Understanding your future market entry barriers is the single most important aspect of success when pursuing a new business venture. In fact, your entire business plan defines how your enterprise will succeed in its new market. Your operations oultine how you'll use your business knowledge and knowhow. Your financing relates to how you’ll work with creditors, ones that operate differently from one market to the next, and ones that always manage risk according to each industry’s risk tolerances. Your business plan has also outlined why your product and service offering will be well received by customers. Finally, you’ve used marketing to define your company’s short-term and long-term growth aspirations, in addition to the market’s overall growth potential. All of these point to the importance of understanding that market’s barriers to entry.
Market Entry Barriers
Most immediately assume that a market’s barriers relate to the government regulations and laws governing how the market is monitored. While these are extremely important issues, there are also issues pertaining to the market’s culture, how credit is granted, the market’s makeup in terms of whether it is open to new companies, or closed and controlled by a select few players, that market’s ability to support your operations and supply chain requirements, and most importantly, that market’s brand loyalty.
All of these are barriers that must be identified and dealt with accordingly. Ultimately, you must define these issues and outline strategies that allow you to reduce their impact on your new business venture. Without a clear definition of these barriers, you’re simply making assumptions, and assumptions rarely, if ever, work out. It's about defining what is immediately standing in your way and eliminating them as going concerns. So, where should you get started?
1. The Market’s Culture: Every market is defined by its market influencers, its customers, its creditors and its vendors. We’ve all heard of the proverbial “old boys network,” but rarely do we contemplate whether this still applies to today’s business environment. Now, the intention isn’t to imply that males dominate some markets. Those days are long gone. However, it is meant to define how some markets adhere to different approaches, ones you may view as outdated and antiquated.
The market’s culture will dictate how competitors interact, how customers are serviced, how credit is secured and how vendors are managed. What might appear normal in your current industry might be completely abhorrent and frowned upon in another. Understanding your future market’s culture involves understanding how all of these aforementioned players interact with one another. Define the characteristics of all your market’s influencers and use that information to outline any immediate concerns.
2. Credit and Financing: Understanding credit in your future market is ultimately about understanding your company’s costs of financing. Your new market’s credit will impact how you finance inventory, how you finance receivables, how you finance your day-to-day operations, and how you finance large capital expenditures. For instance, what are the standard payment terms in your market and are they different for certain customer segments? It’s not uncommon for companies up the value chain to have terms, while those lower in the chain must prepay or partially prepay orders.
Where your company fits in the value chain will have a huge impact on your financing, your cost of capital and your cash flow. Finally, you must clearly define the costs of large capital expenditures, ones where you may lease fixed assets as non-cash expenses. Understanding your leasing terms is essential to controlling financing costs. Focus on the following three aspects of financing when outlining these market barriers to entry.
- Costs of receivables and inventory financing
- Costs of leasing capital expenditures
- Costs of financing day-to-day operations
To read more about the importance of defining your costs of financing, please refer to: Strategic Planning: Reducing Inventory & Receivable Financing Costs
3. Market’s Makeup: Is your future market controlled by a select few companies, ones who use their economies of scale to squeeze out smaller competitors? Granted, all companies are competitive. However, some use their market clout, their political influence, their vendor relationships, and most importantly, their customer relationships to make it all but impossible for new companies to succeed. For instance, some original equipment manufacturers (OEMs) are known for providing their customer base with warranties that are valid if, and only if, those customers buy their spare parts and consumables. In other instances, value-added resellers (VARS) and large distributors may choose to sell at a loss than allow your new enterprise to make a name for itself. It’s essential that you understand not only who makes up your market, but how they conduct business when faced with new competitors.
4. Operations and Supply Chain: Ultimately, you must be able to lower your inventory financing by running an efficient supply chain. Lowering your day-to-day operating costs requires the ability to call upon multiple vendors and creditors, ones who are open to dealing with new companies. What influences will your new market have on your company’s future operations? How will you manage your supply chain so that you never encounter the high costs of material shortages and inventory stock outs?
In both instances, this involves understanding how vendors support customers, ones like your company and ones who need long-term partners. Imagine how bad it would be to find out that you entered a market where material shortages were commonplace and that only the biggest companies were guaranteed supply during these shortages. Or, imagine how costly it would be to enter an industry where your closest supplier is overseas. Better yet, what will you do when vendors are squeezed by your biggest competitors and those vendors refuse your enterprise service? These are damaging outcomes that can increase your company’s costs of operations.
The above video is from: Choose the Right Supply Chain Strategy: Make it an Easy Choice
5. Government Regulations: Is your future market wide open for all, or is it highly regulated? Focus on defining the laws and government regulations within your new market. Identify all the pertinent licences, permits and government regulations your company must adhere to. Summarize their costs and define the time needed to remove these market entry barriers. It’s essential that you understand whether your market has laws or regulations that favor larger competitors, ones who may use their aforementioned political clout to squeeze smaller enterprises infringing on their market share. This is one of the more critical market entry barriers, so be sure to understand what it takes to be compliant in your new market.
6. Competing Brands: Finally, you must clearly define the strength of your competitors’ brands. Who is the market leader, or is the no definitive leader but several competing brands, all vying for market dominance? How strong is customer loyalty for these brands and what impact will it have on sales? Answering these questions goes a long way to defining your company’s sales cycle times. Sales are needed in order to maintain a positive cash position, so understanding how long it takes to create positive cash flow is an essential aspect of success. Make sure to define brand loyalty, or the lack thereof, within your future market. If brand loyalty is non-existent, then focus on a strategy that will reduce your costs of customer acquisition and retention. If brand loyalty is high, then emulate success and study what makes some brands more valued over others.
If you want to read more about being better prepared to enter a new market, please read: Is a Market Feasibility Study More Important than a Business Plan?
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