Barriers and Profitability
Every organization strives to capture a sound market share with their products or services. If we take into consideration the progress of market in the last decade, we will realize that all the niches now face stiff competition. The buyers are more aware and the sellers are more elaborate in terms of marketing campaigns, quality and reaching out to consumers. Some markets have perfect competition where all the products fall in that same category and there are no entry and exit barriers. Therefore, the companies can enter and leave whenever they want. This further affects the profitability and yields either high returns or low returns.
But to understand the relationship, we must first have knowledge about the entry barriers and exit barriers. Entry barriers are the situations that act as hindrance and prevent new competitors to enter the market. These may be lack of expertise, supplier agreements, government regulations, control over essential resources, economic conditions and even strong customer loyalty. On the other hand, exit barriers are certain impediments that do not let a seller leave the market that is not highly profitable or is uncompetitive. These factors may be a strong customer base, legal agreements, high investment, high redundancy and closure costs.
The market and the competition are highly affected by entry and exit barriers. Managers can clearly support the fact that entry and exit barriers have strong impact on the overall profitability of the firm. The model illustrated here in this figure signifies just that fact and is used by firms to analyze products and services along with the support in making a decision about whether a particular market should be entered or not on the basis of the profitability factor. The entry barriers and the exit barriers are plotted on the vertical and horizontal axis respectively. This results in forming four quadrants that indicate the level of returns in a particular market that further makes the decision of getting into a market easier.
Let’s have a look at these quadrants and their implications:
High entry barrier and low exit barrier
This quadrant indicates a market that has strong entry barriers resulting in less people entering this market but the restrictions to leave the market are very low. Education, consultancy firms are some of the examples. This results in low competition and the exit from the market is also easier. It reflects high and stable returns. High returns make this market even more lucrative and it is a good bet for the sellers to invest in this market.
High entry barrier and high exit barrier
The market that poses more restrictions for both entry and exit falls in this quadrant. Examples can be telecommunications and energy sectors. The competition is although low in this market but the exit is difficult due to high level of investments and government rulings. It reflects high returns but with a greater degree of risk.
Low entry barrier and low exit barrier
This market has high competition since both the entry and exit from this market is easier. Ecommerce and retail are some of the examples that fall into this category. The returns are although low but are definitely stable. People who like to tread the path cautiously can easily find this market interesting.
Low entry barrier and high exit barrier
The entry barrier is low resulting in high competition. But the exit from this market is hard. Hotel industry or service sector usually fall in this category. This category is inflicted with low returns and that too with a risk factor. High exit barriers make the market unstable and the profit fluctuation is very vivid.
This model highlights that markets with high exit barriers offer risky returns whereas the market with low exit barriers are well regulated and do not have much profit variations indicating a stable market to invest in. Properly analyze the market before making any investments to have desired profits and much needed longevity.