II. Competitive and strategic relevance of market barriers
III. Barriers to market entry
IV. Barriers to exit
The term “market barriers” subsumes a large number of mobility barriers that make entering or leaving a market difficult or even impossible. The existence of market barriers is equally important from an economic point of view as it is from a business point of view. In economic terms, they influence the functionality and outcome of the competitive process (Bain, J. S. 1956; Weizsäcker, C.C.v. 1980). For the individual company, market barriers are important determinants of profit, investment needs, growth and risk. They are therefore relevant for the corporate strategy, especially in connection with market entry and exit strategies (Porter, ME 1980; Yip, GS 1982a; Yip, GS 1982b), but also influence the design of the individual marketing instruments when it comes to the structure or the overcoming of such barriers is possible. Market entry barriers are of particular importance in international trade, since in addition to the existing customer and competition-related barriers in the internal market, other state-prescribed barriers of a tariff (mainly customs) and non-tariff type (quotas, standards, regulations) can occur. In many cases, such barriers are specifically designed to make market access more difficult for foreign competitors or to keep them out of a market entirely.
In his classic work "Barriers to New Competition", Bain pointed out that barriers to market entry protect established providers from competition from new, cheaper competitors (Bain, J. S. 1956). Barriers to market entry consequently reduce the intensity of competition and are undesirable from a competition policy point of view. It is attractive for the established providers to build up or strengthen such entry barriers. Bain distinguished three types of entry barriers in favor of the established providers: economies of scale, absolute cost advantages (e.g. favorable locations, cost of capital) and product differentiation advantages. Bain and & # x2013 in a similar study & # x2013 Mann empirically investigated the existence of such entry barriers in 23 and 30 American industries (Bain, J. S. 1956; Mann, H. M. 1965). In six or eight industries, the authors diagnosed very high barriers to entry in the sense that the price was more than 10% above the (assumed) price that would have come about with free market access. Both studies agreed that the barriers to entry were particularly high in the automotive, cigarette and alcohol industries. Berg rightly pointed out, however, that the increasing internationalization of the American market reduced or completely eliminated these barriers (Berg, H. 1985).
Until the early 1980s, the industrial economic literature on market entry barriers concentrated on aspects such as quantities, prices and costs (e.g. Schmalensee, R. 1981). So it was implicitly moving in the world of homogeneous products. Particularly intensive was the study of the concept of "entry-preventing price" ("Entry Limit Pricing", e.g. Kamien, M. I./Schwartz, N. L. 1971; Scherer, F. M. 1980). According to this concept, the established competitors try to set their price low enough to deter potential competitors from entering the market. It is doubtful whether this project will succeed, however, since potential competitors are guided more by the general attractiveness of the market (growth, potential) than by the current price.
Von Weizsäcker finally left the world of homogeneous products and increasingly focused attention on the information and goodwill-related advantages of established providers (Weizsäcker, C.C.v. 1980). He took up approaches from information economics, which at that time increasingly determined the preoccupation with market barriers. So-called "signaling" plays a decisive role here (Heil, O. P./Robertson, T. S. 1991; Heil, O. P./Walters, R. G. 1993). Established or potential providers signal certain competitive advantages (e.g. low costs), investment intentions or behavior (e.g. competitive prices, retaliatory measures) or build up a "reputation for harshness" in order to deter competitors or induce them to behave in a certain way (Minderlein, M. 1990 ; Heil, OP / Robertson, TS 1991).
The introduction of the concept of market barriers into the strategic planning of companies is particularly thanks to Porter and Yip (Porter, M. E. 1980; Yip, G. S. 1982a, Yip, G. S. 1982b). In the scheme of the five driving forces of competition, which decisively determine the profitability of an industry and thus the attractiveness of a market, for Porter potential competitors are on an equal footing with established competitors, substitutes, suppliers and customers. Logically, Porter gives the aspect of market barriers a prominent position in strategic planning. He also points out the connection between market entry and market exit barriers. High exit barriers make companies hesitate to enter a market and thus influence the level of entry barriers. Both types of barriers complement each other in terms of their profit effects, as shown in Fig. 1.
Fig. 1: Effects of market barriers on returns (based on Porter, M. E. 1980)
In view of such effects, it is only logical that market barriers play an important role in strategic planning practice. In addition to criteria such as market volume, growth and return, »market entry barriers« are usually used as a feature to assess market attractiveness. This happens not only with regard to the return effect, which is usually already included in the »market return«, but above all with regard to the risk as well as the time and capital required to enter the market. It goes without saying that the evaluation is the opposite, depending on whether one is established in a market (high market entry barriers are evaluated positively) or wants to enter a market (high barriers are evaluated negatively).
