Barriers to entry are elements of a competitive environment that increase the difficulty for a new business to enter the market.
For example, if you want to start an airline, you would have to buy or rent airplanes, airport space, hire employees, and a number of other costs that are prohibitive for a new entrant.
Even as recently as 50 years ago, this is how most new businesses had to start – heavy upfront investment with limited certainty of success.
Additionally, marketing, branding, and distribution channels were largely centralised, meaning that all these services needed to be performed at a scale that was worth it – not exactly cost-effective for the new business.
As customers could access only a few different streams of information, it was easier to market to the masses – provided you had the resources to do so, that is. This further limited the ability for small, inventive businesses to break through – it had to be different enough to what was out there already, yet appeal to a mass-market audience to get a return on the extremely costly advertising spend.
The Shift from the “Old” to the “New”
50 years ago, someone with a new idea could be justified in thinking they didn’t have the money, the infrastructure, or a big enough market for it to be worth trying.
Nowadays, none of those reasons apply – yet that same mindset about starting a business still remains.
I’ll explain why and how, using Porter’s Five Forces as a model to compare the ‘old ways’ against current-day business environments (which I’ll term “Old World” and “New World”).
Porter’s Five Forces – A Summary
Porter’s Five Forces is a framework that essentially outlines how competitive a market is, and ultimately whether a new entrant should participate.
The Five Forces are:
1. Competitive Rivalry – how many firms in the market, and how active are they?
2. Threat of new entrants – how easy is it to get into the market?
3. Threat of substitutes – how similar are your products to your competitors?
4. Supplier Power – number of suppliers, and what % of the market do they supply?
5. Buyer Power – number of buyers, and what % of the market do they purchase?
The key difference between business in the “Old World” and the “New World” is the near removal of two critical barriers to entry: initial capital cost, and centralised media and advertising. This greatly increased the threat of new entrants (Force #2) in most markets, but also leads to more rivalry and more substitutes in the market. It also reduces the power any one firm has over its suppliers or its buyers. I’ve pulled the differences together as they relate to the Five Forces in the table below.
Starting a small business can be done with minimal capital investment via a website, an online storefront, a small advertising budget, and social media accounts (through this method, you don’t even need to pre-purchase product before you know whether there is demand for it). This simply wasn’t possible in the Old World.
However, this poses a different problem. The Old World was categorised by a small number of businesses providing a product or service to a mass-market audience through a small number of advertising and distribution channels. The New World is categorised by an abundance of businesses, providing products and services to a segmented and more discerning audience through a wide variety of channels.
The challenge of business is now a demand-side problem. It’s far less about supply-side economics, and providing a product or service that can be mass-marketed – there’s no need for that approach because the capital and operating costs are so much lower, and customers want to feel special.
These days, it’s about being the best for a particular type of customer, rather than the mass market – because there’s so many new entrants in every sector, you have to be different enough to survive.
So what does this mean if you’re thinking about starting a business, or currently have a small business?
Firstly, if you’re thinking about starting a business, understand that the New World allows you to start with far more certainty and far lower costs than ever before. What is most likely holding you back is fear. The way to overcome that fear is to start small – set up a site, understand who you want to sell to, and find out what they want. Increase your investment in the business as you increase your knowledge about your customers.
If you currently own a business, stop and take a day (or even a couple of hours) to think about whether you’re operating with an “Old World” or “New World” approach.
Here are some quick checks:
– Are you trying to serve everyone (mass-market, Old World) or do you have a clearly defined customer you’re serving (focused differentiation, New World)?
– Do you build a product before contacting the market (Old), or do you contact the market before building the product (New)?
– Can you explain how you’re different to your competitors and why your particular customers wouldn’t go elsewhere? (if you can’t, or the difference is price, you’re in the Old World!)
If you find that you’re an Old World operator, and want advice or hands-on support in how to transition to the New World, book your free call below and we’d be more than happy to help.
Until next time,