Journal of Business & Industrial Marketing

Barriers to entry in industrial markets

Fahri Karakaya,
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Fahri Karakaya, (2002) "Barriers to entry in industrial markets", Journal of Business & Industrial Marketing, Vol. 17 Issue: 5,
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 An executive summary for
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JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 17 NO. 5 2002, pp. 379-388, # MCB UP LIMITED, 0885-8624, DOI 10.1108/08858620210439059
Barriers to entry in industrial
markets
Fahri Karakaya
Professor of Marketing, Charlton College of Business, University of
Massachusetts Dartmouth, North Dartmouth, Massachusetts, USA.
Keywords Market entry, Marketing process, Barriers, Industry,
Business-to-business marketing, USA
Abstract This study examines the importance of 25 barriers to market entry in industrial
markets. A survey of 93 firms indicates that majority of business executives consider cost
advantages and capital requirements to enter markets as the two most important barriers
to entry followed by incumbents having a superior production process, capital intensity of
the market, and customer loyalty. The least important barriers perceived by the
executives in the study are government licensing requirements, followed by heavy
advertising. In addition, the study investigates the underlying dimensions of barriers to
entry in industrial market through a factor analysis. The results indicate that there are
four major underlying dimensions of entry barriers in industrial markets.
Introduction
Barriers to market entry have been the topic of discussion among
academicians, practitioners and government officials for many years. They
limit competition by preventing market entry of new firms and often increase
the profits of incumbent firms in the marketplace. Thus, barriers to entry
sometimes lead to monopoly conditions. The importance of barriers in
deterring entry of competitors into markets, however, varies by products and
industries (Karakaya and Stahl, 1989; Yang, 1998).
This paper reviews the barriers to entry literature from strategic marketing,
strategic management, organization theory, and economics and examines the
importance and underlying dimension of 25 barriers to entry. The research
presented is differentiated from previous studies because of its focus on
barriers to entry in industrial markets. A literature review of the topic via
several electronic data services revealed no research examining a broad list
of barriers in industrial markets. The literature review is presented in the next
section, followed by research objectives, methodology, results, discussion
and conclusions, limitations, and managerial implication sections.
Literature review
Previous research indicate that barriers to entry are created by absolute cost
advantages, economies of scale, product differentiation, the degree of firm
concentration (Bain, 1956; Mann, 1966), capital requirements to enter a market,
customer switching costs, access to distribution channels, and government
policy (Porter, 1980). While these barriers discourage market entry, there are
conditions that encourage and make it attractive for new market entrants to
enter markets. For example, size and expected growth of the market have been
found to be significant determinants of entry (Baldwin, 1995).
The importance of some barriers to entry is different in industrial and
consumer markets. An empirical study by Karakaya and Stahl (1989) showed
that the cost advantages, customer switching costs, and government policy
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379
 are perceived to be more important in industrial goods markets compared to
consumer goods markets. Consistent with this research other studies also
indicate that customer-switching costs are salient barriers to market entry
(Gruca and Sudharshan, 1995; McFarlan, 1984; Stigler, and Becker, 1977).
There are implicit and explicit costs associated with switching from one
product or brand to another. These costs are in the form of financial (e.g.
sunk costs) and psychological (e.g. perceived risk in switching to another
product or brand).
Low or aggressive pricing Previous research also indicates that cost advantages of incumbents (Bain,
1956; Karakaya and Stahl, 1989; Porter, 1980) and lower prices (Needham,
1976; Smiley and Ravid, 1983) serve as important barriers to entry. If new
competition attempts to enter a market with low or aggressive pricing, the
incumbent firms are likely to remain in markets at lower prices and adjust to
the new lower profit level (Guiltinan and Gundlach, 1996). The cost
advantages and lower prices charged by firms are especially important in
industrial markets because they purchase products in large quantities.

