Ease of Entry: A Step beyond Entry Barriers

Article excerpt

ABSTRACT

The concept of entry barriers has been passed from discipline to discipline--from Industrial Organization Economics to Strategic Management to Entrepreneurship. Recent attempts to examine the impact that entry barriers have on new venture performance (i.e., Yip, 1982, and McDougall, 1987), have found that the direct impact of entry barriers on new venture performance is difficult to gauge when entry barriers are measured in traditional ways. This paper suggests that the traditional view of entry barriers is incomplete and proposes a new construct, called "ease of entry," (1) which includes, but is not limited to entry barriers.

INTRODUCTION

Bain (1956) introduced the concept of "entry barriers" to the literature of industrial organization economics (IO). Hofer (1975) brought the concept of entry barriers to the field of strategic management. Porter (1980) expanded the concept, breaking entry barriers down into two classes: entry barriers created as a result of the structural characteristics of the industry ("structural entry barriers") and entry barriers created as a result of the threat of retaliation by incumbents ("retaliation entry barriers").

Yip (1982) expanded the understanding of entry barriers by applying the strategy paradigm to prior IO theories of entry and entry barriers. Yip expanded entry barrier theory to include entry through acquisition, rather than limiting entry to new legal entities, as had previously been done in IO theory. Yip also introduced the term "entry gateways" to represent situations in which an entrant may not face barriers to entry but, instead, may actually be in an advantageous position vis-a-vis incumbents in the industry.

McDougall (1987) attempted to measure the impact that entry barriers have on new venture performance. In testing this relationship, McDougall operationalized "entry barriers" as a composite of five variables. Accepting IO theory, McDougall included as the five most significant sub-variables of entry barriers:

1. economies of scale (using minimum efficient plant size as a
surrogate for economies of scale)

2. product differentiation (using advertising-to-sales ratio as a
surrogate for product differentiation)

3. industry concentration, (using the four-firm concentration
ratio)

4. capital intensity, (using the assets/value-added ratio as a
surrogate for capital intensity)

5. rate of growth of total market demand in the industry.

McDougall (1987) calculated a composite height of entry barriers score for each of nine four-digit Standard Industrial (SIC) codes, then compared this composite height of entry barriers score with the performance of the firms in that SIC code. McDougall found some support for the proposition that entry barriers affect profitability of firms within industries, but no support for the proposition that entry barriers affect market share or market share growth, measures of operational performance.

McDougall's (1987) five sub-variables are based on those which IO theorists have most often suggested as the most important sub-variables in entry barriers. This paper makes three suggestions:

1. One of the five sub-variables which IO theory suggests as making
up entry barriers (industry concentration) should not be included
in entry barriers at all because it influences entry both
positively and negatively.

2. There is a set of sub-variables called "entry gateways" which
should be included along with entry barriers in the analysis of
entry.

3. The inclusion of entry gateways along with entry barriers in the
analysis of entry into industries suggests a new construct, called
"ease of entry."

EXCLUSION OF INDUSTRY CONCENTRATION FROM ENTRY BARRIERS

IO researchers have consistently hypothesized that "industry concentration" is an entry barrier. McDougall (1987) included concentration ratio in the calculation of entry barriers, thereby implicitly accepting the IO assumption that concentrated industries are more difficult to enter than less concentrated industries. …