There is also a relationship with the concept of "strategic groups". This is understood to be a group of companies that pursue similar competitive strategies (Homburg, C./Sütterlin, S. 1992). Similarity means that strategic key variables such as cost structure, product range, research and development activities and markets served have comparable characteristics. Intense competition takes place within a strategic group. On the other hand, there are mobility barriers between different strategic groups, i.e. changing or joining another strategic group is associated with high costs and risks. Competition between strategic groups is consequently restricted. Caves and Porter see mobility barriers as a generalization of the concept of market barriers (Caves, R./Porter, M. E. 1977). In particular, not only market and competitive factors, but also internal company conditions such as commitment, internal ties to a business, core competencies or corporate culture are understood as mobility barriers. Many entries into new markets failed because such conditions put the new business at a disadvantage compared to the old one. It is therefore no coincidence that such ties gained in importance in the discussion of corporate strategy in the early 1990s (Ghemawat, P. 1991; Hamel, G./Prahalad, C. K. 1989).
Market and mobility barriers not only influence the analysis of markets, but also imply specific recommendations for action. In this context, the following questions are of interest:
For a company that is established in a market and wants to prevent the entry of new providers: How can you build or strengthen barriers to market entry?
For a company that wants to enter a market: How can one reduce or completely eliminate barriers to market entry or how can existing barriers to entry be overcome?
For a company that wants to exit a market itself or that wants to persuade established competitors to exit: How can one lower the market exit barriers?
1. Types of barriers to entry
Before we turn to the answers to these questions, a brief overview of the most important barriers to market entry should be given. These are (see also Schewe, G. 1993):
Economies of scale: Unit costs, which decrease sharply with the size of the company, define an entry barrier for newcomers. Because entering such a market requires a high level of capital investment. The utilization of the large capacity also requires corresponding sales volumes. Size-related barriers exist not only in production, but also in distribution, Advertising (wastage) and service.
Absolute cost advantages: Established providers often have advantages in the absolute cost position that do not depend on the size. These include access to cheap raw materials, cheap locations (e.g. retail, banks) and low capital costs. The experience curve can also be classified here. In contrast to economies of scale, experience gains cannot be overcome through the use of capital / investment volume, but only through a time-consuming learning process.
Product differentiation / goodwill: Established suppliers benefit from customer loyalty, awareness, brand image, trust capital. Better customer knowledge, the two-way relationship with the customer in the sense of "relationship marketing" also usually give the established an advantage over the newcomer. The well-known and widely investigated pioneer effect represents a special case of this entry barrier (Carter, T./Gaskin, S./Urban, GL 1986; Buzzell, RD / Gale, BT 1987; Kerin, RA / Peterson, RA / Varadarajan, PR 1992; Golder, PN / Tellis, GJ 1993).
Compatibility: Changeover costs due to limited or non-existent compatibility can be serious obstacles for newcomers. Examples are systems business and information technology.
Know-how: If a certain know-how is only available to established providers due to patent or factual circumstances, it hinders or prevents newcomers from entering the market. The reasons can be high research and development requirements (e.g. electronics), access to scarce research and development resources (e.g. top researchers such as in biotechnology) or learning-related time advances. Know-how deficits of new providers can also affect knowledge of the market and marketing methodology.
Distribution / Service: Barriers of this kind occur when established companies set up or use a distribution system exclusively and new providers have no access to efficient channels. The same applies to service and spare parts systems.
Law / Politics: Barriers due to legal or political requirements are particularly important in international business. In addition to tariff barriers (tariffs), there are a number of non-tariff barriers. Many countries are very inventive in this regard. But state-imposed barriers to entry also exist in the internal market. These include concessions (e.g. in the taxi business), quotas (e.g. milk quotas in agriculture), qualification requirements (crafts, liberal professions, banks) or advertising bans (liberal professions). All of these regulations prevent new providers from entering the market and thus protect the established ones.
2. Establishing and overcoming barriers to market entry
Establishing and overcoming barriers to market entry essentially require mirror-image actions so that they are expediently dealt with together. In the game theory sense, building a barrier can be understood as a pull of the established, overcoming it as a counter-pull of the newcomer. The possibilities are as varied as the type of barriers themselves. The following explanations are therefore to be seen as exemplary rather than complete. In addition, there are no permanent optimal behaviors in practice, since barriers to market entry change over time. A hitherto effective barrier can become irrelevant due to new technologies, market changes, shifts in distribution, etc. In this sense, few barriers prove to be effective in the long term. The most obvious measure to overcome any type of entry barrier is to acquire a company that is already operating successfully in the target market. This form replaces market entry using one's own resources (start-up) and, in addition to reducing risk, above all offers time advantages. However, the method can be very costly.
