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Defend Your Market with Barriers to Entry

To become the market leader, you must deal with the threat of new entrants

30 March 2020
ichael Porter listed five forces in the competitive environment. But the five forces are not necessarily of equal importance. From the book, "Competition Demystified," by Bruce C Greenwald and Judd Kahn, the most important force by far is the threat of new entrants because this is the force that determines whether you will become the market leader.

And to prevent the threat of new entrants, you need to set up barriers. And these barriers are what we call "barriers to entry".

Simply put, barriers to entry is what makes it difficult for competitors to emulate you, i.e. to enter your market. Or you already have some existing competitors, it's what makes it difficult for them to expand.

Some of the barriers to entry:

1. Network Effects

This is when more people use your product or service, the more useful it becomes and the more people will use your product or service. Once you have reached a tipping point, competitors will not be able to unseat you because they don't have the numbers.

2. Proprietary Technology

Having sole access to patented technology or technical experience that lowers cost or provides a major benefit, gives you an advantage over others.

3. Lower Cost of Supply

Having sole access to supply at lower cost gives you a cost advantage.

4. Captive Customers

When the cost or inconvenience of switching to a competitor is high, the customers will tend to stay with you. And competitors will find it difficult to take them away from you.

5. Economies of Scale

this is when your volume is large enough that your fixed cost per unit becomes significantly lower than others. This then translates to either a lower price to the customer or a higher gross margin for you. Your competitors, whose volume is smaller, would have to sell at a higher price with a lower margin.

When building your business or startup, consider how you could have barriers to entry as part of your growth strategy.



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