Barriers to entering an industry
Launching a business is a process fraught with hurdles. Many innovations never hit the market at all, due to what economists call “barriers to entry” – obstacles that prevent new competitors from entering an industry, thus cornering the market for existing businesses (think high start-up costs). Depending on the industry, emerging businesses may face obstacles that are relatively straightforward to overcome (low barriers to entry), those that are impossible to overcome without extensive resources (high barriers to entry) – or both.
It’s easy to see how, in searching for answers to the question of what are barriers to entry, many business owners understandably come to believe that they must achieve perfection (i.e. complete funding, a fully-staffed team and perfect economic conditions) in order to compete. Although ideal conditions make entering an industry easier, it is not conditions or circumstances that ultimately create market entry barriers. It’s your mindset, and the biggest barriers to entry stem from your own fears.
By working diligently to refine your business vision and the passions that inspire you, you’ll discover a sense of certainty that will propel you past any barriers to entering an industry you may encounter.
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What are barriers to entry?
From an economist’s standpoint, both low and high barriers to entry fall into three primary categories: Natural barriers (e.g. the cost of drilling a new oil well), policy-based barriers (e.g. regulations and licensure requirements) and market-based barriers (i.e. competition from other firms in the same industry). Common barriers to entry include the struggle to accumulate start-up capital, existing patents that limit innovation by would-be competitors and cost-prohibitive regulatory clearance requirements. There are also industry-specific barriers to entering an industry. Existing businesses also have the advantage of experience, which means they have a leg up on brand identity and customer loyalty within their target market.
High barriers to entry
In discussing how to overcome market entry barriers, it is also important to remember that, ostensibly, many market barriers are put in place to protect the industry’s integrity by preventing the entry of subpar products into the marketplace. High barriers to entry provide a particularly potent measure of protection for existing firms, since high barriers make it exceedingly difficult for competitors to enter the industry. (This is true whether the barrier is natural (e.g. access to medicinal ingredients), policy-based (e.g. pharmaceutical regulations) or market-based (e.g. a lack of competition).)
The pharmaceutical industry is a prime case study in high barriers to entry protecting an industry posing potentially wide-ranging risks to public health. What are barriers to entry for an industry as powerful as Big Pharma? In the US, federal law mandates that in order to manufacture and market a pharmaceutical drug domestically, the manufacturer must first obtain authorization from the Federal Drug Administration (FDA). The average wait time for obtaining FDA clearance for drug manufacture is a whopping 17 months. Within this timeframe, the review process entails rounds of reviews, and just 7% and 34% of applications typically pass in the first and second rounds, respectively. Even if a drug passes the review process, it must still pass clinical trials, which cost up to $100 million per trial and have a mere one-in-ten chance of obtaining FDA approval. Even after passing clinical trials, it can still take the FDA up to 10 years to approve a drug for consumption.
Drug manufacturers with existing products on the market can take the fast track, replicating and patenting existing FDA-approved products to retain a monopoly. As a result, the average cost of launching a new pharmaceutical drug in 2012 was reportedly between $1.3 and $4 billion, with a ceiling of as much as $12 billion.
Low barriers to entry
Unlike high barriers to entry, low barriers do not typically entail excessive costs or regulations implemented to protect an industry. Low barriers to entry are hurdles common to almost any enterprise, like the overhead costs of starting a brick-and-mortar retail store or the fixed costs of running an e-commerce business. (This is true whether the barrier to entry is natural (e.g. access to raw materials), policy-based (e.g. commercial regulations) or market-based (e.g. healthy competition in a balanced market).) Although it is vital to craft your business map, marketing strategy and operations to overcome low barriers to entry, these types of obstacles do not present the burden of high barriers to entry.
The pharmaceutical industry’s market entry barriers present a clear and present obstacle to would-be manufacturers of new drugs. Yet even if you’re starting a small, local business with no ties to Big Pharma, you’ll need to overcome your own obstacles. How must businesses approach and overcome barriers to entry?
How to use high barriers to entry to your advantage
Small Business BC reports that, although overcoming barriers to entry is a challenge, those same barriers can actually help your business. What’s the trick? Seeing the equation from an investor’s perspective. Rather than speculating about what are barriers to entry for a company, an investor asks another question: How do these barriers increase the business’ appeal? Enter the beauty of high barriers to entry – high “ticket prices” make it difficult for competitors to even approach the market, which means that industry profits go to existing companies. When an emerging business is able to overcome significant obstacles to entering a market, it demonstrates the potential for a high return on investment, which endears the business to investors.
How to use low barriers to entry to your advantage
To overcome low barriers to entry in your industry, you need a strategy that prioritizes your own business vision, backed by rock-solid advertising, marketing, accounting and customer-retention practices.
Advertising and marketing.
Your well-established competition likely has the financial resources to swamp the market with advertising and drown out new entrants to the market. To combat this, carefully craft your marketing strategies so that you successfully reach your target market.
Economies of scale.
Unlike startups, established businesses enjoy “economies of scale” – cost structures that benefit large, established firms in a market. As a result, established firms are likely to have competitive access to materials or resources that streamline their production processes. Careful financial planning is your best defense against these types of barriers to entry.
It’s common for new businesses to under-price their products in an effort to eclipse the competition. This approach can actually backfire if the price attracts what economists call “insensitive customers” – customers who do not respond to price incentives. Cigarette smokers are a clear example, since they do not generally respond to cigarette price increases by reducing their cigarette consumption.
If you attract customers unswayed by your pricing, the demand for your product cannot be predicted and you’ll be unable to steer demand through strategic pricing. To counteract this effect, carefully consider who your market is as you create your pricing strategy.
Customer engagement and retention is your point of strongest leverage. If you don’t have a plan for recruiting loyal customers, finding answers to the question of what are barriers to entry will not keep you afloat. Unlike economic forces, which are largely beyond our control, customer relationships are one of the most malleable factors of running a successful business. Loyal customers are your bridge over barriers to entry, so take strategic action to create raving fans.
Overcome your fears to overcome market entry barriers
As a small business owner working to overcome barriers to entering an industry, it is essential to remember that high or low barriers to entry are not necessarily a bad omen. Don’t let your fear of failure stop you. Imagine that, instead of trying to break into an existing market, you opted to avoid barriers to entry by searching out a new, untapped market. It’s understandable to think that a lack of competition would allow you to secure an uncontested monopoly, but if there is not an established market for your product, there may be a lack of demand. Working to overcome market entry barriers may actually be your path of least resistance. Rise to the challenge and learn to empower yourself for success. Take action today to overcome barriers to entry with Tony Robbins’ 7 Forces of Business Mastery, where you’ll gain the skills you need to optimize your business, hone your competitive advantage and create raving fans for life.
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