Author: Natanja Rebsamen
Your company is planning to go overseas? You see foreign market opportunities, tax benefits and have profit and growth goals? Your market is saturated and you are trying to withstand the competitive pressure by entering new markets?
“.. it is undeniable that the concept of entry barriers plays an important role in a wide variety of competition matters because it is vital to the analysis of market power”
(OECD, 2007, Policy Briefs Competition and Barriers to Entry)
The Organization of Economic Co-operation and Development (OECD) which works with governments to understand what drives economic, social and environmental change, explains the many different aspects and definitions of market entry barriers elaborately in a policy brief. As the various definitions cause confusion the OECD differentiates structural and strategic barriers
Structural barriers are more measurable and driven by the new entrant and may need tactical actions in:
- Economies of scale as the unit cost of a product declines while the production volume increases
- Capital requirements for large financial investments into in resources as inventories, production facilities or research and development
- High switching costs by providing potential customers with incentives to adopt their products such as purchasing support equipment, engage technical assistance, and redesign products
- Product differentiation requests lots of time and money to enter the and to overcome customer loyalty and brand identification towards competition
Strategic barriers are created by the existing competitors in the market to deter potential entrants and to maintain their own market share through:
- Channels of distribution could be controlled by competitors, you need to provide incentives in the form of price discounts, promotions, cooperative advertising to launch new products
- Government policy could be persuaded by competition to can limit or even prevent the market entry by standards, testing regulations, raw material limitations etc.
- Predatory pricing and exclusive dealing agreements by competitors limit possibilities of market entry
More regarding market entry barriers in “Competitive Strategy: Techniques for Analyzing Industries and Competitors (1980)” from Michael E. Porter and his 5 forces.