How to Overcome Barriers of Entry
Strategies for Small Entrepreneurs to Penetrate New Markets
Small-scaled businesses may find it difficult to enter new markets where established players already exist. Here are some suggestions to overcome these barriers of entry.
A barrier of entry is defined as an obstruction that makes it difficult for a company to enter into an industry. There are several forms of entry barriers that are commonly seen in established markets. This article takes a look at the different obstructions and provides insights for small business owners to penetrate the market.
Economies of Scale
Without a doubt, this is a problem for small companies. Larger, more established companies enjoy economies of scale as they are able to lower their production costs just by their sheer size. Small companies always begin operating with high costs and usually incur losses during the first five years of their operations, which may inevitably lead to their demise.
There is no sure-fire way to overcome this problem as economies of scale come with resilience and continuous reallocation of resources to achieve efficiency in productions. Small-scaled businesses can start, however, by being realistic. A prudent forecast of sales and profits will indicate a reasonable level of costs in the first few years. Purchasing only the minimum capital (physical and human) will help curb high costs. Small business owners are required to work harder during the first few years and to make more sacrifices financially to pave for success in the long-run.
High Capital RequirementsHigh capital requirements are inherent in start-up businesses. Financial resources can be a massive barrier especially if a company is reliant on expensive raw material. Again, financial planning is of the essence here. Small companies have to learn to work within their means. Financing for small-scaled businesses is, however, available, but is incumbent on a strong business plan with a reasonable but promising financial forecasts. Applying for a loan from a bank / corporation / consortium is possible but small companies have to ensure that they factor in the costs in repayment into their financial forecasts.
High Switching Costs and Product Differentiation
To increase customer sales, small-businesses have to win over consumers from exisitng providers. This can be expensive for customers as they may already be comfortable with their current facilities and fees. Similarly, high-scaled branding and advertising that translates into product differentiation will entice consumers to remain with their larger providers.
The way around here is to create a niche (pronounced neesh, not nitch). A niche target market is a specific group of consumers who have a specific requirement. Small-businesses have to find their own niche product or service that will be able to cater to this group of people. Small companies are generally unable to reach out to the masses, the same way established companies are able to do - so they should concentrate on building rapport with their own niche target markets to boost their presence in the market. This allows smaller companies to demonstrate their own expertise and product branding.
Lack of Access to Distribution Channels
Small businesses have low bargaining power and usually begin with shaky business networks. Because of this, it is easy to lose out on business opportunities to the big corporations in the market.
There are ways to overcome this hurdle. One way would also be to concentrate on a niche product or service. This would help eliminate the main competition with the big players in the market. Alternatively, small companies can find ways to "complement" the networking channels (with their niche products and services) to increase bargaining presence in the industry.
Another popular way is the use of Internet marketing. The Internet is a potent tool in today's business world, especially where distribution channels are concerned. Networking and marketing via the net is cost-efficient, fairly non-technical and makes small business owners accessible to billions. If the Internet marketing strategy jives with the business model, small-firm owners may quickly work their way up to larger distribution channels.
