Barriers to entry
Barriers to entry are aspects of a business that inhibit a competitor's efforts to offer equivalent products or services.
There are two sides here: obstacles that make it expensive and time-consuming for competitors to break into the market, and circumstances that make it expensive or time-consuming for customers to switch to a competitor.
High start-up costs, for instance, could prevent or make it very hard for a new competitor to get up and running. Lola-Jane Enterprises (no connection to any real company) isn't going to be able to easily jump into oil exploration because of the large amounts of cash, specialty equipment, and productive land that are needed.
Government regulations could also pose a barrier to entry in an industry. If China grants Company XX the sole license to make zidgets, how will another company break that monopoly? (Although the government could do away with the restrictions, so keep watch as barriers to entry aren't impenetrable.)
Common barriers to entry include brand strength, trademarks, copyrights, patents, market share, proprietary technology, raw materials position, trade secrets, business relationships, production efficiency, reputation.
Barriers to entry are part of a company's competitive advantage, its moat.Companies with strong moats can make good investments, but remember that conditions change, so it's only one thing to look at. Even the competitive advantage that comes from superstar investor Warren Buffett will be gone someday. Sigh
Many of these advantages are broadly classified as intellectual property.
Related Fool Articles
- Business relationship
- Intellectual property
- Production efficiency
- Proprietary technology
- Raw materials position
- Trade secrets