Research objectives
Usually, before entering a market, new competitors consider more than a
single barrier to entry. However, they are not likely to weigh each barrier
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equally and consider all barriers individually. Thus, the objective of this
research is to investigate the importance of barriers to entry as perceived by
business executives and determine the underlying dimensions (latent
variables) of barriers to entry in industrial markets. In an empirical study,
Karakaya and Stahl (1992) identified 25 market entry barriers in consumer
markets and indicate the presence of three major underlying dimensions of
barriers to entry. Many of the variables tested in consumer markets are also
applicable to industrial markets. One would expect that there are underlying
dimensions of these 25 of barriers to entry in industrial markets as well. Most
researchers have focused their attention on the six barriers to entry proposed
by Porter (1980) and do not differentiate between consumer and industrial
markets in terms of barriers to entry. With the literature review in mind, this
study has the following major objectives:
. Examine the importance of a broad list of barriers to entry in industrial
markets in general.
. Identify the underlying dimensions of barriers to entry in industrial
markets in general.

Methodology
Random selection A total of 500 industrial firms from chemical, steel, pharmaceutical,
electronics, and metals manufacturing industries were randomly selected
using the Wilson's computer database. The 500 companies were mailed a
cover letter addressed to Vice-Presidents of Marketing and a one-page
questionnaire that contained 25 barriers to entry. If the survey recipients did
not make market entry decisions, they were asked to forward the survey to
the appropriate individuals in their firms. The questionnaire asked the
respondents to evaluate the importance of the barriers to entry on a Likert
scale ranging from ``very important'' to ``not important at all.'' Due to
address changes, etc., 19 of the surveys were not deliverable. In total, 93
firms completed and returned the survey by the deadline, yielding a
19 percent response rate. Interested participants were promised a summary of
the results. The respondents' titles were vice president of marketing,
marketing manager, director of marketing and strategic planner. Therefore,

380 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 17 NO. 5 2002

 those who responded to the questionnaire appear to be in positions to make
or influence market entry decisions.
Early and late respondents Non-response bias was assessed following the procedures developed by
Armstrong and Overton (1977). Early respondents were defined as the first
one third of all respondents in the data set, whereas late respondents were
the last one third of all respondents in the data set. The early and late
respondents were compared on their responses. T-test showed that only
two of the 25 barriers differed in importance between early and late
respondents at p = 0.05 significance level. One could explain that these
two statistically significant differences observed might be due to chance
because of the high number of comparisons (25 comparisons). Therefore,
one can conclude that there is no strong basis to believe that the late
respondents are significantly different from those of the early respondents
in the study.
The instrument was pretested with 10 MBA students, some of whom said
they did not pay much attention to the second half of the survey. Thus, four
different survey forms containing the same questions in different orders were
designed. The 25 barriers to entry variables were divided into four sections,
following a Latin-square design, (four groups of questions as groups A, B, C,
and D) with thick lines of separation and each section was presented at least
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once in the first, second, third, and last sections of the form. Specifically, the
design was as follows: Form 1 = A, B, C, D; Form 2 = C, A, D, B; Form 3 =
B, D, A, C and Form 4 = D, C, B, A. This design assured that all barriers
received equal attention by the respondents when their importance was
considered.

Results
An examination of the mean scores indicates that the absolute cost
advantages (mean = 4.13) and capital requirements to enter markets (mean =
4.11) are perceived as the two highest barriers to entry by most executives
who responded to the survey. These two barriers are followed by
incumbent's superior production process (mean = 3.91), capital intensity of
the market (mean = 3.84), and customer loyalty (mean = 3.78). The lowest
barriers to entry as scored by the respondents are government licensing
requirements (mean = 2.20), and heavy advertising (mean = 2.54). One
should note that ``high profit rates earned by incumbents (mean = 2.63)'' is
not considered as a high barrier to entry because this situation may actually
attract the entry of new firms into the market. Table I shows the mean scores
and standard deviations for each of the barriers tested.

Underlying dimensions of barriers to entry

Factor analysis In order to identify the underlying dimensions of barriers to entry in
industrial markets, the 25 barriers were factor analyzed. A principal
component extraction method and varimax rotation was used to aid in
interpretation of the results. In deciding how many factors to retain, a
scree test was also utilized. The scree test and the analysis of the factor
structure matrix suggested selection of the four-factor solution. The
Varimax-rotated factor loadings are reported in Table II. The four-factor
solution produced an interpretable factor structure with barriers loading on
the factors. The four factors extracted account for 47.6 percent of the
variance in the data. The reliability coefficients calculated using
Cronbach's alpha are 0.84, 0.74, 0.69, and 0.55 for factors I, II, III, and IV
respectively.

JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 17 NO. 5 2002 381

 Barriers to market entry Mean Std. dev
Absolute cost advantages held by incumbent firms 4.13 0.90
Capital requirements to enter markets 4.11 0.98
Incumbents with superior production processes 3.91 0.94
Capital intensity of the market 3.84 0.91
Incumbents with proprietary product technology 3.81 1.02
Customer loyalty advantage held by incumbents 3.79 0.97
Incumbents with cost advantages due to economies of scale 3.71 0.85
Amount of sunk cost involved in entering a market 3.69 1.00
R&D expense involved in entering a market 3.63 1.02
Low prices charges by incumbents 3.61 0.81
Access to distribution channels 3.53 1.10
Magnitude of market share held by incumbents 3.50 0.87
Number of firms in a market 3.49 0.94
Brand identification advantage held by incumbents 3.38 1.04
Incumbents with cost advantages due to learning curves 3.32 0.90
Amount of selling expense involved in marketing a product 3.22 0.98
Customers' costs associated with switching from one supplier to another 3.17 1.07
Expected post-entry reaction of incumbents 3.16 0.98
Trade secrets held by incumbent firms 3.15 1.11
Incumbents possessing strategic raw materials 3.09 1.17
Incumbents with relatively easy access to raw materials 2.78 0.96
Incumbents with government subsidies 2.76 1.38
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High profit rates earned by incumbents 2.63 1.14

Heavy advertising by firms already in the market 2.54 0.92
Government licensing requirements 2.20 0.99
Note: Measured on a five point scale ranging from extremely important (coded as 5)
to not important at all (coded as 1)

Table I. Importance of barriers to market entry in industrial markets

Firm specific advantages

The first factor accounts for 18.7 percent of the variance and it is labeled as
``firm specific advantages.'' A total of ten barriers to entry make up this
factor and they appear to be firm specific advantages (e.g. Proprietary
product technology, possessing strategic raw materials, trade secrets held by
incumbent firms, absolute cost advantages, superior production processes,
etc.). As one can note, these barriers are typically the ones that the entering
firms have difficulty in achieving or duplicating because they are
proprietary.

Product differentiation
Incumbents' advantages The second factor accounts for 11.5 percent of the variance and it is labeled
as ``product differentiation.'' A total of 6 market entry barriers make up this
factor including brand identification advantage held by incumbents,
customer loyalty advantage held by incumbents, heavy advertising by firms
already in the market, amount of selling expense involved in marketing a
product, customers' costs associated with switching from one supplier to
another, and access to distribution channels. As one notes, all but one of the
barriers, amount of selling expense involved in marketing a product, is
related to brand or customer loyalty.

Financial requirements or cost of market entry

Capital requirements and the financial requirements associated with market
entry are barriers to market entry for most firms. The barriers such as capital
requirements to enter markets, capital intensity of the market, amount of
sunk cost involved in entering a market, and R&D Expense involved in

