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ii)                  Barriers to entry and new entrants

What are the elements preventing new competitors from entering the business ? Are these elements rather financial, technical, regulatory ? Note that the barriers to entry present a dual interest since they are telling you what will be the difficulties you will have to overcome when trying to break into the industry (and eat into the competition’s market share) but also what will be your protection against new entrants in the future. Typically, you will easily understand that a market with low barriers to entry will almost surely bring in very limited returns (since otherwise everybody would try entering the business, and would as a result drag down the returns of this industry).

Analyzing the barriers to entry is also necessary in order to be able to keep the potential new entrants in control: if you notice that one of them is likely to grow into one of your future’s serious competitors, your interest will be to drive him out of business as soon as possible (through legal means, of course).

For instance, you might want to trigger a price war on a given product, exploiting the fact that your company is enjoying higher learning and volume efficiencies since it has been operating for a longer period of time. Thus, your staff knows how to produce more efficiently and you can enjoy lower operating costs, which are also guaranteed by the fact that your suppliers grant you better purchasing terms, since you already are one of their large clients.

However, you shall remain careful when choosing the way you will drive your neighbor out of business, for several methods can be downright illegal. An example of this would be the practice consisting in selling one of your competitors’ key products at loss until his company doesn’t receive enough orders anymore and is forced to file for bankruptcy.

Example: how Yahoo overlooked the Google threat

At the time when Google was still a small company, Yahoo had the opportunity to launch a takeover offer over that potential future competitor but omitted to do so. Google later developed into one of the largest and most powerful companies in the world and dethroned Yahoo (who is now undergoing a complete upheaval in a desperate attempt to avoid bankruptcy and to avoid being acquired by Microsoft at a ridiculously low price).