: 1) the need to license a product, 2) the presence of trade markups, 3) difficulties with registering a company, 4) the actions of regulatory authorities. And they include the following as the most significant economic barriers: a) the need to reduce or increase prices due to the actions of old competitors' firms, b) unexpectedly low effective consumer demand in the market
➨difficulties in finding suitable premises for rent
➨the presence of network competitors that have the widest coverage of the market
➨ the existence of exclusive agreements with old firms with profitable suppliers and retailers.
and others. Examples of the most serious barriers to entering the international market include: - the protectionist policy of the state in relation to local companies, - the presence of quotas for the import and sale of goods of certain groups (these can be agricultural or own production (for example, the import of wine and cheese to France), - environmental and sanitary restrictions on the import of goods.
It is theoretically possible to overcome any barriers to entering the market, however, sometimes the price of this is so high that it makes the business unprofitable, and entering a certain market is unprofitable. Then you have to either look for another market, or adjust your product, sales policy, interaction with competitors in order to reduce all barriers to nothing.
What do barriers to entry include?
➨advertising (a company already on the market can afford good advertising, but a newcomer does not have such opportunities.)
➨resource management (a company that controls resources in a particular industry in the market does not allow other companies to enter the market.)
➨conditions not depending on the size of the company (new technologies available only to one company, different know-how, geographic location.)
➨agreements (if the company has agreed with suppliers, then it is quite difficult for new companies to enter the market and lure them in their favor)
➨scale (large companies can afford a lower cost of goods)
➨state influence on the economy (the state fully controls and may not allow companies to enter the market)
➨ inelastic demand (the cost of a product is lower than that of all competitors)
➨a network effect (the cost of a product or service depends on the number of customers, naturally, an already operating company has more customers than a newcomer.)
➨a predator's pricing policy (the company sells goods at a loss)
To attract competitors' clients, it is necessary to offer the consumer more favorable conditions than have already formed and exist on the market. Companies that have been on the market for a long time have not only their own client bases and loyalty programs for clients, but also stable agreements with suppliers, verified and functioning logistics, warehouses, retail chains, and experienced personnel. The more attractive and profitable an industry is, the more difficult it is to enter the market and the more barriers to entry. A new company that enters the market always has more costs than those companies that have been operating in this market for a long time. After all, it is necessary to buy or rent warehouses and stores for goods, attract employees, order advertising, organize logistics. The new company has much higher costs for these items of expenses than competitors who have been in the market for a long time.
When entering the market, there are personnel problems. An important key to the prosperity of any business is to hire competent personnel. People who have been working in this industry for a long time also have their own client base and experience. To hire experienced employees, they need to be offered more favorable terms of cooperation. At the same time, people are extremely reluctant to leave places where they have a stable job, their customers and respect for both customers and employees. After all, the team is an important component of any business. It is extremely difficult to attract new employees, since they do not have enough experience. Therefore, when entering the market, there are problems with personnel. Experienced employees are extremely reluctant to go to work in a new business, as everyone knows that 80% of a new business goes bankrupt, and stability is important for any employee.
In addition to external barriers (economic, administrative, labor), there are internal barriers. This is the structural organization of the business. Any existing and long-running business that has withstood the competition in the market is well established and functions like a clock. The new business still needs to be organized and adjusted for it to function steadily, and not every manager can do this. For this reason, about 80% of all functioning enterprises cannot withstand competition and are closed in the first year of operation.
Market entry barriers are the obstacles a company will have to overcome in order to bring their products to market.
In this case, we can talk about both legal entities and individual entrepreneurs. Different experts classify barriers to market entry in different ways. For example, George Stigler argues that barriers to market entry are the cost of production that a company must pay. What is the logic here? The fact is that companies that are already on the market with a similar or similar product do not have to pay this cost. They produce products at a certain cost, receive revenue, and pocket the difference in the form of profit. And the new company, in addition to the cost of production, must pay for the creation of production. This is the barrier for her.
Franklin Fisher says market entry barriers are something that prevents a company from entering a market when it is considered socially profitable. According to Joe Bane, barriers to entry are the factors that allow companies that have already entered this segment to generate above-average profits.
The objective reasons for the establishment of barriers to entry are determined by the structure of this particular market segment or the characteristics of the corresponding industry, where a new participant is trying to break through. These include:
➨the degree of market development in a certain direction
➨technological processes for the production of goods
➨the level of demand for good
➨all types of costs
➨market boundaries determined by the size of transport costs, etc.