382 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 17 NO. 5 2002

 Barriers Factor 1 Factor 2 Factor 3 Factor 4
Factor 1: Firm specific advantages
Incumbents with proprietary product technology 0.732 0.124 ± 0.038 ± 0.017
Relatively easy access to raw materials 0.668 0.024 0.164 ± 0.041
Incumbents possessing strategic raw materials 0.652 0.147 0.224 0.360
Incumbents with government subsidies 0.631 0.162 0.064 0.115
Incumbents with superior production processes 0.615 ± 0.103 ± 0.159 0.062
Government licensing requirements 0.593 0.413 ± 0.008 ± 0.221
Absolute cost advantages held by incumbents 0.587 ± 0.121 ± 0.116 0.206
Incumbents with cost advantages due to 0.586 ± 0.166 0.324 0.166
economies of scale
Trade secrets held by incumbent firms 0.555 0.303 0.215 ± 0.122
Incumbents with cost advantages due to 0.375 0.078 0.149 0.342
learning curves
Percent of Variation: 18.7% Alpha = 0.84
Factor 2: Product differentiation
Brand identification advantage held by 0.191 0.763 ± 0.113 0.195
incumbents
Access to distribution channels 0.011 0.761 ± 0.011 ± 0.068
Customer loyalty advantage held by incumbents ± 0.020 0.668 ± 0.008 0.245
Heavy advertising by firms already in the 0.097 0.616 0.100 0.044
market
Amount of selling expense involved in ± 0.166 0.544 0.330 0.343
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marketing a product
Customers' costs associated with switching 0.048 0.422 ± 0.029 ± 0.077
from one supplier to another
Percent of Variation: 11.5% Alpha = 0.74
Factor 3: financial requirements or cost of
market entry
Capital requirements to enter markets ± 0.048 ± 0.166 0.783 0.088
Capital intensity of the market 0.108 ± 0.026 0.742 0.056
Amount of sunk cost involved in entering a 0.087 0.147 0.710 0.053
market
R&D expense involved in entering a market 0.282 0.412 0.491 0.014
Percent of Variation: 9.8% Alpha = 0.69
Factor 4: profit expectation of entering firms
Magnitude of market share held by incumbents 0.033 0.165 0.214 0.676
Expected post-entry reaction of incumbents 0.092 0.063 ± 0.035 0.582
Number of firms in a market ± 0.091 ± 0.095 0.253 0.566
High profit rates earned by incumbents ± 0.052 0.117 ± 0.042 0.531
Low prices charges by incumbents 0.288 ± 0.313 ± 0.151 0.437
Percent of variation: 7.6% Alpha = 0.55
Cumulative percent of variation: 47.6%

Table II. Rotated factor matrix showing the underlying dimensions of barriers to
entry in industrial markets

entering markets are all related to the cost of entry. Thus, these barriers
determine an underlying dimension of barriers to entry that can be named as
``financial requirements or cost of market entry.'' This latent variable
accounts for 9.8 percent of the variance and definitely has face validity.

Profit expectation of entering firms

Potential profitability The fourth and final factor is labeled as ``profit expectation of entering
firms'' and it accounts for 7.6 percent of the variance. The barriers such as
magnitude of market share held by incumbents, expected post-entry reaction
of incumbents, number of firms in a market, high profit rates earned by

JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 17 NO. 5 2002 383

 incumbents, and low prices charged by incumbents make up this factor. As
one notes, the barriers that make up this factor deal with the potential
profitability of the firms once they enter the market.

Differences among the four factors

Further analyses were performed to determine if any of the factors were
different in their importance. Only one of the factors has a significantly
higher score when compared. Factor 3, ``financial requirements or cost of
market entry,'' has a mean score of 3.81 compared with factor 1 (mean =
3.29), factor 2 (mean = 3.27), and factor 3 (mean = 3.28).

Discussion and conclusions

The five highest and the five lowest barriers to entry
Cost advantages Based on the mean ratings of the barriers as perceived by most executives in
this study, the highest barriers to entry are absolute cost advantages (mean =
4.13), capital requirements to enter market (mean = 4.11), incumbents
having a superior production process (mean = 3.91) capital intensity of the
market (mean = 3.84), proprietary production technology (mean = 3.81), and
customer loyalty (mean = 3.79). These are unique advantages held by
incumbent firms in industrial markets, and they are not perceived as
important as in consumer markets (see Karakaya and Stahl, 1992). The firms
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that are already in a market possess some of these advantages because of

being in the market or because of being early entrants. As shown in the
marketing literature, early entrants and pioneering firms have certain
advantages over late entrants (Robinson and Fornell, 1985; Kerin et al.,
1992). Similarly, the lowest barriers to entry in industrial markets are easy
access to raw materials (mean = 2.78), incumbents with government
subsidies (2.76), high profit rates earned by incumbents (mean = 2.63), heavy
advertising by incumbents (mean = 2.54), and government licensing
requirements (mean = 2.20).

