Filed under: Private Business

November 30, 2016

Competition is good for business, right? Perhaps, but what if your business’ superior product, cost structure advantage, or intellectual property protection result in your company having an “unfair advantage” over the competition? Or, what if another business has that unfair advantage over you? Does your company have barriers to entry that keep the competition in the rear view mirror?

Often, business people think of barriers to entry as the legal protections offered by patents or trademarks. These intellectual property barriers can allow companies to recover significant up-front costs of R&D and effectively block competition. They can also be enormously important to the overall value of a business. However, barriers to entry can take on several other forms, and business owners need to understand the value that these protections can provide their company. Some may be hidden in plain sight.

Examples of Barriers to Entry

Key relationships with suppliers or customers, even informal relationships, can serve as effective barriers for keeping potential competitors from entering a market. Companies build these relationships over time through providing superior service. That service then leads to implicit trust and mutual respect, effectively keeping competitors out of the picture.

Exclusive agreements between manufacturers and distributors or retailers can also serve to bar outsiders from entering a market. Such agreements are normally won through promises of minimum orders, specific territories, and sales/service support requirements.

Sometimes large manufacturers enjoy economies of scale through having large production runs, a highly trained workforce, or operational efficiencies that effectively prevent new entrants to the market. These assets can be some of the most significant barriers for competitors to overcome. They are also often the catalysts for new inventions or technology that disrupt the market.

Cost advantages outside of economies of scale can also provide an effective barrier. For example, proximity to sources of raw materials, labor, or inexpensive power can give one company an advantage over another through providing products at a lower cost.

Capital is also a potentially significant barrier. New products that are intended to compete with existing products may be incredibly expensive to develop. Within the pharmaceutical industry, for example, few companies are willing to invest capital on unproven technologies, thereby giving the market leader a tacit advantage.

What can I do?

The barriers to entry are not always clear or tangible to every business. However, simply being aware of whether or not your business has clear advantages over the competition can help your company understand which barriers exist and how best to be a strong competitor.

Start developing legal protections by looking at your contracts and employment agreements, or by documenting these agreements. Next, consider elements outside the business, such as complimentary products or technology that could add an element of exclusivity to your offering.

This list includes just a few of the strategies businesses have developed to stay ahead of their competitors. Companies that have taken advantage of market forces or government-sponsored means to stave off competitors generally enjoy a profit and value advantage. At a minimum, business owners need to understand this important element of business value and how it applies to their business.

© 2016 Clark Nuber PS All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.