Tactical Entry Barrier: Definition, Categories, Illustrations
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In the competitive world of business, established companies often maintain their market dominance through strategic entry barriers. These barriers make it difficult for new entrants to gain a foothold, thereby deterring them from challenging the incumbents.
One such method is the implementation of specialized loyalty schemes. These schemes help incumbents keep their customers loyal, making it harder for newcomers to attract those customers and gain market share.
New entrants might try to lure customers with lower prices, but this strategy may not be effective if the intermediate costs are higher than the difference in price between the entrant and the incumbent. High costs can quickly erode any competitive advantage gained from lower prices.
A strong brand value is another powerful tool for incumbents. Customers are often loyal to brands they trust, making it difficult for new entrants to gain market share. Incumbents with strong brand loyalty and economies of scale create barriers that new firms find challenging to overcome.
High switching costs also act as a significant barrier to entry. Newcomers must incentivize customers to switch to their products, which can be costly given the time, effort, and uncertainty involved.
The effectiveness of strategic entry barriers depends on the type of action taken and the time it takes for new players to compete effectively. For instance, if an existing company has a license or patent, it makes it difficult for potential players to enter the market and develop a new product from scratch.
Regulatory restrictions and capital-intensive investments are other common strategic entry barriers. In the seaport industry, for example, entry is limited by costly, large-scale investments and strict regulatory or institutional limits set by port authorities. These barriers reduce the number of competitors, maintaining incumbents’ dominance and deterring new firms due to high entry costs and complex authorization procedures.
Similarly, in the pharmaceutical sector, brand-name drug companies create entry barriers through "patent thickets" and strategies like "pay-for-delay" settlements and restricted access to samples for bioequivalence testing. This legal protection significantly reduces competition by preventing generics from entering the market promptly, sustaining high prices and profits for incumbent firms.
However, not all market entries are successful. Failed entries often occur when firms underestimate these barriers. For example, Walmart's failure in Germany was due to cultural misalignment and an inability to adapt its model, while Target encountered operational and supply-chain difficulties in Canada. Uber's struggles in China were due to intense local competition and regulatory hurdles.
In conclusion, strategic entry barriers create significant competitive advantages for incumbents, reducing market contestability and often leading to higher prices, less innovation, or reduced consumer choice. New entrants must carefully navigate regulatory requirements, protect against massive capital costs, and overcome strong brand or legal protections to succeed.
Incumbents can signal efficiency through low prices, but this strategy is more effective if supported by a low-cost structure, first-mover advantages, and economies of scale. Switching costs, including monetary, effort, time, and uncertainty costs, form a significant barrier to entry and force newcomers to incentivize customers to switch to their products.
Types of strategic entry barriers include limit pricing, predatory pricing, acquisition, signaling, advertisement, brand, contracts, patents, and licenses, loyalty schemes, and switching cost. Advertising spending by incumbents contributes to building a strong brand image, making it less likely for newcomers to enter the market.
Customers may bear transportation costs when switching to an alternative product if the incumbent does not sell it in their country. Another term for strategic entry barriers is artificial barriers to entry or strategic entry deterrence. Strategic entry barriers are created deliberately by old players to prevent new players from entering their market.
Acquisitions are a way for incumbents to create and increase the credibility of barriers to entry by taking over potential rivals or acquiring companies in one production chain. In limit pricing, existing companies charge low prices and produce at a high rate to reduce the chance for new players to get higher sales. Predatory pricing is similar to limit pricing, but incumbents set the selling price below average variable cost to drive competitors out of the market.
Examples of structural entry barriers are network effects and economies of scale. Strategic entry barriers are actions taken by existing companies to deter new players from entering their market. Understanding these barriers is crucial for both incumbents and new entrants to navigate the competitive landscape effectively.
- In order to maintain their fierce competition edge, companies might invest in intricate loyalty schemes as a part of their strategic financing, which makes attracting new customers and gaining market share for competitors tougher due to the existing customers' loyalty.
- The pharmaceutical sector often employs strategies like patent thickets and pay-for-delay settlements to impede new investors, creating entry barriers and subsequently maintaining high profit margins for established companies.