Underlying dimensions
In addition to measuring the importance of barriers to entry in industrial
markets, one of the main objectives of this study was to identify the
underlying dimension of barriers to entry in an exploratory nature. The factor
analysis resulted in identifying four major latent variables that business
executives consider when making market entry decisions. The first factor or
the latent variable is the ``firm specific advantages'' of the firms already in
the market. Since this factor is mostly proprietary in nature, it is difficult to
overcome or disregard when entering industrial markets. For example, trade
secrets and proprietary product technology barriers are almost impossible to
overcome. Therefore, the new entrants must study the competitors'
production technology and the trade secrets, if they can, or avoid these
markets. Of course, this is only true if the trade secret is relatively important
or cannot be overcome in another way.
Product differentiation The second factor, product differentiation, if held by incumbent firms makes
it difficult for new firms to enter markets because the customers are already
loyal to their current suppliers. Brand identification advantage causes loyal
customers to prefer certain brand names to others despite higher prices.
Customers perceive some brands more reliable or better quality. This is
especially true and is more important in industrial markets because of the
perceived risks involved in the purchase of industrial products such as
machinery or equipment. Furthermore, there are costs associated with
switching from the current supplier to a new one. These costs may include

384 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 17 NO. 5 2002

 training of employees, disposal of current equipment used and sometimes
psychological risks of switching to a new supplier. Therefore, the entering
firms must be ready to reduce the switching costs by offering incentives to
their potential customers that are already doing business with firms in the
market. When entering firms have product differentiation advantages, it is
easier for customers to switch brands. Thus, product differentiation can be an
advantage for market entrants also.
The third factor, financial requirements or costs of market entry, deals with
cost of entry as the factor label indicates. This factor is often more important
in industrial markets compared to consumer goods markets because of the
high cost of equipment in many industrial markets. Furthermore, many
industrial products cost more than consumer products. Therefore, the cost of
producing and marketing of industrial products is likely to require more
financial resources.
Profit expectations The final and the fourth factor, profit expectations of entering firms, can
influence a firm's entry decision in both positive and negative ways. For
example, if the firms already in the market are enjoying high profit margins,
this situation may encourage or discourage new market entrants. If the profit
margins are high, the potential market entrants may want to have a piece of
the pie. Similarly, potential market entrants may perceive the incumbent
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firms who are earning high profits to have solid financial conditions. Thus, if
they entered the markets where the incumbents firms earn high profits, they
would expect strong retaliation from the incumbent firms in the form of price
reductions, increased promotional expenditures or other means of competing.
In addition to the factors identified, this study also discovered that the
``financial requirements or cost of market entry'' factor is perceived to be
significantly more important than the other factors in deterring market entry.
The other three factors are identical in terms of their mean scores.

Limitations and future research

Sample size This study used a small sample of 93 industrial firms and the results may not
represent the population. Future studies of this type could attempt to increase
the sample size. In addition, this study included five major industries; again,
future studies could increase the number of industries to examine. Because of
the small sample size it is inappropriate to test differences among the
industries. A larger sample size would allow researchers to test for the
differences in the importance of barriers to entry in different industries.
Finally, because of the nature of the study (survey research), this research
could not relate the importance of barriers perceived to profitability of firms.
It would be beneficial to examine actual market entry situations and market
entry barriers present at the time of market entry through case studies or
historical data if available.

Managerial implications and recommendations

This research examined the importance and underlying dimensions of 25
barriers to entry in industrial markets. Therefore, it's major contributions are
twofold:
(1) which of the 25 barriers are perceived as important or not so important
by majority of the executives responded in this study; and
(2) underlying dimensions of barriers to entry.
Before market entry decisions are made, it is highly beneficial for companies
to assess the importance and existence of barriers to entry and how to

JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 17 NO. 5 2002 385

 overcome them. The advantages held by incumbent firms or the entering firms
influence company profitability and long-term success. However, executives
making market entry decisions need not to consider all 25 barriers to entry
simultaneously. The four factors identified in this research, firm specific
advantages, product differentiation, financial requirements or costs of market
entry, and profit expectations of entering firms represent the 25 barriers.
Risk If the incumbent firms have firm specific advantages, or product
differentiation advantages, then the potential for the new entrants may not be
attractive unless the entrants are willing to take a risk or are able to match the
specific or proprietary advantages. Similarly, financial requirements or costs
of market entry are important and require careful evaluation before making
market entry decisions. Some of the costs of entry are sunk costs and become
barriers to exit once entered the market. Therefore, it is important to assess
the amount and the types of costs involved in market entry decisions.
Another major underlying dimension of entry barriers is the profit
expectations of entering firms. Companies avoid markets where profit
expectations are low. Incumbent firms' reactions to market entry and their
profit margins, and market shares, as well as the entering firms' cost
structures influence the magnitude of this barrier. Similarly, the product life
cycle stage is an indication of the potential profits in a market.
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386 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 17 NO. 5 2002
 This summary has been
provided to allow managers
and executives a rapid
appreciation of the content
of this article. Those with a
particular interest in the
topic covered may then read
the article in toto to take
advantage of the more
comprehensive description
of the research undertaken
and its results to get the full
benefit of the material
present
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JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 17 NO. 5 2002
Executive summary and implications for managers and
executives
Most important barriers to entering industrial markets
Karakaya focuses on 25 barriers which limit the ability of firms to enter
industrial markets. A survey of 93 companies indicates that most business
executives consider cost advantages and capital requirements to enter
markets as the two most important barriers to entry, followed by incumbents
having a superior production process, capital intensity of the market, and
customer loyalty.
Cost advantages and the lower prices charged by firms are especially
important in industrial (as opposed to consumer) markets because products
are purchased in large quantities. If new competition attempts to enter a
market with low or aggressive pricing, the incumbent firms are likely to
lower their own prices and adjust to a lower profit level.
Least important barriers to entering industrial markets
The least important barriers to entering industrial markets, as perceived
by the executives in the study, are easy access to raw materials,
incumbents with government subsidies, high profit rates earned by
incumbents, heavy advertising by incumbents and government licensing
requirements.
Underlying dimensions of barriers to entering industrial markets
Karakaya shows that there are four major underlying dimensions of entry
barriers in industrial markets:
(1) Firm specific advantages. These include advantages such as proprie-
tary product technology, possessing strategic raw materials, trade
secrets held by incumbent firms, absolute cost advantages and superior
production processes. Such advantages, by their very nature, are
difficult for new market entrants to replicate.
(2) Product differentiation. The six market entry barriers under this
heading are the brand identification advantage held by incumbents,
customer loyalty, heavy advertising by firms already in the market, the
expense of marketing a product, customers' costs in switching from one
supplier to another, and access to distribution channels. New entrants
can combat some of these advantages by offering incentives to potential
customers who are trading with firms already in the market. Customers
find it easier to switch brands when firms entering the market have
product differentiation advantages. Product differentiation can therefore
be made into an advantage for market entrants.
(3) Financial requirements or cost of market entry. These barriers
include the capital requirements to enter markets, the capital intensity
of the market, the amount of sunk cost involved in entering a market,
and the research and development expense involved in market entry.
These barriers rank highest in the minds of the executives questioned.
The barriers are often more important in industrial (rather than
consumer goods) markets because of the high cost of equipment in
many industrial markets. Furthermore, many industrial products cost
more than consumer products. The cost of producing and marketing
industrial products is therefore likely to be higher than for consumer
products.
387
 (4) Profit expectation of entering firms. Under this heading can be
classified the magnitude of the market share held by incumbents, the
expected reaction of the incumbents to the arrival of a new player in the
market, the number of firms in the market, the high profit rates earned by
incumbents, and the low prices charged by incumbents. Of course, the
fact that firms already in the market enjoy high profit margins may
actually encourage new market entrants to try to gain a piece of the pie.
Alternatively, the high profits earned by firms already in the market may
make it easier for them to combat the arrival of a new firm by cutting
prices or increasing the amount spent on advertising.

(A preÂcis of the article ``Barriers to entry in industrial markets''. Supplied by

Marketing Consultants for Emerald.)
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388 JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, VOL. 17 NO. 5 2002

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