Tactical Entry Threshold: Definition, Classes, Illustrations
In various industries, incumbent companies employ strategic entry barriers to protect their market position and deter new entrants. These barriers, also known as artificial barriers to entry or strategic entry deterrence, create challenges for potential competitors looking to enter the market.
In the automotive industry, high capital requirements, stringent regulatory barriers, and complex distribution networks make it challenging for newcomers to compete with established giants like Ford or Toyota. The need for significant investments in manufacturing plants, tooling, R&D, and distribution networks, along with the complexities of navigating emissions standards and safety norms, act as formidable obstacles for new entrants.
Similarly, in the technology and consumer electronics sector, companies like Apple use patents extensively to protect their innovations and create barriers to entry. By securing broad patents, they increase the cost and complexity for competitors to develop similar products, thus maintaining their market advantage.
The power generation industry, including electricity, also presents substantial financial and operational barriers to new firms. The high capital requirement involved in building and operating plants, coupled with the complexity of obtaining permissions and regulatory approvals, makes entry into this sector a daunting task.
Strict regulatory requirements, such as obtaining licenses and meeting security standards, limit new entrants in the banking sector. Incumbents can also deter new players by requiring them to develop new products from scratch, thanks to their possession of licenses or patents.
Incumbents employ various tactics to maintain their competitive advantage. Limit pricing, where existing companies charge low prices and produce at a high rate to deter new players, is one such strategy. Offering specialized services and after-sales support, and locking in customers through contracts, are other tactics used to deter new entrants from gaining market share.
Predatory pricing, where incumbents set the selling price very low, below average variable cost, to drive competitors out and create barriers for new players, is another type of strategic entry barrier. Acquiring a distributor company can increase entry costs for new players by requiring them to develop their own marketing networks.
Loyalty schemes help incumbents maintain customer loyalty, acting as a barrier to entry for newcomers. Newcomers may need to offer lower prices to attract customers, but high intermediate costs can negate the price difference.
Structural entry barriers, related to the nature of the market such as demand behavior and cost structure, further complicate market entry for new players.
Each of these examples illustrates how incumbents leverage various barriers to maintain their competitive advantage and limit market entry for potential competitors. Understanding these strategic entry barriers can help new entrants navigate the competitive landscape more effectively.
[1] "Automotive Industry Barriers to Entry," Investopedia, 2021,
- In the finance and investing world, established financial institutions might utilize a diverse range of barriers such as complex regulatory compliance, extensive investment in research and development, and exclusive access to patented technologies, to hinder new entrants from penetrating the market.
- Similarly, companies looking to venture into the business of renewable energy may face substantial financial and operational entry barriers, inclusive of high capital requirements for plant construction and operations, intricate permitting and regulatory approval processes, and stringent environmental standards.