Subjective reason son the part of already existing market participants, preventing another participant from taking a certain place in the market - competition. That is, the arrival of another participant will force others to move over and give this last part of the consumers, that is, in fact, share their profits.
All barriers can be divided into strategic and non-strategic, which, in turn, have their own classification. The division depends on who installs them.
For example, common administrative barriers include the following:
➨government-established licensing system
➨obtaining permission to conduct a business
➨for manufacturers, all equipment must be certified
➨controlling the formation of prices, etc.
The difficulty of entering the market leads to the lack of effective competition, as a result of which the market is monopolized by several participants in the industry (market).
There are two types of barriers.
With technical problems, everything is much easier. It could be a problem with a lack of internet or the power of your computer. Maybe you can't work from home, maybe you live in a village and don't have good internet. But you really want to be successful in the financial arena. Of course, the lack of internet and other technical problems is a major barrier.
Your broker may also have such problems. Perhaps you will choose the wrong server and find yourself in an unpredictable situation.
3) Dementia and despair.
These are the most serious and common problems, especially the third type. The problem with despair appears in many traders during the naïve hunger for money. This psychological barrier can appear even when you already have a lot of money! You can simply fall into such a psychological cocoon and start opening deals for the entire deposit until it is fully loaded and drained.
The main reasons that create market barriers:
➨the degree of market development only in a certain direction
➨complex technological processes for the production of goods
➨the level of demand for goods in various categories of goods
➨all types of costs and expenses in the production of goods
➨external and internal boundaries of the market, due to the value of various costs, logistics, foreign economic activity, etc. etc.
In addition to objective reasons for the development of barriers to entry into the market, there is also a natural subjective reason - competition. Of course, competition is a market mechanism, but it is not always transparent. In the context of the interest of state structures, competition may be completely absent, turning the market into a monopoly, and this is already a degradation of the market system. In a monopoly environment, market barriers cannot be overcome.
The state sets administrative barriers:
➨ licensing system
➨Obtaining permission to conduct a particular business
➨controlling the formation of prices, etc.
Difficulty entering the market often results in a lack of effective competition. Also, do not forget about the shadow component of competition - these are bribes and patronage, as well as closed contests and auctions.
What exactly can be considered a barrier? For example, advertising. Companies already present on the market have established themselves as a brand, consumers know these products, and there are regular customers. The new company should, in addition to setting up production, direct the lion's share of resources to a marketing campaign.
Resources. A specific company can control the resources required to manufacture a product. Other companies cannot enter the market without agreeing on the supply of these resources. Having strong established brands is also a barrier to market entry because it is easier for such a company to sell its products. The brand itself speaks for it.
Scale effect. Large companies with huge production have the opportunity to reduce costs precisely due to their scale, while small enterprises often do not have such an opportunity. This difference in costs can sometimes be critical, because by reducing costs, the company dumps prices.
Policy and government regulation. For example, the state can establish a monopoly on a certain type of activity. And then there is no way to enter this area. The state may require obtaining a license, permission to carry out activities.
Intellectual property. A company might come up with a new technology, patent it, and not allow others to use it. In fact, this is a legal possibility of establishing a monopoly.
Network effect. There are areas of business in which profitability depends on the number of customers. The more, the better. And it is difficult for a new company to catch on to this segment, because there are already established leaders with their client base. In this case, the beginner should work at a loss at first until he has a sufficient client base. And this is a barrier to entry into the market.
Restrictive trading practices. This is common in the field of air travel. The airlines negotiate with each other and do not give new members the opportunity to get a seat for landing at the airport.
Predatory pricing policy, or in other words dumping. A larger company is purposefully dumping prices at a loss, hoping that a new market participant will not be able to withstand such a mode of operation.
There are even more barriers to entering the market, we have analyzed only the most obvious and most famous ones. Joe Bane identifies four levels of barriers:
Branch with free entry. There are no barriers to market entry here. Capital and labor resources move freely. The equilibrium price is set at the marginal cost level.
The presence of ineffective barriers. In this case, there are barriers to entering the market, but they are short-term. It is easier for established market participants to admit newcomers than to incur losses by creating barriers.
Industries with effective barriers. Barriers to entry to the market exist, but in the long term, they are leveled. Here, a beginner will need to work at a loss at first. Not all are making their way.
The entrance is blocked. New firms will not be included in this segment in any way. At each stage, there is a monopoly firm.
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