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What You Should Know About Barriers to Entry

by Allen Weiss  |  
January 1, 2001

The Internet revolution began as a land grab with swarms of startups throwing business on the web in the hope of grabbing market share early. But, in the rush to get customers many of these companies thought the marketing rules were completely different, made many mistakes in judgment, and forgot to think about barriers to entry. Before long, virtually every domain in cyberspace was overcrowded with competition, and today we are seeing an ugly shakeout.

So now that we've seen the demise of so many startups, it's time to get back to basics and put barriers to entry back into your marketing plan.

But what are barriers to entry, anyway? Barriers to entry are any number of strategic, economic, cultural or logistic requirements that may impede or even prevent a company from entering a market or industry.

Below we list a number of major barriers to entry. Think about how these barriers exist or don't exist in your industry, and to what extent they might pose a risk to your company or business idea. If you're starting a company, think about how you plan to overcome these barriers. Or think about how to make these barriers higher if you want to keep competitors out.

Capital Requirements - These are essentially the costs of becoming established in your industry. The amount will depend, of course, on your industry. Capital is typically required for research & development and production facilities. But capital is also necessary for things that fall under the heading of "working capital," which funds such things as inventories, credit for customers, and advertising.

A key idea to think about here is whether any of these investments can be recovered if your company or business folds. A recoverable capital requirement might be machinery or property. Advertising, however, is a non-recoverable investment because you don't get your money back from advertising if you company folds. As you can see, capital requirements for investments that are non-recoverable are typically larger barriers to entry.

Cost Advantages - Many cost advantages exist that may act as barriers to entry. Many of these are obvious, such as government subsidies, best contracts with suppliers or distributors, or favorable access to materials. In the case of the Internet, perhaps a cost advantage might be cheap content.

One of the more interesting sources of a cost advantage is the so-called "learning curve." The learning curve is based on the idea that the more you do something, the more experience you acquire, and thus the better and more efficient you get at it.

This is a well-known concept, and it's tempting to think that if you sell a lot of products, you'll get that experience curve benefit. But it is also well known that experience doesn't lead to cost advantages unless the experience is actively managed. Texas Instruments, for example, has had a long history of being able to manage costs via an experience curve. In fact, they were able to use this effectively in the early 1970s to take over the burgeoning pocket calculator market from Hewlett Packard.

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Allen Weiss is the founder and publisher of He can be reached at

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