Establishing Barriers to Entry

It was Sunday night in Missoula, Montana, a beautiful city of 70,000 set in the spectacular Rocky Mountains, in an area known as “Big Sky Country”. Mike and Paul had gathered at the Montana Club restaurant a block from our motel. As Paul checked the Rockies/ Cardinals game on the big-screen TV above the bartender’s head, Mike scanned the establishment, searching for their driver.

Where’s Scott?” Mike asked. “He texted and said he got a late start. We should eat without him,” Paul said. Mike and Paul had flown in from their respective hometowns that afternoon, but Scott had decided to drive the 500-plus miles to Missoula from his base in Salt Lake City. “Sounds fine,” Mike said. “Why did he drive his car rather than fly and rent a car like usual?” “He didn’t say,” Paul replied. “Hey, I’ll buy you dinner if you get the Big Mike Burger— and finish it.”

Mike eyed the menu and found the Big Mike: two one-third-pound all-beef patties, American cheese, and Thousand Island on a double brioche bun. “I’ll take the Caesar salad with blackened salmon and a Big Sky IPA,” Mike said when the waitress appeared, declining Paul’s generous offer for fear of becoming, himself, a Big Mike.

Scott’s late departure got him to Missoula well past midnight, and Mike and Paul were waiting impatiently outside his room the next morning. “Is this Scott’s car?” Mike said, pointing to a Volvo wagon with Utah plates in the Ruby Inn parking lot. “Oh man,” Paul sneered. “Is there anything less cool than three economists in a soccer-mom car?”

Just then, Scott emerged from his room. Over his shoulder, he carried a bicycle— a high-end, carbon-fiber, Lance-Armstrong-wannabe road bike. Speechless, Mike and Paul watched as Scott affixed the bike to the Volvo’s roof rack. “Summer in Montana is perfect for biking. I’m figuring on some pre-meeting rides,” he said, squinting in the early morning sun.

OK, Rule #1,” Paul lectured. “No Lycra bike shorts. I’m pretty sure I can speak for the entire Mountain Time Zone when I say I do not want to see you in those.”

Did your divorce decree say that she got the cool stuff and you got the Volvo?” Mike asked. “You should fire your lawyer.”

Missoula is a college town, and we spent part of our day there at a start-up that was launched directly from the laboratory of a University of Montana chemistry professor named Donald Kiely. Professor Kiely had developed a process to produce a chemical compound called glucaric acid, and the startup, Rivertop Renewables, was launched to try to find a market for the innovation. Unique among the companies we visited while on the road, this start-up owned technology that was protected from competition by a patent. A patent is a government-sanctioned monopoly that prevents rivals from copying the patent holder’s methods— a powerful barrier to competitors wanting to enter the market. Patents exist to reward inventors; in exchange for disclosing the details of the innovation, the patent holder receives exclusive rights to use— and profit from— the innovation for a period of time.

Needless to say, this is a pretty good deal if you can get it, but few small businesses are built around patentable innovations. And this means that competition— share-stealing and margin-destroying competition— is a fact of life for most small businesses. Our MBA students frequently pitch their business ideas to us during office hours and a stock question we ask in response is “What would prevent competitors from copying your idea, entering your market, and stealing a big chunk of your profits?” Without barriers to entry, even the best business strategies will only temporarily generate great results.

Different markets do, however, present different challenges to entrants, and it’s useful to anticipate which markets are likely to quickly become crowded with competitors— and hence unprofitable— and which are not. An important Mazzeo’s Law question for all businesspeople is this: Can I erect barriers to entry to protect my business from margin-destroying competition?

Learn more about establishing barriers to entry only at the University Canada West, one of the best universities in Canada, offering various business and management related programs.

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