Barrier to entry

You can remove this barrier to entry but it may well kill you…

Published on: 19 Jul 2013

Any organisation that can create a barrier to entry which prevents new competitors entering the market can, in theory, keep prices high.

Economies of scale (think Airbus or Boeing), branding (think Apple) and distribution channels (think Coke) are all excellent examples of barriers to entry but one of the toughest barriers to break through are government licenses.

If a licence is needed to operate in that industry then that is the ultimate barrier. After all, without the license the company can’t operate.

Japan is the home of sushi and as you would expect some of the top sushi restaurants can be found in Tokyo.

Sushi is fish and we all know that fish is healthy for you. It may come as a surprise then that one particular sushi delicacy in Japan could end up killing you rather quickly if it is prepared incorrectly.

Certain parts of the poisonous blowfish are considered by many to be the ultimate in sushi. It tastes gorgeous although to be honest I’ve never tried it so I’m taking somebody else’s word for this.

I’ve never tried it because I’ve never had the opportunity although even if I did have the opportunity I would have a few doubts. The reason is that as well as the edible parts of the fish, some of the organs of the fish are filled with poison called tetrododoxin which is more deadly than cyanide.

Now, if you’re eating blowfish then one thing for sure is that you want the chef to know what he or she is doing. You don’t want them making a little slip of the knife and including by mistake some of the poison as before you have a chance to say “does this fish taste a bit funny to you?” you would be on your way to a quick death.

The Japanese government have therefore heavily regulated this part of the sushi industry and there are only a handful of locations that have a licence to prepare and serve blowfish.

In October though new laws are coming into place which remove the need for a licence (or to use business strategy terminology, remove a barrier to entry).

So the good news for anyone that fancies trying some of the blowfish is that it’s likely to become a bit cheaper after October. The question though is whether price will be the key decision making factor when people are deciding to eat a meal which if prepared incorrectly could quickly kill you…

Are we about to see Nokiasoft or Microkia phones?

Published on: 04 Feb 2011

I used to have a Nokia phone. It had a good battery and made great calls.

Then smartphones came along and I progressed onto an Apple iPhone. It looked super slick and did a lot of things.

Alas, problems with the battery and a slow processor meant that I fell out of love with it and recently decided to replace it.

I briefly looked at the Nokia phones and in particular their flagship phone the N8. The reviews were pretty bad and instead I decided on the Desire HD phone from  HTC.

Now my phone history isn’t the most scintillating of reads but what I found interesting was that Nokia appear to have gone from having arguably the top phones to really having not a lot to offer in today’s Smartphone market.

The challenges faced by Stephen Elop, the new CEO of Nokia have been blogged elsewhere but it seems that the anticipated success of their great hope, the N8 hasn’t materialised.

Nokia’s first quarterly results since Mr Elop joined have just been released.

Whilst their figures are growing with Smartphone sales of 28.3 million units (compared to 20.8 million units for the corresponding quarter in the previous year), their share of the Smartphone market has fallen to 31% (vs. 40% in the 2009 equivalent quarter).

On 11 February there is an investor meeting where Nokia will outline their new strategy but Mr Elop offered a few hints this week.

He stated that the company should have a better strategy around operating systems.

At the moment the 2 big operating systems in the Smartphone market are Apple and Android (the Google open source platform used by Samsung and HTC amongst others).

Nokia currently use their own Symbian operating system with a planned shift to the mobile Linux-based MeeGo operating system. Neither of these systems appear to be particularly impressive.

Mr Elop also mentioned the need for the company to “build or join a competitive ecosystem”.

Now, let’s just take a step back here and look at some of the facts:

Nokia make great handsets but they haven’t got a particularly good operating system. Apple are their arch competitors and switching to an open source Android operating system would make it challenging for them to rise above the other companies using Android.

Now here’s an interesting thought. A couple of months ago Microsoft launched their Windows 7 mobile platform. It’s reportedly technically very good but arguably needs a major handset manufacturer to take it on board.

Mr Elop’s previous employer before joining Nokia was none other than Microsoft.

Will we see Nokiasoft or Microkia phones in the near future?

Was it a good bet or not? 10 years and £1.4 billion later and the answer seems to be…

Published on: 27 Oct 2010

Although people have been gambling for a long time, the profile of the betting industry has changed dramatically over recent years.

The bookmakers that were seen on many a high street seem to be gradually disappearing.

People are still gambling though but the delivery method of the industry is switching to internet based gambling rather than placing bets at a physical bookmakers.

Ten years ago former professional gambler Andrew Black and former JP Morgan trader Edward Wray started up a betting business that addressed matters in a new novel way.

For years the typical approach to gambling had been where a bookmaker set the odds and it was up to the individual gambler whether or not he or she accepted these odds and placed the bet.

Betfair pioneered the concept of person to person betting whereby individuals bet against each other rather than the bookmaker. Betfair provide the platform for the betting and take a commission on each transaction.

A gambler will say that they want to bet on a certain event happening (or not happening) and if another gambler wants to accept the bet then the transaction goes ahead. Betfair provide the mechanism for this to happen.

This is known as a betting exchange and is a great example of where first mover advantage really counts.

