In the previous steps we highlighted the most important factors in setting up a business and also got familiar with the most important economic principals. By now, you should have a business idea, so you can easily work with it. For the sake of simplicity, I will use one of the most popular unit, a restaurant as an example (and hopefully convince you about how risky the catering industry is).
Entry barriers
It sounds childish, but to start a business, we must enter the market, which is (theoretically) in almost every case possible if we have the necessary resources. However, even if you have a rock start idea, plenty of factors can make it sweaty to have access to the market and convince customers to buy your goods or service.
By definition:
Barriers to entry are the existence of obstacles that prevent new competitors from easily entering an industry or area of business.
- capital requirement (how much you need to invest)
- degree of competition (number of restaurants in the neighborhood)
- absolute advantage of competitors (cost advantage, smooth supply network, best chef in the city...)
- customer loyalty (they might won't switch brand)
- brand identity, product differentiation (Can we emphasize our brands, differences from competitors?)
- access to resources (labor, such as skilled waiters, fresh ingredients, place to rent...)
- government regulation (licenses, permissions, limitation of companies, such as cable companies)
Exit barriers
Entering a market is a significant achievement, but we shouldn't forget about the so-called exit barriers. Let's say our restaurant can't capture market share and make huge losses, and as experienced chiefs we make a decision on liquidation and leave the market, but it can be tough, can take time, which means additional losses.
By definition:
Barriers to exit are obstacles or impediments that prevent a company from exiting a market it is considering a cessation of operations in or wishes to separate from.
- exit cost (asset write-offs, clean up costs in case of heavy industries)
- highly specialized assets (e.g. a special oven used in the restaurant)
- loss of customer goodwill (if you have several stores, you might lose your customers)
- government regulation (e.g. pay back tax-benefits)