Intro to Barriers to Entry for Entrepreneurs

1. MY
DIRTY
LITTLE
START-UP
SECRET
BARRIER-TO-ENTRY
STRATEGY FOR
START-UPS http://www.flickr.com/p

2. when dealing with
competitors

3. provided that you don't
break the law

4. cheating is good

5. one of the best ways to
cheat

6. is to change the rules of
the game

7. to stack the deck

8. so that competitors find it
harder, or more
expensive, to do the
same thing as you

9. in b-school, we teach
Cheating 101

10. but we call it Barriers to
Entry
* From Porter’s 5 Forces if you’re looking to impress at a dinner party

11. ideally, you want to have
low barriers to entry in
any market space that
you want to enter

12. and then

13. once you are in

14. you immediately slap up
high barriers, so that
future competitors cannot
follow you

15. historically, start-ups have
placed an over-emphasis
on intellectual property

16. IP gives you a
government-protected
monopoly to profit from a
specific solution

17. it is no longer free-market
competition

18. you've changed the rules
of the game

19. excellent cheating!

20. but IP is just one of
dozens of barriers that a
start-up has at its disposal

21. and frankly, one of the
weakest

22. let’s take a tour

23. INTELLECTUAL PROPERTY
VULNERABILITIES
• Innovation around the patent
• Reverse engineering
• Shameless piracy
• Prohibitive cost to enforce
• Inability to protect across all
jurisdictions
• Public disclosure of IP required in
registration
Leverage the government sponsored
monopoly privileges that come with
registering patents, trade marks, or
copyrights.
Competitors are blocked from using your
innovations without obtaining a license
from you to do so.
BACKGROUND
COMBAT STATS
Defence Strength LOW
Cost to Setup HIGH
Cost to Maintain MED
COMBAT RATING
LEGAL / GOV’T BARRIER

24. TRADE REGULATION
VULNERABILITIES
• Counter lobby
• Forfeit of future growth markets
If your competitors pay an additional 15%
import tax in order to sell into your
market, you're cooking on gas!
Similarly, if you can help design safety
regulations, subsidies, zoning, licensing
procedures, subsidies or other laws such
that your competitor products are
disadvantaged, you are also laughing all
the way to the bank.
BACKGROUND
COMBAT STATS
Defence Strength MED
Cost to Setup HIGH
Cost to Maintain MED
COMBAT RATING
LEGAL / GOV’T BARRIER

25. RECIPROCITY
VULNERABILITIES
• Be especially wary of jail time
• Reciprocity has a quick half-life. You
need to earn quickly and spend
quickly.
In many political contexts, firms use
lobbying, favours, outright bribes, or
other creative means to create reciprocity
debt with powerful market players. These
reciprocity debt pools can be called upon
when needed to address competitors in
creative ways.
BACKGROUND
COMBAT STATS
Defence Strength HIGH
Cost to Setup HIGH
Cost to Maintain MED
COMBAT RATING
LEGAL / GOV’T BARRIER

26. CONTROL RAW MATERIALS
VULNERABILITIES
• Competitor innovates an equivalent
product from different raw material
• Suppliers break their contract with
you
• Government intervention (anti-
competition law)
If you can control the raw materials
required for production, you control the
competitive landscape.
For example, if the product absolutely
requires Mangosteen extract to work,
and you have 10-year exclusive contracts
with 86% of the world's Mangosteen
farmers, then your competitors won't be
able to manufacture the product, as they
simply won't be able to purchase raw
material
BACKGROUND
COMBAT STATS
Defence Strength HIGH
Cost to Setup HIGH
Cost to Maintain MED
COMBAT RATING
SUPPLY CHAIN BARRIER

27. CONTROL TALENT
VULNERABILITIES
• Spin out start-ups
• Someone always can pay more or give
better perks
• High-flyers often don't get a long
• There are always new PhD's that put
your PhD's to shame
This is like control of raw materials, but
specific to knowledge industries like high-
tech, banking or pharma.
In this case, you hire all the PhD's in the
market so that competitors don't have
access to the specific brain power.
Then you comp them well and use bonus
payments, equity, patenting support, etc
to keep them locked-in
BACKGROUND
COMBAT STATS
Defence Strength LOW
Cost to Setup MED
Cost to Maintain MED
COMBAT RATING
SUPPLY CHAIN BARRIER

28. COST OF PRODUCTION
VULNERABILITIES
• Once you drop your price, you may
not be able to raise it again – you may
win the war, but what you win is a no
margin market.
• Niche or Blue Ocean Strategies
• Production / Manufacturing
Innovation
When you are big, and spending big wads
of cash, your costs go down. For example,
you get discounts for bulk ordering.
With a reduced cost model, you can drop
your price below what smaller
competitors can sustain.
You can also leverage specialized know-
how (which requires high cost/long time
to duplicate) or favourable geographical
location to reduce cost.
BACKGROUND
COMBAT STATS
Defence Strength MED
Cost to Setup HIGH
Cost to Maintain MED
COMBAT RATING
MANUFACTURING BARRIER

29. CONTROL MANUFACTURING
VULNERABILITIES
• Primarily works only for specialized
(non commoditized) manufacturing
processes
• Easy to have facilities break ranks
unless they are well locked-in by
contract or otherwise
The idea here is to control all the
factories that make your widget or you
control the technology required to
manufacture it.
BACKGROUND
COMBAT STATS
Defence Strength MED
Cost to Setup MED
Cost to Maintain MED
COMBAT RATING
MANUFACTURING BARRIER

