How to Determine the Barriers to Entry for Your Business Identifying the obstacles in your way shows that you thoroughly understand the competitive landscape.
By Eric Butow
Opinions expressed by Entrepreneur contributors are their own.
This is part 7 / 9 of Write Your Business Plan: Section 4: Marketing Your Business Plan series.
If you want to become a semiconductor manufacturer, you'll need a billion-dollar factory or two. If you want to have a TV network, you'll need programming and cable carriage in the major markets. These problems are called barriers to entry, and they exist to some extent in all industries.
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The barriers may be monetary, technological, distribution, or market-related, or they may simply be a matter of ownership of prime real estate. (This last is frequently cited as the real competitive advantage of McDonald's. "Whenever you see a good site, you find out McDonald's already owns it," groused one fast-food competitor.)
An important part of your business plan is identifying the barriers to entry and how you plan to overcome them. If your business is in automobile manufacturing, you can be assured new competitors are likely to be slow in springing up, thanks to the high overhead cost. But if you're opening up a nail salon, which does not have a considerable overhead, you have more opportunity to get into the game. But there will also be more competitors.
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Think twice before deciding barriers to entry are high for all potential competitors. For instance, you need billions of dollars to start a semiconductor company—but not if you contract out fabrication of the silicon chips to a manufacturer. Several years back, many semiconductor startups did exactly that, providing serious competition for rivals who assumed the barrier was too high to allow many new entries.
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Also, be alert for innovative competitors when writing the section of your plan in which you analyze barriers to entry. Some markets are also more saturated than others, and today, some are dominated by the McDonald's of their industry. For example, it's hard to open a bookstore today with Amazon changing how people buy books. In that industry, you must be creative and explore entry into specialty books, mystery books, or another niche within the larger market. Exploring entry points in the marketplace carefully will save you from a disastrous error and will certainly demonstrate to investors that you've thought your plan through and are not jumping to conclusions.