Examples are the entry of the RWE Group into the German mineral oil market through the acquisition of Deutsche Texaco AG (later renamed RWE-DEA) or the purchase of the generics manufacturer Copley by Hoechst AG with the aim of achieving rapid entry into the American pharmaceutical market. The counterbalance of the established providers is the prevention of such acquisitions by buying the company itself. By taking over Nixdorf Computer AG, Siemens prevented Mannesmann from entering the German computer market.
Economies-of-scale barriers can be built up through the choice of appropriate technologies and the highest possible investment volumes and market shares. A newcomer can try to overcome these size barriers, e.g. by expanding the market, teaming up with partners or using a new technology that is profitable at a small size. Examples are mini steelworks or combined heat and power plants.
Contractual ties, inexpensive access to raw materials, choice of location, etc. can secure absolute cost advantages for established companies and represent entry barriers for new providers. As long as these barriers are in place, it can be extremely difficult for a newcomer to enter the market. However, it is not uncommon for the original cost advantages to shift over time, so that market entry becomes possible. For example, inner-city locations can become less attractive due to parking problems, raw materials such as copper can be substituted by fiber optics, or trade union influences at old locations can hinder productivity (e.g. American automotive industry). Such changes then give new providers the chance to avoid or bypass the barriers (green meadow locations, new raw materials, younger employees, more flexible employment contracts).
Reputation and goodwill barriers offer established companies & # x2013 - unlike temporary patent protection & # x2013 - the possibility of erecting barriers over the long term. The more important factors such as brand awareness, references etc. are for the purchase decision, the more worthwhile it is for the established providers to invest in such barriers and to keep them high through ongoing intensive advertising (Buzzell, RD / Gale, BT 1987; Carpenter, GS / Nakamoto, K. 1990). This can make building new brands extremely difficult. Examples can be found in markets e.g. for cigarettes, non-alcoholic beverages, margarine or breakfast cereals (Schmalensee, R. 1974; Schmalensee, R. 1978). Schmalensee even suggested a compulsory licensing of trademarks in order to reduce such entry barriers (Schmalensee, R. 1978). Overcoming such barriers may be more successful with a no-name / generic strategy than with a classic brand concept. The no-name / generic strategy does not try to build a well-known brand name with high advertising investments and thus neutralize the competitive advantage of the brand providers, but instead a product of good standard quality without advertising but at a significantly lower price is offered. Distribution usually plays a key role in this. Case studies are the very successful companies Ratiopharm in the German pharmaceutical market or Aldi in food.
Know-how barriers can be set up and maintained through secrecy, patent protection (including permanent expansion and variation of the same), a high level of discretion in cooperation with customers and suppliers, or the acquisition of the best research and development experts. As countermeasures for newcomers, the poaching of know-how carriers and the use of competitive intelligence tools (e.g. reverse engineering) are possible. The effect of the experience curve as a market barrier also depends crucially on the extent to which it is possible to slow down the outflow of know-how or, from the perspective of the newcomer, to participate in the experience of the market leader (so-called shared experience). Know-how barriers can be circumvented through new and improved technologies; in these cases even patent protection can prove ineffective. In the case of cash registers and clocks, mechanics have been replaced by electronics, and mechanical know-how barriers (such as skilled worker qualifications) have lost their relevance with the emergence of electronic products.
Established providers can set up distribution barriers by contractually binding sales agents or by using their products to such a degree that sales agents are not interested in further product variants. Such a defense strategy often goes hand in hand with the creation of second or cheap brands that are used specifically to combat market entry (brand proliferation, »combat brands«; Schmalensee, R. 1978). For newcomers, the only opportunity to enter is often the opening of new distribution channels. When Timex wanted to enter the watch market with cheap watches in the sixties, the specialist watch trade was closed. The market entry nevertheless succeeded via new sales channels such as petrol stations, kiosks, etc.
Legal and political barriers can be particularly effective because they cannot be overcome with standard marketing tools. In this case, Kotler proposed the concept of "mega-marketing". It includes the expansion of traditional marketing tools to include public relations and political influence with the aim of changing the political framework, i.e. either establishing or defending or removing such barriers, depending on the interests of the individual (Kotler, P. 1986). In the international area there are a large number of specific barriers to market entry and consequently a corresponding spectrum of measures to maintain or overcome them. The entry barriers in the Japanese and Korean markets are considered to be particularly high (Simon, H. 1985; Simon, H. 1986; Alden, V. R. 1987). For international market entry barriers, reference is made to special articles (Bernkopf, G. 1980; Donges, J. B. 1981; Bauerschmidt, A./Sullivan, D./Gillespie, K. 1985; Simon, H. 1989b).