30. SUNK COSTS
VULNERABILITIES
• Competitors may not always be
rational
If the manufacturing process requires
expensive start-up costs and because of
the nature of production, those assets
can not be redeployed to some other
production process, then entrants will be
wary to invest because they may end up
losing big.
BACKGROUND
COMBAT STATS
Defence Strength LOW
Cost to Setup HIGH
Cost to Maintain MED
COMBAT RATING
MANUFACTURING BARRIER

31. CONTROL RETAIL REAL ESTATE
VULNERABILITIES
• E-Commerce
• Multi-level Marketing
• Channel margin war
Why are there so many versions of
Colgate on the shelf at your
supermarket? It is not because they
actually have that many distinct client
segments.
It is so that they can pack the limited
shelf-space. If their competitors have no
shelves upon which to display their
products, nobody will be able to buy
them.
If you own shelf space your competitor is
blocked.
BACKGROUND
COMBAT STATS
Defence Strength HIGH
Cost to Setup HIGH
Cost to Maintain MED
COMBAT RATING
DISTRIBUTION BARRIER

32. CLIENT LOCK-IN: BRAND LOYALTY
VULNERABILITIES
• Brain rewashing
• It’s hard to brainwash in the first place
Brainwashing is great. With brand loyalty
lock-in, you convince your customers that
their very sense of self (self image or
personal brand) depends on your
product.
Without your product, or with another
product, they are just sneetches without
belly stars.
BACKGROUND
COMBAT STATS
Defence Strength HIGH
Cost to Setup MED
Cost to Maintain MED
COMBAT RATING
CUSTOMER BARRIER

33. CLIENT LOCK-IN: TYING
VULNERABILITIES
• Anti-competition laws
• Need a pretty powerful product Y
Tying happens when you force a
customer to buy Product X if they buy
Product Y. If Product Y is good enough, it
locks in Product Y.
BACKGROUND
COMBAT STATS
Defence Strength LOW
Cost to Setup HIGH
Cost to Maintain LOW
COMBAT RATING
CUSTOMER BARRIER

34. CLIENT LOCK-IN: SWITCHING COSTS
VULNERABILITIES
• Adaptors
• Signing “buy-out” bonuses
Make it financial difficult for a customer
who has already purchased your product
to switch to another one:
• Phone number portability
• Standards incompatibility &
proprietary formats/APIs
• Warranty on the whole, not the parts
• Points & rewards programs
• All or nothing service agreements
• Licensing terms
BACKGROUND
COMBAT STATS
Defence Strength HIGH
Cost to Setup LOW
Cost to Maintain LOW
COMBAT RATING
CUSTOMER BARRIER

35. NETWORK EFFECTS
VULNERABILITIES
• Susceptibility to trend setters and new
networks (Facebook vs MySpace)
A network effect occurs when customers
gain more value as more customers buy.
Once a network reaches critical mass, it is
hard for a customer to leave the network
unless all the other customers move too.
BACKGROUND
COMBAT STATS
Defence Strength HIGH
Cost to Setup MED
Cost to Maintain LOW
COMBAT RATING
CUSTOMER BARRIER

36. PSYCHE WARFARE: VAPOURWARE
VULNERABILITIES
• Clients may eventually see what you
are doing
• Lead users may still buy if they are too
excited to wait
You are a small start-up that has come up
with a cool new software product for
enterprises. Microsoft sees it and thinks
that it is a good idea, but it will take them
2 years to build, or they don't want to
build it & just want to squish you like a bug
so that the tech is killed in the womb.
They announce that the feature will be
supported in the next version of Windows.
Lies, damn lies, statistics….and marketing.
Will clients buy from you, or wait for MS?
BACKGROUND
COMBAT STATS
Defence Strength MED
Cost to Setup LOW
Cost to Maintain LOW
COMBAT RATING
GENERAL BARRIER

37. PSYCHE WARFARE: RETRIBUTION
VULNERABILITIES
• You have to always win
• New punks with no memory will come
eventually
Nobody wants to enter a bloody,
embarrassing battle (price or marketing
war). If you respond to the first few
competitors quickly, harshly, and with
deadly force, you'll develop a reputation
for retribution. Competitors will have
learned not to mess with you and will
self-divert to another market without you
actually doing anything
BACKGROUND
COMBAT STATS
Defence Strength MED
Cost to Setup HIGH
Cost to Maintain HIGH
COMBAT RATING
GENERAL BARRIER

38. INNOVATIVE SPEED
VULNERABILITIES
• Actually, you don't have the only
smart team
• The weight of operations will slow you
down in practice
• Talent poaching
• Key-man risk
• Burn out
Just innovate faster than your
competitors. You know, whip those
engineers until they bleed!!!
BACKGROUND
COMBAT STATS
Defence Strength LOW
Cost to Setup MED
Cost to Maintain MED
COMBAT RATING
GENERAL BARRIER

39. WAR CHEST
VULNERABILITIES
• Fight fire with fire – clash of the titansJust out spend! Having a big war chest is
its own barrier. You can just spend more
on everything – Marketing, R&D,
Manufacturing Infrastructure
BACKGROUND
COMBAT STATS
Defence Strength MED
Cost to Setup HIGH
Cost to Maintain HIGH
COMBAT RATING
GENERAL BARRIER

40. CARTELS & EXCLUSIVE DEALING
VULNERABILITIES
• Anti-competition lawJoin together independent business
organizations to regulate production,
pricing, and marketing of goods by the
members.
This can occur either vertically or
horizontally.
BACKGROUND
COMBAT STATS
Defence Strength HIGH
Cost to Setup LOW
Cost to Maintain MED
COMBAT RATING
GENERAL BARRIER

41. ok, that’s my list so far

42. if you've got a sneaky
trick to play on a
competitor, please email it
to me so that I can add it

43. thanks for reading this far!

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