Nothing attracts competition more than high profit margins. But no matter how strong the market looks in the beginning, the unimpeded entry of new players leads to supply exceeding demand and tumbling profit margins as players fight for market share. That’s why you need to consider a company’s competitive advantages, or barriers to entry, in your analysis.
Barriers to entry discourage new players from entering the market. Without sufficient barriers to entry, a company’s long-term success is problematical, because it will be easy for new competitors to enter the market.
Barriers to entry can take many forms. The following paragraphs describe some of the more common barriers. You will uncover others when you analyze prospective candidates. ...