Despite the effort and investment (psychological, social, economic) that start-ups and their founding entrepreneurs make towards turning that ‘great business idea’ into viable business ventures, such dreams often do not materialise. They hardly get off their feet in some cases, while others succumb to the numerous threats in the changing business environment, including those from competitors. A number of reasons may be adduced to explain why some start-ups are unable to thrive in the Ghanaian business environment, more so, why having a ‘great business idea’ is not enough. One reason elaborated here is to do with how enthusiastic founding entrepreneurs in a quest to launch their dream business ventures often lose sight of ‘entry barriers’. Low ‘entry barriers’ may threaten the launch, success and survival of start-ups. Next, the meaning of ‘entry barriers’ is explained with some examples, a brief elucidation of some of the dangers of low entry barriers is then offered. Finally, some strategies for building/raising entry barriers or avoiding spaces with low entry barriers are discussed.
What are entry barriers?
In the traditional Business Strategy literature, entry barriers relate to the ‘threat of entry’, one of Porter’s 5 forces that define industry structure, and thus competition and profitability. They are factors that new or potential entrants into an industry or sector need to overcome in order to compete successfully in the industry. By extension, the lower the entry barriers, the higher the threat to incumbents’ in relation to competition, profitability, and survival. Some examples of low entry barriers include low differentiation, low switching costs, low brand loyalty, small scale, low entry capital requirement, limited experience, government legislation etc.
Despite its origins in industry analysis, the import of the concept has far reaching implications, and hence applicability in other contexts. An important tenet is an invitation to give potential competition some consideration in the analysis of competitive threats. Along these lines, limiting competitor analysis to incumbents is self-defeating. First, this concept is particularly adaptable to a start-up, as start-ups usually aim to be first-movers or pioneers in the delivery of a product, service, and solution; or in a market, market segment, an industry/sector or strategic group of an industry. Second, the tendency for start-ups to assume potential entrants/competitors away in the development of a business plan is relatively high since the thinking that: ‘No one is currently offering this product, service, solution or serving this particular market/segment we have identified’ is rife and could render them oblivious to this formidable potential threat. Unfortunately, this thinking has the tendency to feed into that ‘great business idea’ mentality and mantra.
Again it is important to conceive the potential competitive threat from three angles. The first and the most obvious are businesses that are yet to setup, but potentially may enter to offer similar products, services or solutions aimed at your customer group. For instance, if your business idea is to introduce/offer mobile vehicle washing services to very busy working people and families, other businesses that are likely to come in later to do similar things fall under this threat. Second are incumbent businesses operating in a different space, but could potentially reposition to become competitors when you setup in future. So other current and traditional vehicle washing service providers with fixed locations belong to this group. The third are potential substitute products/services (though Porter identified ‘threat of substitutes’ as one of the 5 forces). We can contemplate two types of substitution:
• Product for product/service for service substitution: For example, where new or other products or services substitute for your mobile vehicle washing services either partially or wholly. There are new vehicle washing accessories in the market currently, such as water spray guns that your potential customers may find convenient because it is a better fit for the purpose than the tradition water hose that others use.
• Doing without substitution: As the name implies, these are the possible developments that may lead to your target customers not having a need for your mobile vehicle washing services in future. For instance are we experiencing or likely to experience an increase in tarred and paved roads that are free of dust and dirt?
Dangers of low entry barriers
Amongst other things and as alluded to early on, new competing businesses may ‘flood’ your market leading to intense rivalry, granted that the factors that potential entrants need to overcome in order to favourably compete with your business are minimal. Price wars are likely to set in as customers can ‘shop around’, invariably they may demand higher levels of product or service benefits for less. This could result in an increase in cost of production without a promise of a commensurate increase in prices; consequently, it may take longer to break even. It is important to note that even in the case of incomplete or relatively remote substitution threat; the effects may manifest in limits on pricing, lower margins, as well as hampering of long-term growth and survival. This may ultimately result in business death and the associated loss of investment.
Building/raising entry barriers
It is important to identify Critical Success Factors (CSFs) of your market or segment early and keep track of how the CSFs change over time. These are factors that are of outmost value to your customers, and which the business must particularly excel in. It underpins competitive advantage/disadvantage. For example, your mobile vehicle washing business may identify price, ‘opening hours’, turnaround time, security of vehicle, levels of service amongst others as CSFs. What are customers’ preferences as far as these CSFs are concerned and how will your business perform/does perform relative to competitors? The business therefore needs to know its competitors in order to identify where their deficiencies (weaknesses) and strength lie relative to your business along the CSFs. This is where constant feedback in the form of frequent short survey questionnaires and/or casual interviews with customers and ‘mystery shopping’ (where you send unidentifiable persons to buy and experience competitors’ service, and also gather information) are particularly valuable. Such information will inform strategies for building and raising entry barriers with the intent of introducing high switching costs for customers. Switching costs are an expense, inconvenience or disruptions that a customer will have to bear if he or she is to move from your supplies to those of competitors:
• Differentiation: Having identified what your customers particularly value and also your competitors’ weaknesses and strengths, the business has to strive to offer a product or service with higher perceived benefits than your competitors in unique ways that sets the business apart from the competition.
• Brand/customer loyalty: A related approach to introducing switching costs is to build loyalty amongst your customers through many different means; including customer relationship management. Granted the power of ICT in today’s business environment, start-ups are positioned do a lot with customer databases and related ICT tools. This could as well be an example of a ‘new’ CSF in our mobile vehicle washing service case that incumbents are not meeting currently. Leave customers with fond and everlasting memories; this is where customers’ experience with your business, its products and services are key. The business must therefore strive to attain and maintain an unblemished reputation and image.
• Bundling and long-term contracts: Two other ways to introduce switching costs is offering bundles of complementing products/services or consider building long-term ‘partnership’ relationships with customers. They easily pass for examples of differentiation and building brand loyalty, because if done rightly they enhance the value of the business’s offering. This strategy may lead to ‘lock-in’ for customers as they become embedded in the relationship, and thus reliant on the business’s offerings.
For certain kinds of industries, securing patents and intellectual property rights at the Registrar General’s Department is a route to building formidable barriers to entry, at least for a good number of years. Again if the start-up intends to set up/sets up in a highly-regulated industry, it may employ non-market strategies such as lobbying to get government raise barriers via regulations and licencing regimes.
Finally, start-ups must selectively choose markets and industries and endeavour to avoid those with low entry barriers, especially if opportunities to build switching costs are limited. For instance those:
• With extremely low entry capital requirements.
• Where economies of scale are important, yet the start-up will struggle to attain competitive scale levels in short time.
• Where experience and learning curve effects do not accord any first-mover advantages.
Author: Dr William Kofi Darbi, PhD, MSc, BSc
Ghana Institute of Management and Public Administration