In order for the business model to work there has to be a critical mass of gamblers that are willing to offer and accept bets. Without this critical mass the business simply would not work.

Another example of where first mover advantage has been critical to business success is in online auctions. After all, who are the main competitors to eBay?

Back to Betfair though and it certainly is a good business model. Risk for example, is nicely reduced as the company is not standing to lose on the bet but instead takes a nice commission on each transaction.

So how well has it done over the last 10 years?

The answer to this can be found last Friday when 15% of the company was floated on the London stock market and the company was valued at £1.4bn.

Betfair’s advisors were some of the biggest names in the business and included Goldman Sachs, Morgan Stanley and Barclays Capital to name a few.

Amongst other things their job was to identify the price range of the proposed offer. Initial indications were that it would be between £11 to £14. The final initial public offering (IPO) price was set at £13.

With some of the top investment bankers involved and Betfair being in the gambling industry (which is not necessarily renowned for being generous to gamblers) it was something of a surprise to some people to see the share price rise by nearly 20% in the first day of initial trading after the IPO. After all, this could imply that the IPO was undervalued if there was such an initial jump in price.

I wonder what odds you would have got from Betfair that the IPO share price would rise by 20% on the first day of trading?

Get out your sketch pad if you want to overcome a barrier…

Published on: 11 Oct 2010

If an organisation can create a successful barrier to entry then it will have a great competitive advantage.

In simple terms, a barrier to entry can prevent competitors entering the market.

We’ve blogged before about a good example of a barrier in the Indian telecommunication market but a recent attempt to create a barrier by Southampton Football Club in the UK was met by a truly artistic response.

Southampton FC decided that they would try to boost their income by preventing any non Southampton FC photographers from taking photos of their match with Plymouth Argyle.

This barrier meant that the only photographers present were official Southampton FC photographers and hence any photos of the match would have to be purchased from the official agency. A nice revenue source for the club.

Ignoring the rights and wrongs of this in terms of impact on other clubs and setting a precedent, this is indeed a pretty tough barrier to overcome.

Understandably upset at having to pay for photos of their local team, the Plymouth Herald newspaper approached well known local artist Chris Robinson.

Chris watched the match on television and then drew “comic strip style” pictures of the football action which were then published in the paper instead of photos.

As you can see, the results were pretty impressive.

It also resulted in a pretty unusual answer to the question of “How do you overcome a barrier to entry”.

The answer now includes, “Draw some cartoons”.

Is it really an auction for 3G licenses or is it an auction for the ultimate barrier?

Published on: 28 Apr 2010

Mobile phone companies have recently started placing bids in the auction for India’s 3G phone licenses with the government likely to receive over $8 billion in the process.

3G technology provides users with the ability to download content such as music and internet pages at higher speeds.

There has been a dramatic increase in the number of mobile phones in India over recent years with the number of phones sold increasing from 35 million five years ago to 130 million last year.

This is going to be an interesting auction but what exactly will they be bidding on?

Most people will say that they are trying to buy a 3G mobile license but students of Porter’s 5 forces will argue that they are in fact buying a barrier to entry. One of Porter’s 5 forces is “Potential Entrants”. A key element in connection with this force is the concept of barriers to entry. As the name suggests these are barriers that can either prevent or make it difficult for new entrants to enter a particular market.

The 3G licenses are great examples of barriers to entry as without the license it is simply not possible to enter the 3G mobile market. The license is the ultimate barrier.

In summary therefore, surely the headline should be “Companies in bids for barrier to entry”?

Strategy exams and Toyota. Is it a barrier?

Published on: 26 Feb 2010

Toyota has been in the news for all the wrong reasons recently. The company has faced strong criticism following reports of unintended acceleration and braking problems. These problems have been linked to a number of deaths. The end result is that millions of Toyota vehicles have been recalled for remedial work.

Akio Toyoda, the boss of Toyota and the grandson of the founder of Toyota, gave evidence yesterday to the House of Representatives Oversight and Government Reform Committee in the States. Whilst this is a very serious problem for Toyota in terms of the damage to its reputation there was a comment made by US congressman John Mica which reminds us of another interesting topic of discussion for ACCA P3 strategy students involving Toyota.

Mica said: “This is an embarrassing day for Toyota and for the thousands of hard-working Americans who work in Toyota plants across the US.”

Whilst Toyota is a Japanese company it can also be considered to be a truly global company. In America alone for example there are over 33,000 direct Toyota employees.

There are numerous reasons why a company may open up manufacturing operations in another country. Access to technology skills, cheaper labour and being closer to its end market are a few examples. For car manufacturers though there is a big incentive for manufacturing in certain countries. Namely, in doing so they remove a potential barrier to entry involving duties on imported vehicles.

In some countries there are excessive duties on imported cars. By manufacturing within the country the cars are built locally and therefore are not imported and hence there is no import duty. This nicely removes a barrier to entry. Of course there are other potential barriers to entry but these will be discussed in future blogs.

Anyway, back to Toyota. They are indeed a global company with recent Toyota figures showing that there are 53 Toyota manufacturing companies outside of Japan in 27 countries.

The ExP Group