Understanding the concept of Entry Barriers and how it applies to India


The concept of Entry Barriers is very important in any business environment and more so, in India, where we now have a real economic crisis. Unrelated diversifications never work and in an economic crisis, will not work at all. An understanding of entry barriers will help anyone understand why it is so important. Some dimensions are sought to be discussed in this article.

Introduction

It has always been proved that heavily focussed companies, that spend all their managerial and leadership competencies in doing perfect business in a range of products that they know well about, are always pro-active and are also able to retort quickly to any new move of any competitor. In the language of Strategic Management, they would have a formidable competitive advantage over all competitors in a particular industry and grow from strength to strength. Very intensive knowledge-based industries have a advantage -- their skill-sets can never be copied by any competitor, and even if copied, the competitor will always fail, since the knowledge of how to get things done, will always be a mystery and learning from scratch does take a lot of time. Three best examples of such companies are BHEL, Larsen & Toubro and Asian Paints. Each of these industries operates in the highly-competitive global environments in their specific business contexts. Yet, since they have honed their skills over two or three decades, it becomes very difficult for any competitor to even come anywhere close to the competencies of these giants. Here itself I have already discussed the concept of competitive advantage.

In this article, we will discuss the concept of Entry Barriers. Furthermore, we will discuss a) Entry Barriers in the FMCG industry b) Entry barriers in the service industry and c) Entry barriers in the manufacturing industry.

What is an Entry Barrier?

An Entry Barrier is a barrier that totally prevents any new competitor from entering the industry at all. For example, in the TVS group, there is a company called Brakes India Private Limited. It is a zero-debt company. The owners never like to advertise their products. They supply entire Brake systems to all auto majors around the world. They also supply castings from their Foundry Division, based at a small town called Sholinghur, in Vellore District of Tamil Nadu. This is the only Foundry in India, to have got both the Deming Award for Quality processes and the TPM Award for excellence in Total Productive Maintenance (TPM). Now, they are so advanced in their technology. Not a single competitor can even think of going anywhere near their level of excellence. They also have a Foundry at Oman, for exports. Brakes India Private Limited has a knowledge base that is the envy of every single competitor.

However, not a single bit of this level of knowledge has come cheap. It has taken decades of perfection, and constant working at excellence in production processes. The Foundry Division is itself among the best ten in the world. It is the largest in India, and in Asia too. Hence, the formidable entry barriers are so well set now.

Entry Barriers in the FMCG industry

In total contrast to Brakes India Private Limited, the technical processes of any FMCG product like soaps and detergents, shampoos, biscuits, food products and so on, all of which are consumer products, is never sophisticated. Technology can be easily copied. The products look deceptively similar and their differentiation is indeed not so much at all. To give a simple example, in the toothpaste industry, every single product from Colgate would claim to prevent tooth decay. This is also the claim from Pepsodent. The same company, Hindustan Unilever, has Close up, which talks about fresh breath, but the subtle message is that one's teeth will be clean.

Furthermore, since there are so many brands, even from Indian competitors like Dabur, there is no clear market leader. Yes, Colgate is still number one, but it is always living with the threat of new competitors. Himalaya Drugs, for instance, has an entire range of products that have milked the "herbal" platform. Hence, even Colgate has a new toothpaste called Colgate Vedshakti.

it is even worse in biscuits. The market is flooded with too many brands. The concept of Entry Barriers will never apply here. Smart operators manufacture locally and distribute it in a small territory of even one State. The individual entrepreneur may still be making enough profits and does not have the overheads of the players. His cost of production will be even less. The marketing cost is also less.

In shampoos, a smaller company, called Cavinkare, which is a Rs 2000 crore company, has taken, head-on, the might of a giant like Hindustan Unilever. Even today, Chik shampoo is the largest selling shampoo in the sachet segment. Such is the formidable might of this company that the MNC offered to buy out the company. Its founder, whose name is C.K. Ranganathan, not only refused to sell out but has also taken over brands like Ruchi and entered the pickle market, where the MNCs dare not to enter.

The dynamic game is on. MNCs compete with one another too. ITC, an Indian multinational company, has taken on the might of Britannia Biscuits and has successfully launched so many good varieties of biscuits under the Sunfeast brand. Entry barriers are always zero in the FMCG industry.

