Entry Barriers Analysis Of Potential Entrants

One of Potter's five force analysis models is very important:

Potter pointed out that for an industry, the threat of entry depends on the entry.

First of all, we need to look at policy barriers, including industrial policies, environmental policies, etc. we generally divide the industry into a fully competitive market and a policy influenced industry.

For example, household appliances, clothing, catering and other industries are market competition industries, and their policy barriers are relatively low.

However, some industries have great policy barriers. For example, the tobacco industry, though under the control of policies, is difficult to have large-scale expansion and development. However, because of policy barriers, there are no new entrants, which also protects the original tobacco producers in disguise. Therefore, even though we all know that tobacco profits are high, but because of barriers to entry and no new entrants, this high profit can be maintained.

However, when the market is fully competitive, once there is a high profit, many companies can expand their capacity. Even unrelated companies rush into the industry and quickly drag the whole industry into low profit or even loss.

It is noted that industrial policy is not a constant. If the change of policy ultimately leads to the increase of barriers to industry and the change of the pattern of industrial competition, it will often bring greater investment opportunities.

For example, China's rare earth industry, the government to environmental protection, resource protection as the reason, vigorously rectify the rare earth industry, eliminate small rare earth enterprises, the quota system, so that the access threshold of the rare earth industry increased significantly, which made the original rare earth companies benefit, the Baotou Steel Rare earth company's share price has continued to rise several times.

Such events also occur in lead-acid batteries and fluorine chemical industries, but we find that the investment opportunities of lead-acid batteries are significantly weaker than that of rare earths, mainly due to the different implementation of policies, and of course there are other reasons.

Apart from policy barriers, the main barrier we will follow next is mainly the competitive barriers formed by competitive advantages in the process of market competition.

These competitive barriers are mainly reflected in the following four aspects:

1. intangible assets -- competition barriers formed by patents, brands and franchise authorization.

Excellent products, high market share, excellent management and executive ability are not the barriers to entry of potential entrant.

As a matter of fact, we must admit that all excellent products and high market share have their reasons for supporting them.

Such as technical characteristics and monopoly of resources, but this is not the entry barrier of potential entrant.

Look at our mobile phones. 35 years ago, NOKIA phones had good performance and high market share. But when the advent of smart phone came, instant customers were scramble for Apple phones, and the market share of NOKIA mobile phones collapsed.

While Apple is leading the smart phone revolution, we see that HTC, millet and other products are sharing market share, which fully shows that Apple phones do not have a clear-cut barrier to shield potential entrants, but now they have a certain competitive advantage.

Intangible assets are often ignored by investors.

However, it is the most common feature of creating economic moat.

It refers to brand, patent and statutory license.

Brand is the symbol of an enterprise, which is embodied in trademark right.

Moutai, Wuliangye, Tsingtao Brewery, Fuzi brand donkey hide gelatin, Tongrentang, Ma Ying long, Yunnan Baiyao and so on all have their own famous trademark brands.

For these brands, there are specialized agencies for value assessment. In 2011, Moutai's brand value was 29 billion 500 million yuan, while Guizhou Moutai (600519.SH) had only 25 billion yuan in net assets.

Although brand value is the competitive advantage of a company, brand is not a natural barrier to entry.

Only those trademark rights that can increase consumer desire and consolidate consumers' dependence on brands can form barriers.

We believe that trademark brands such as Moutai, Yunnan Baiyao and Coca-Cola have a certain barrier effect, while Lenovo, Haier, Hisense and other trademark brands do not have such a barrier effect.

Patent is also an intangible asset that creates competitive barriers.

The essence of patent is technology protection. Therefore, in the stage of patent protection, the entry of competitors can be effectively prevented.

In this regard, the performance of pharmaceutical enterprises is very obvious, but such enterprises need to have continuous technology reserves, so that there are always new products launched and applied for patent protection. Once there is a break, it will bring a fatal blow to enterprises.

Whether intangible assets can bring barriers to entry for the industry's infiltrate, mainly depends on whether intangible assets can bring excess returns to the company.

2. "Stickiness" -- the competitive barrier formed by the high conversion cost of customers.

The existence of switching costs constitutes a barrier to entry, that is, the one-time cost encountered when a customer pfers products from the original supplier to another supplier.

Switching costs can include the cost of employee retraining, the cost of new ancillary equipment, the time and cost of testing and assessing new resources, the need for technical assistance, product redesign, and even the psychological cost of interrupting old relationships due to reliance on supply side engineering support.

If these conversion costs are very high, the new entrants must make significant improvements in cost or operation to enable customers to accept such conversion.

For example, there are mainly two types of products that we have written in the east electric heating (300217.SZ). One is the civil electric heater, which belongs to the standard parts. There is no conversion cost. In other words, the downstream customers can smoothly buy other companies' products instead of Dongfang Electric heating products.

Another kind of product is industrial electric heater, its product specification and part of performance parameters are customized according to the needs of downstream customers, such products have high conversion costs of customers.

3. entry barriers formed by the competitive effect of the network

New entrants need to ensure the distribution of their products, which also constitutes barriers to entry.

To some extent, the ideal distribution channel of the product has been possessed by the original company. The new company must push the distribution channel to accept its products by pressing the price and sharing the advertising expenses together, and the adoption of these methods has reduced the profit.

For example, food manufacturers must persuade retailers to set aside a new place for food in highly competitive supermarket shelves.

For this reason, they have to undertake a sales promotion to the retailers and make strong sales efforts or adopt other methods.

Obviously, for a product, the less the wholesale or retail channel is, the more control the existing competitors will have, the harder the industry will enter.

Existing competitors may be able to control these channels through old relationships and high quality services. Some special manufacturers may even establish exclusive relationship with exclusive channels.

Sometimes this entry barrier is too high to go beyond, so that new enterprises must establish a new sales channel.

With the development of the times, we can not limit the understanding of the network to the distribution channel, but also include digital network, logistics network and so on.

4. low cost processes, favorable physical geography, special resources and relative large-scale benefits - entry barriers in the form of cost advantages.

Market competition is cruelest and the most effective way is price competition.

If an enterprise can achieve the lowest cost in the same industry, it is equal to digging out a profit protection barrier for itself.

However, low cost protection is changing, for example, if the cost of products is only the cost of labor, then the pfer of enterprises to low labor cost areas will make profits.

But this process may be accompanied by the same shift of competitors and the increase of wages in the areas where enterprises are located.

Here are two obvious examples. One is polycrystalline silicon. When the price of polysilicon is high and the industry is profiteering, there is no barrier to entry, and everyone rushing in, eventually making the industry lose money overall. At this time, low cost has obviously become the core barrier to ensure profits.

The second is the automobile industry. Although Audi set up a branch in China, reducing the cost of China's low-cost labor force and occupying the high-end market of domestic automobile, with the large multinational companies set up branches in China, Audi's competitive edge was gradually smoothed out.

These four characteristics are generally not reflected in an enterprise, and enterprises that can block barriers to potential entry must have one or more characteristics mentioned above.

These characteristics are to be considered when we invest in stocks, and also the criteria for institutions to choose stocks.

Even if our strategy is not for long-term ownership, it is very meaningful to understand the concept of institutional choice.