Michael Porter's six barriers to entry

Porter's six barriers to entry

Michael Porter is one of the greatest business strategists of contemporary times. One of his theories has to do with entry barriers of a company can have in a market.

Below are identified the six barriers to entry, created by Michael Porter, which can be used to create a competitive advantage for the company (against potential competitors):

1. Scale economics:

Large companies achieve enormous levels of production compared to small companies. This results in reduced production costs. This effect is due to the fact that by increasing production, companies reduce the unit fixed cost of each product. Explained in simple terms, for example if a company that produces bicycles rents a workshop for $ 200 per month and produces 10 bicycles per month, the unit fixed cost would be $ 20. What would happen if the same workshop doubles its production? In this case, the unit fixed cost would be $ 10.

Other barriers to entry of economies of scale are favorable locations, experience, and the learning curve.

2. Product Differentiation:

In almost all markets, established competitors have managed to position their products and brands thanks to extensive advertising and loyalty efforts. If a company firmly establishes its products and differentiates them from those of the competition, it will be very difficult for new competitors to gain some market share.

3. Capital investments:

Another type of barrier to market entry occurs when new entrants have to invest large financial resources to compete in the industry. For example, certain markets may require large capital investments in inventories or production facilities. Capital requirements form a particularly strong barrier when capital is required for venture investments, such as research and development.

4. Disadvantage in Costs regardless of Scale:

There are certain types of behaviors in markets in which companies achieve a competitive advantage over others. In these cases, the companies that intend to compete with the companies already established must adapt and try to reach production levels with competitive costs. A great example of this patented technologies, good access to raw materials (alliances) and experience. In the case of patented technologies, companies that want to compete with existing companies must find new ways to reduce their costs, which implies large investments.

5. Access to distribution channels:

Companies already established in a market have facilities in the distribution of their products from production to the final consumer. New competitors must begin negotiation processes with distributors to make the products available to customers. This process can lead new entrants to reduce costs or increase quality, which is a clear disadvantage to established companies. There are times when companies are unable to enter their products on the market and must make large investments to generate their own structure to distribute their products.

6. Government Policy:

Government policies can sometimes make it difficult for new entrants to enter markets through complicated laws and requirements. There are certain government regulations that have to do with the environment that produce great barriers to investment, this does not mean that the environment should not be respected, but government policies are often not entirely clear and tend to confuse newcomers participants.

There are other types of regulations that are very well justified (such as sanitary requirements for example) that require large investments which is a clear barrier to entry.

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