Any strategy which is designed and incorporated to gain advantage over the competitors is a competitive strategy. The goal of every business is to obtain sustainable competitive advantage, so that it can stay ahead of its competitors. It is essentially a way to stay ahead of the competitors and not give in to the competition.
The efficiency of competitive strategies also determines whether the company will stay below or above average in terms of profitability in the industry. Generically, the competitive strategies are based on cost leadership, differentiation and focus.
Carlson Capital's Double Black Diamond Fund posted a return of 3.3% net of fees in August, according to a copy of the fund's letter, which ValueWalk has been able to review. Q3 2021 hedge fund letters, conferences and more Following this performance, for the year to the end of August, the fund has produced a Read More
One of the most effective ways to gain and sustain competitive advantage is by creating high barriers to entry. When the barriers to entry are high to the other potential competitors, it deters them from entering the market and keeps the company at an advantage. It is better to deal with the problem at the root, than to deal with it when it has grown, isn’t it?
The barriers to entry can be in the form of technology that cannot be copied, innovating regularly to come up with new, uncopyable ideas, keeping the entry investment high, gaining customer loyalty, creating brand equity and brand loyalty and using differentiators that cannot be replicated.
By using these barriers to entry, the company can make sure that any new entrant to the market is unable to enter the industry and become visible. The new players may come, but they will remain weak for a long time and then stop existing. Thus, entry barriers form an effective strategy to keep the competition at bay, to a large extent.
“We agree with Porter’s view that five forces—Substitutes, Suppliers, Potential Entrants, Buyers, and Competitors within the Industry—can affect the competitive environment. But, unlike Porter and many of his followers, we do not think that those forces are of equal importance. One of them is clearly much more important than the others. It is so dominant that leaders seeking to develop and pursue winning strategies should begin by ignoring the others and focus only on it. That force is barriers to entry—the force that underlies Porter’s “Potential Entrants.”
If there are barriers, then it is difficult for new firms to enter the market or for existing companies to expand, which is basically the same thing. Essentially there are only two possibilities. Either the existing firms within the market are protected by barriers to entry (or to expansion), or they are not. No other feature of the competitive landscape has as much influence on a company’s success as where it stands in regard to these barriers.
Rightly said that either a firm has barriers to entry or it does not. If it does, barriers to entry provide a huge competitive advantage to the firm and it goes far ahead in the competition. It becomes very difficult for the new entrants to go even close.
If there are barriers to entry, then many strategic concerns can be ignored. The company does not have to worry about interacting with identifiable competitors or about anticipating and influencing their behaviour. There are simply too many of them to deal with.
With a universe of companies seeking profitable opportunities for investment, the returns in an unprotected industry will be driven down to levels where there is no “economic profit,” that is, no returns above the costs of the invested capital. If demand conditions enable any single firm to earn unusually high returns, other companies will notice the same opportunity and flood in. Both history and theory support the truth of this proposition. As more firms enter, demand is fragmented among them. Costs per unit rise as fixed costs are spread over fewer units sold, prices fall, and the high profits that attracted the new entrants disappear.
When the barriers to entry exist, the firm does not have to worry about using other strategies to gain advantage. When there are no competitors who can survive in the company’s landscape, there is hardly any situation for the firm to deal with them by using other techniques and resources.
Life in an unprotected market is a game played on a level field in which anyone can join. In these markets, often but mistakenly identified as “commodity” markets,* only the very best players will survive and prosper, and even they have to be continually on their toes. Without the protection of barriers to entry, the only option a company has is to run itself as efficiently and effectively as possible.”
Thus, other competitive strategies help the firms to deal with the competition, either by low cost, differentiating factors, or focus. On the other, entry barriers ensure that it becomes very difficult for new players to enter into the market. The new entrants will be discouraged from entering and even when they do, they will not be able to survive for long. Barriers to entry enable a firm to make the competitors irrelevant and dissuade them, rather than trying to beat the competition later. Therefore, barriers to entry is a very effective proactive competitive strategy, which helps to give the market player a big edge over the others.