How to Use Barriers to Entry to Your Business Advantage

Cisco Innovators Forum guest blogger Bob Goedjen suggests that when we refer to barriers to entry for a business we are not talking about such issues as normaly required start-up costs of business but rather about those things that are inherent in the industry or selected market place that impede a small business or any business from entry. Significantly these often become an asset once you have entered the market as they impede additional competition from following your entry and making the market even more competitive.

Things you should consider as barriers may be in the form of unusual investments in cash up-front, permits and licenses, technical development time, and special expertise required. A small business has to be fully aware of those impediments prior to launching or they will be unpleasant surprises later. Potential patent infringement is also something to be analyzed.

A simple example might be for a restaurant, the process of getting the city building and business permits, liquor license, and even the lease improvements required to operate. Even more than the direct costs involved in these may be the unexpected delays which may often drain capital longer than your business plan anticipated. You need to particularly watch those that might occur after a lease is signed.

A more complex barrier might be that potential clients are under existing contracts which might even be multi-year and therefore extend the time it takes to get your sales to break-even. This emphasizes the importance of doing exhaustive market research.

Another area where many enterprises have totally missed calculating is where approval is required from a government agency such as the FDA. Here, in the case of medical devices or treatment the time may be three years or more and pilot tests beyond what you might have planned on. Worse, you might not get the approval and without it you have no opportunity for sales in the USA or perhaps other countries where you planned on marketing your product. While mentioning government regulations and agencies it should be recognized that countries raise barriers in the form of quotas, import duties, subsidies and other mechanisms to protect local industry.

Since this is becoming a rather negative picture I would like to mention again that these barriers become competition-limiting once you have overcome them and can protect your company from direct competition. It is surprising how many business areas do have barriers to entry and I counsel any entrepreneur to study carefully so that they plan for and find ways to leap over if possible. It might be possible to help overcome some through alliances and cooperative agreements where a competitor may help if your offering enhances the market without negative impact on their own sales. Sometimes a novel product or service offering may also lower market barriers to entry. Consider that well-entrenched brands in commodity product areas make market penetration quite challenging.