Barriers to entry

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Barriers to entry block new hospitality competitors
from entering the local industry. Since new
hotels or restaurants bring additional capacity
and the desire to gain market share, the result
often reduces profitability for existing firms. This
threat of entry can be reduced through seven
major types of entry barriers: (1) economies of
scale, (2) product differentiation, (3) capital
requirements, (4) switching costs, (5) access to distribution
channels, (6) competitive advantages
such as proprietary products, locations, access to
raw materials, etc., and (7) government policy
(Porter, 1980). If a firm is operating within a
local industry, high barriers are desired to block
new entrants. Existing competitors can raise barriers
through favorable supplier contracts, market
dominance, offering unique products and/or
services or by lobbying government for restrictions
on building policies or licensing costs. Brand
strength can act as a barrier, causing a potential
entrant to reconsider entry because of the
strength of the associated marketing power and
customer identification with the existing brand.
Macro-level forces such as a weakened economy
(high interest rates, lack of venture capital for
loans, etc.) or the unavailability of raw materials
such as land or labor also act as industry level
barriers to entry. In the hospitality industry, entry
barriers are not particularly high. Opening a
restaurant requires a relatively modest investment
and would-be hotel operators can usually
find financing (Harrison, 2003).

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