The New Barriers to Entry: Why Strategy Assumptions Need to Change in an Era of Ecosystems
by Rita Gunther McGrath

Posted on Posted in 11th Global Peter Drucker Forum

A cherished idea in traditional strategy is that a company that has found a repeatable, reliable business model then needs to erect barriers to entry—some kind of obstacle that prevents others from simply copying or matching their offerings. Barriers can take many forms, including regulatory hurdles, high investment in assets, patents and strong brand names. What we are witnessing today is a weakening of many traditional barriers and simultaneously the emergence of very powerful new barriers that institutions are struggling to figure out.

Consider the barrier represented by high costs of entry. Once upon a time, a startup would have needed to raise funds to buy computer servers, hire people, get office space, perhaps invest in plant and equipment and otherwise set up a functioning company. Today, in the access-to-assets rather than ownership-of-assets that is part of the transient advantage economy, none of that is necessary. Computing power can be purchased on demand, as needed. Freelancers are readily available. Office space may not even be needed, and if it is, can be accessed on demand through firms such as WeWork or IWG (formerly Regus). Digitally intermediated marketplaces match supply and demand with great efficiency, reducing the need for investment dramatically.

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A second twist on the conventional wisdom is that today, strategic advantage is often determined by complementary relationships rather than by product or service benefits. A music player with no music, a computer without an operating system or a streaming service with no content has no value to anyone. And yet, complements don’t figure very much in conventional strategy frameworks. Moreover, establishing an ecosystem of complementary relationships means that today, ecosystems compete with ecosystems rather than firms competing with one another independently.

Relatedly, today’s most effective competitors are leveraging network effects to their advantage. Network effects refer to the increased value a firm captures when it has more users or customers than other firms. This is typically the strategy pursued by platform companies, which make their profits by combining different sides of a two-sided market. Thus, Airbnb intermediates between owners of homes and potential renters of homes, benefitting both sides and making a profit in the exchange.

All of this leads to an urgent need to rethink what “monopoly” really means. Traditionally, the presence of entry barriers would raise regulatory eyebrows as firms able to prevent competitive entry could raise prices since other competitors couldn’t enter the market and challenge them. Today, market domination is gained by firms such as Facebook, Alibaba, Google and Amazon because of their extensive networks, desirable platforms and ability to deliver enormous value to customers without traditional barriers to entry. Rather than monopoly, we have monopsony conditions, in which firms do not so much raise prices for consumers as use low prices as a barrier to entry in themselves.

While consumers often actually benefit in price terms from monopsony conditions, they suffer in other ways. Perhaps most egregiously, they find they must give up significant information about themselves to avail of the benefits offered by the large tech ecosystems. Institutions are only slowly figuring out how to regulate such conditions in the face of new barriers to entry.

About the Author:

Rita Gunther McGrath is professor at Columbia Business School and one of the world’s leading experts on innovation and growth. She is the author of The End of Competitive Advantage (Harvard Business Review Press, 2013). Her new book is Seeing Around Corners: How to Spot Inflection Points in Business Before They Happen (Houghton Mifflin Harcourt, 2019).

This article is one in the Drucker Forum “shape the debate” series relating to the 11th Global Peter Drucker Forum, under the theme “The Power of Ecosystems”, taking place on November 21-22, 2019 in Vienna, Austria #GPDF19 #ecosystems

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