Entry barriers in the service industry

Though not as uncomplicated as the FMCG industry, where the knowledge and technology are so easy to acquire, in the service industry too, the concept of entry barriers do not exist to a significant extent. For example, let us take the example of a huge shopping mall. Some can easily buy pockets of land, get the best of professionals to manage the business and learn as one goes along. The Phoenix Mall, at Velacheri, Chennai, is the best example of a superb piece of execution of plans. It does have significant footfalls and also has the crowd that does spend money, mostly on the snob value. Yet, it is economics.

However, the competition can enter from anywhere and still make it a success. In the star hotel category, one can learn from their working and still flourish. The GRT group, for instance, is the jewellery business in Chennai, where it is a formidable player. It has diversified into three hotels and the one in Chennai is making huge profits. Appasamy Real Estates is a name in the branded flats and apartments segment in Chennai. Yet, several years ago, they went in to build a superb three-star hotel in the commercial district of Chennai and also diversified into Coimbatore. Their three-star property is the pride of Coimbatore city. It is well managed.

How does this happen? It happens because hotel management education facilities are so widespread in Tamil Nadu. One can easily recruit and train manpower in Chennai. The poaching of Senior Managers happens from the likes of the Tatas and the ITC, the two major players. When managers are 45+ in age, they always look for fresh challenges. This is one reason why trained manpower at senior levels is easy to acquire in the hotel industry.

Entry barriers in the manufacturing industry

As already mentioned in the introduction of this article, the entry barriers in the manufacturing industry are massive. Even in cement, which is a commodity, those without experience can never enter the industry so quickly. In industries like tyres, the knowledge base is so difficult to acquire. The advent of new technologies will always mean that only existing players will survive and grow. The entry barriers are quite high. The entry barriers are not based on money. If it were so, the likes of Mukesh Ambani would have easily entered cement or even tyres. The new players will always be baffled by the skill-based competition, which is the crux of what is called Core Competencies.

Yes, core competencies can never ever be easily copied in the manufacturing sector. Formidable Indian players like MRF and JK Tyres have not sold out to the MNCs. They have their own competencies and know-how to manage. Apollo Tyres is one street smart operator. Even Ceat tyres has staged a comeback.

In industries like Steel, where the profits are never assured and where the market will zoom for a while and then stagnate, the hgh level of debts can prevent any expansion. Their owes will literally stonewall any new competitor coming to India. Perhaps this is the reason why too many MNCs are not into the manufacture of steel. So, the entry barriers are still there. Tata Steel, JSW, SAIL, Essar, you name it. And all of them are in huge debts. The biggest giant of them all, called Lakshmi Mittal, is in debts that threaten the very survival of his empire. too. Mergers and Acquisitions are so common too.

Conclusion

The aforesaid discussion had clearly discussed the scope of Entry Barriers in three different business segments. Corporate India is now witnessing a metamorphosis of sorts. In the years to come, Entry Barriers will play a big role in the game plans of each player, big or small.


Comments

Author: DR.N.V. Srinivasa Rao01 Sep 2019 Member Level: Platinum   Points : 4

A good write up from the author. When there are certain established industries functioning, it will be very difficult for a new company to come into the market and go forward. This is particularly so in the manufacturing sector. Even in the electronics industry also when we go for purchase we always look for those companies like Samsung or LG. We never settle for any other products for these items.

I feel these days this entry barrier has been overcome by one industry. We all know how Pathanjali has entered into the market and they are doing good business and in many places we see their exclusive shops selling their products. I have seen many service industries coming into the market and the entry barrier there is not that much. They can pick up their sales if they maintain prices competitively.

Author: Venkiteswaran20 May 2020 Member Level: Diamond   Points : 4

The market or consumer is benefited only when there is healthy competition. Otherwise, it will be a monopoly and the customer gets exploited. This was happening in India too before the nineties. In many sectors, there was only one player. The market faced shortage and delays. But there was no alternative.

Then came the open market situation. Many players entered and prices came down supply was sufficient. Innovations came and buyers could choose. However, this did not last. The predatory tactics of certain conglomerates resulted in suffocating and swallowing many small fishes.

So now artificial entry barriers are created by greedy monoliths and monopolists. It is very difficult to penetrate the barrier for a new entrant. The call for promoting and supporting 'local' goods and services is proof that local producers are facing strong entry barriers by certain monopoly croony capitalists.



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