The actions outlined are examples of ways to set up or overcome barriers to market entry. Another decisive factor for their effect on potential competitors is how credibly deterrence and retaliation are communicated or signaled in connection with market entry. The signaling literature deals with this question (Heil, O. P./Robertson, T. S 1991; Heil, O. P./Walters, R. G. 1993; Minderlein, M. 1990). Such approaches are important to the behavior of both established and new vendors. Signaling with the aim of preventing market entries can even take place between providers who are both not yet in a market. If, for example, a hotel company A wants to prevent a competitor B from building a new hotel in a certain city, A & # x2013 can announce, regardless of whether he is already in this city or not & # x2013, that he is planning a large new hotel there himself . The credibility of this announcement is decisive for the deterrent effect. For example, if A owns a suitable piece of land in the city, this will increase the credibility and B will deter B more. The same applies to the threat of price cuts or other retaliatory measures in the event of a market entry. The most credible signal effects are based on previous behavior. If, in the past, a company has resolutely and successfully combated newcomers or, conversely, has managed to enter markets despite great resistance, it will acquire a corresponding "reputation for hardship". IBM, for example, had such a reputation for decades. From the perspective of the established, such a reputation can keep potential competitors out of the market. From the perspective of a newcomer, this reputation can dissuade established companies from taking strong defensive measures, as these are considered hopeless. In connection with market barriers, reputation has value. The cost of reputational campaigns can therefore be interpreted as an "investment in a reputation for hardship." These are justified because foreign market entries will not occur in the future or own market entries will be facilitated and higher profits will be achieved (Roberts, J. 1987; Minderlein, M. 1990; Heil, O. P./Walters, R. G. 1993).
Market exit barriers affect the competitors in a market and thus usually a well-defined circle. In contrast to entry barriers, nobody is primarily interested in erecting such barriers. Rather, exit barriers result from the existence of fixed (i.e., by definition, at least in the short term, non-degradable) costs (MacLeod, W. B. 1987; Meffert, H. 1987). These cost structures are based on technological, economic or legal factors (e.g. minimum company size, economies of scale, ensuring area-wide distribution and service presence). Legal obligations play a major role in practice (e.g. contractual or legal obligations towards employees, investment commitments in the new federal states). In this respect, the exit barriers can be very different from country to country, e.g. depending on the possibilities and costs of laying off workers.
The current relevance of market exit barriers is closely related to the different phases of the life cycle. They always become relevant when excess capacities arise. This can happen for the first time when a market enters the maturity phase, if the phase of stormy growth with massive expansion investments is followed by a flattening of sales. Another typical situation is the downturn in the life cycle of a product or an industry. The downturn is forcing capacity reductions.
Exit barriers are usually characterized by the fact that a partial, equally directed capacity reduction and market exit of all competitors is difficult or not possible or is not wanted by them. The shrinkage is often accompanied by hard disputes and shifts in market share.
The existence of exit barriers gives rise to a number of possible strategies for dealing with them:
"Survival of the fittest": The weakest companies are driven out of the market by force, only the "fittest" survive. This method can take a considerable amount of time (especially if government subsidies are also involved), cost everyone involved a lot of money and make peaceful competition between survivors more difficult in the future. In any case, this option is only recommended for companies that are superior to their competitors.
Cooperation: Here the competitors agree in some form who will leave with what capacities and share the costs. The law against restraints of competition contains exceptions for such cases. Until recently, a classic example was the structural crisis cartels, which, however, were no longer explicitly mentioned in the legal text after the adaptation to EU law in July 2005.
Takeover: A competitor takes over the capacities or market shares of another and then reduces the capacities as necessary.
Cross-market agreements: If the same companies compete in several markets and there are similar problems, it makes sense to coordinate the priorities. For example, a chemical company can withdraw from the fiber business if at the same time a competitor gives up its film business (Gelfand, M. D./Spiller, P. T. 1987).
Signaling can also play a role in connection with market exits, but is less important here than in influencing market entries. Overcoming barriers to exit shows the typical characteristics of oligopolistic competition. If the competitors fail to reach an agreement or a peaceful solution to the problem, this is usually to the detriment of all.
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Further terms: free good | Limited partnership (KG) | Business cycle theory