Entry and Exit Barriers

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. 

The established corporations benefit from it, but for us, it's quite a bad news. The most important entry barriers you should consider are the following (remember, our example is a restaurant):

1. capital requirement (how much you need to invest)
2. degree of competition (number of restaurants in the neighborhood)
3. absolute advantage of competitors (cost advantage, smooth supply network, best chef in the city...)
4. customer loyalty (they might won't switch brand)
5. brand identity, product differentiation (Can we emphasize our brands, differences from competitors?)
6. access to resources (labor, such as skilled waiters, fresh ingredients, place to rent...)
7. 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.

The most important factors, which you should keep in mind are to following:

1. exit cost (asset write-offs, clean up costs in case of heavy industries)
2. highly specialized assets (e.g. a special oven used in the restaurant)
3. loss of customer goodwill (if you have several stores, you might lose your customers)
4. government regulation (e.g. pay back tax-benefits)

Check the step by step guide