This at least is the argument put forward by Bruce Greenwald and Judd Kahn in their new book Competition Demystified: A Radically Simplified Approach to Business Strategy. Barriers to market entry is one of the five forces Michael Porter had identified as influential on the competitive environment in his groundbreaking Competitive Strategy. The others are substitutes, suppliers, buyers, and competitors within the industry.
As Greenwald and Kahn explain: "Our purpose is not to ignore Porter's forces but to prioritise and clarify them. Simplicity and clarity are important virtues of strategic analysis, provided we keep in mind Einstein's admonition that 'everything should be made as simple as possible, but not simpler'."
What the authors suggest is that the existence of barriers is paramount to establishing the kind of competitive environment a firm will evolve in. If there are barriers to market entry, existing firms are essentially protected against competition. If there are no barriers, many competitors are likely to be present on a level playing field. Only the best players will then survive, and will have to fight for survival.
In either scenario, firms should ask themselves whether there is a competitive advantage for them to tap into, and if so, what kind of advantage that is: from the supply side (strict cost advantage over competitors), demand (access to market that is not accessible to rivals for lack of customer mobility) or economies of scale.
But firms should also remember that paradoxically, in an increasingly global world, competitive advantage almost always stems from local circumstances. In that respect, it is good news for service industries, which tend to be both produced and consumed locally.
Source: Competition demystified
Columbia Ideas@work, July 26 2006
Review by Emilie Filou