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Guest Post by Joseph Brady
If you’ve ever read stories of castles and the knights who guard them, you understand what it means to establish barriers. Barriers for your business are a similar concept. It means to fortify your business against new competition that can enter the market and steal your customers.
Establishing business barriers is playing defense. Rather than attack any singular competition, strengthen your own business instead. The best businesses and companies have proved that focusing on your competition and what they’re doing leaves less time to focus on your own business. Create an intent for your business to deliver more value, rather than imitate or repurpose what your competition does. When you’re armed with the right strengths, your current and any future competition will find it a real challenge to break down your walls. Any business with high entry barriers is most attractive to prospective investors and financiers.
Building on your value stream is the most important component of business barriers. Your competition is irrelevant when you’re continuously generating value for your business. While factors like government regulations, stringent business requirements, or even exclusive skills required in your industry can build some initial barrier to entry, it is up to you to strengthen your business past this first line of defense.
Initial market-entry barriers
The starting point of establishing market barriers to entry is owning a patent proprietary to your business. Your competition can’t use or sell the patented invention in the territory of the patent. Even a pending patent application of a pending utility patent can act as a barrier to entry because the competition does not know if the patent will be issued or not. A famous example of this is the pharmaceutical industry, where companies can be barred or banned from manufacturing or marketing the medicine until the patent for the original company is granted. Even if a patent is granted, it doesn’t solve all problems. Even more difficult is protecting the patent and names like Apple and Samsung fighting it out in court are the prime examples of this.
A trade secret is the “secret ingredient” of your business. If your company has a specific recipe, algorithm, process, or formula, then you can file it as a trade secret, which cannot be obtained by other companies, even through legal means. Companies like Coca-Cola and Kentucky Fried Chicken (KFC) have their recipes exclusively filed as a trade secret. It is your business’s responsibility to protect the trade secret. If it is let out, there’s not much you can do to protect it.
Establishing key rights with the right people in your area can be a useful barrier to entry. It can be a little costly but an exclusive relationship with the best suppliers, distributors, licensers, financiers, endorsers, and even customers can be one of the best investments to make for your business. Your competition won’t have a chance of even breaking into the market, provided you put the effort into maintaining these relationships.
Second-line of barrier to entry
Economies of scale
Any business that produces at a larger scale has reduced manufacturing costs which can be a competitive advantage. This is known as economies of scale. If you have an established profitable business, consider expanding or franchising your business to meet this barrier of entry. Although this isn’t easy on the piggy bank either, several financing options can help businesses do this. For businesses that are new to the market, trying to scale their business up right away isn’t a feasible choice which can give you the upper hand.
As an established business that has been around for awhile, you have the ability to take risks that your early competition cannot afford to take. Offer products or services on sale or at cheaper prices which can slightly dip in your profit margins without throwing your business off balance. If it isn’t sales, you can reduce your profit margin through other profitable means to establish a barrier.
Marketing and advertising
Marketing and advertising is one of the best ways to get a quick boost above your competition. Create great advertisements, organize a brilliant marketing plan, or reach out across social media. Anything and everything you can do to engage with your customers brings their loyalty towards your business and brand as well. Attend local events and become a well-known name for the industry. The best marketing technique is through word-of-mouth so make sure your customers have a great experience at your store and share their reviews online and with their circles of influence. The more your business is known, the less your customers will acknowledge any competition you might have.
Third-line of barrier to entry
High research and development costs
Another place to invest your profits is on high research and development to take your business forward. Putting an effort into research and development shows your competitors that you’re into serious business and in for the long-term run. This can help improve all other barriers to business as well, by identifying critical factors that can strengthen your foothold in the market.
Even if your business doesn’t have a great intellectual property portfolio, if you have a loyal customer base, your strategy can be to build a great product and invest largely in customer acquisition and market shares. Even though it may not seem like it, this is a subtle barrier to entry strategy most businesses use.
Some of the best brands in the world came to be household names by building their own barriers against competitors rather than fighting against them. Building lines of defense, being adaptable and innovative to suit changing needs, and improving the overall customer experience isn’t easy. Focus on the options that are in line with your industry, and continuously build, expand, and protect your barriers. Your competition is sure to land in the moat.
Joseph Brady is Senior Director of Digital Marketing for Reliant Funding, a provider of short-term working capital to small and mid-sized businesses nationwide. He has more than 14 years of experience in B2B digital marketing, optimization, and operations, with a focus on the financial services market.