The Barriers to Entry in Supply: From Start-up to Corporate

1) What do You Mean by the Barriers to Enter a New Market?

To enter a new market, a firm or an industry have to compete against some issues. This may refer to the challenges of technological hindrances, procedures and licensing rules laid out by the government, economical expenses of starting a new business etc.

The Barrier to Entry

George J. Stigler explained a barrier to entering a market as “a cost of producing that must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry.”

The economic barrier to enter a market for supplying to corporates is the primary barrier. The secondary barrier is the cost, an industry or a firm has to go through in order to remove other barriers existing in the market. There is one other barrier which is known as the antitrust barrier, this refers to the cost that reduces communal benefit and also delays the entry. Every antitrust barrier is not barriers to entry, however every barrier to entry maybe antitrust barriers.

The column chart demonstrates the percentage of competition business holders confront in each segment from other large industries. The chart uses data from the survey of NIFB, 2012.

2) The Two Categories of Barriers to Enter a Market

A) The Fundamental Barriers of Entering

The large cost for set up: The cost to enter is enormous, moreover, some of the costs cannot be regained as these costs are more like investments to enter a business. Costs related to marketing and advertisement cannot be recovered even if a firm wants to leave to another type of market. So a firm must bear these fixed costs without the assurance of regaining them.

Cost of research and development: if an industry in the market spends a huge amount on the development and research, it refers that, the firm has a huge commercial capital. So other firms who are new to the market must also invest a huge amount of cost or have a vast budget, in order to compete with the existing firms.

Setting up network: If firms existing in the market have strong networks of multiple users or strong connection with users through their product or service, it may reduce the chance of new competitors to grab a hold on the market or to gain a minimum amount of users.

The balance of economy: often the scale of economy is exploited by the firms existing in a given market, this discourages new entrants to enter the market as they have fewer possibilities to earn or achieve their requirements.

Preservation of crucial assets: Existing firms in a market, usually holds on to the resources essential to enter the market. This generates varieties of problems for the new firms or industries which are likely to enter the same business.

B) The Synthetic Barrier of Entering:

Advertisement: This can be referred to as a recessed cost which cannot be regained by the firm. If the existing firms apply a lot of resource in this section, it reduces the chance for new entrants to join.

The limitation of price: This is a well-known barrier to all new entrants. When the incumbent firms lower the price of the product and still give highly effective products in the market to restrain other firms to enter.

Trademark: A reputed brand has a strong grip over their customers. Therefore, new entrants come in contact with major difficulties to rise above the food chain.

The required cost of switching to a new firm: Customers are aware of the complications; they have to go through during the transition from one supplier to another. They go through some major and minor problems such as; connecting new appliances and equipment, the loss of time during the connection period and also, the training required to use the new equipment. These complications are misused by the firms existing in the business, for which new entrants are discouraged to enter the same line of business.

The hardship of acquiring new contracts: The existing firms may have major contracts with them and would not want to leave them. They may also hold the patent which allows them to create a certain product which is not allowed to new entrants. So the licensing process is very demanding for the newcomers.

Schemes of loyalty: Oligopolists maintain their customers through special arrangements. They preserve customer’s loyalty which daunts new entrants to join the market.

The action of limiting the price: Existing firms may reduce the price of their products or services in order to decrease the competition. It is a scheme which has been seen throughout the ages of business. They may also procure a high amount of share from the opposing firms to gain a good amount of interest.

3) The Barriers of New Entrants

High costs or impediments are often met by a new entrant in order to enter a certain market. These barriers are quite grim to overcome and for so, many new entrants prevent themselves from joining the same line of business.

Some of the barriers new entrants face to join a market:

Retribution: The existing companies may retaliate and discourage new entrants to join the market. This usually occurs because current firms or industries want to acquire the maximum amount of income through their business.

Principles of the government: The regulations lined by the government often deter new entrants.

The large capital required to begin: A huge amount of capital is required to start a new business. Furthermore, existing companies make it more challenging for the new entrants to join. If the existing firms have invested a high amount of resource, the required amount for new entrants become higher and hard to obtain.

The advantages of cost: New entrants would likely keep their price high due to the entrance to an unknown territory. However, the prevailing firms can reduce the price of their product to eliminate their competition.

Loyal to the Brand: Generally, customers are loyal to their service provider. This limits the chance for new entrants to gain a strong grip in the market or to acquire the trust of customers.

The difficulties of dissemination networks: Predominant corporations are firmly related to their suppliers. Conversely, new entrants are not for which they come in contact with major issues of acquiring a proper distributor. It is difficult for new entrants to set up a proper network for procurement.

Procurement issues: Procurement can be referred to as multiple tasks related to the purchasing of products or services. However, to maintain the chain of procurement and supply can be difficult. Therefore, digital procurement platform has been introduced to reduce the pressure of new firms.

When do Entrants Confront High Level of Threat?

When existing firms have a well-known brand, a high capital investment, high brand loyalty in the current market, it lessens the chances for new entrants to enter the market. Furthermore, additional barriers such as; strong government regulations, the threat of retaliation from the prevailing firms and diminutive or no contact with distributors increases the level of threat to entry.

When do Entrants Confront Minimum Level of Threat?

When existing firms are not a well-known brand or the loyalty of brand is low in the current market and the investment is significantly small, the chances of entering the market increases. It is easier for new entrants to join, if there is no threat of retaliation, weak regulations administrated by the government and when exclusive technologies are required.

The exhibited statistics are based on the total number of recorded firm births for separate industries. It is recorded by the U.S Small Business Administration’s Office of Advocacy for the fiscal year 2009-2010.

4) What are the Barriers New Entrants Confront in Order to Supply to Corporates?

First of all, a brand name comes into the play. Corporates are likely to obtain service or products from a renowned brand rather than procuring services from a new entrant. On top of that, the cost and issues of switching from one provider to another are inconvenient. As corporates have to deal with installing new equipment or appliances and also train themselves to use these. These delays or withholds the service provided by the corporates which are a nuisance and a major complication for them.

These kinds of issues reduce the chance of corporates to shift from one supplier to another. For example, pizza hut would collect their ingredients from other reputed suppliers in order to maintain their quality of service or product. Furthermore, to conserve the reputation a corporate will procure their necessary commodities from another long-standing business institution. This is also related to the advertisement required for a new entrant which is a sunken cost.  

Other issues such as patent, contract and licensing are witnessed by new entrants. Predominant firms usually own the patent or license to supply to different corporates. If the prevailing firms reduce the amount and increase the efficiency of their product, which a new entrant cannot due to entering unfamiliar territory, it will reduce the chance for new entrants to supply to corporates and corporates to obtain supplies from the new entrants. The access to suppliers and procurement channels are also hard to achieve by new entrants.

Existing firms hold on to suppliers or different procurement channels in order to remove new completions in the market and without proper distributors a new entrant cannot supply to a corporate. The retaliation of dominant suppliers is also a barrier for new entrants to get a hold of a corporate. Dominant firms are bound to retaliate if new entrants try to snatch their well-organized business scheme. Loyalty to their current suppliers is also a barrier for new providers to supply to corporates.

References:

https://corporatefinanceinstitute.com/resources/knowledge/economics/barriers-to-entry.html

https://corporatefinanceinstitute.com/resources/knowledge/strategy/threat-of-new-entrants/

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