Structural Barrier of Entry: Amway

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Qns 6
Entry and Exit will determine the extent of competition in an industry. Apply to the airline, pharmaceutical or supermarket businesses. Using the industry of your choice, how can this company deter entry?

Entry is the beginning of production and sales by a new firm in a market, and exit occurs when a firm ceases to produce in a firms.

The existence of high start-up costs or other obstacles that prevent new competitors from easily enter an industry or area of business. Barriers to entry benefit existing companies already operating in an industry because they protect an established company's revenues and profits from being whittled away by new competitors.

Structural barriers to entry exist; when the incumbent has cost advantages or marketing advantages over the entrants and incumbent are protected by favorable government policy and regulation.

Barriers to entry protect incumbent firms and restrict competition in a market; they can erect strategic barriers by expanding capacity and/or resorting to limit pricing and predatory pricing. The existence of monopoly and market power is often aided by barriers to entry.

The three main types of structural barriers to entry are
1. Control of essential resources
2. Economies of scale and scope
3. Marketing advantages of incumbency

The company to be used is Amway

Amway is a direct selling company and manufacturer that use network marketing to sell a variety of products, primarily in the health, beauty, home care market, etc…Amway was founded in 1959 by Jay Van Andel and Richard DeVos. It was ranked No.114 among the largest global retailers by Deloitte in 2006, and No.32 among the largest private companies in the U.S. by Forbes in 2010

Its product lines include home care products, personal care products, Beauty product (Artistry) jewelry, electronics, Nutrilite dietary supplements, water purifiers (eSpring), air purifiers (Atmosphere), insurance and cosmetics.

1. Control of Essential Resources

Incumbent is protected from entry if it controls a resource necessary for production and can be use that resource more effectively than newcomers

Amway’s Health Product Brand, Nutrilite is the only global vitamin and mineral to grow, harvest and process plant on their own certified organic farms. They have their own Nutrilite farm with other 2590 hectares (6400 acres). It could be costly and difficult for new entrant to make the claim of their own farm to be certified organic.

Incumbent can legally erect entry barriers by obtaining patents to novel and nonobvious products or production processes. Once the patent is approved, anyone who wishes to use the process or make the product must obtain permission from the patent holder. Patent lives are currently 20 years in most developed nations.

Access Business Group's Research & Development Centre in Ada boasts state-of-the-art equipment, 38 laboratories, with more than 400 scientists and support staff. Amway has 450 patents granted worldwide with over 250 patents pending. Patent provide significant marketing and financial advantages for Amway against its’ rivals.

The patents granted to Nutrilite scientists and researchers help to improve the NUTRILITE brand by complementing our high-quality products with technology that is unique to the brand.

Special Know-How that is hard for the rivals to replicate may be zealously guarded by the incumbents.

In fact, Amway has been successful as the annual sales growth is 9.5% reaching US$9.2 billion for the year ending December 31, 2010. It has been a very established firm to know how to use the direct selling from the start of their business and is known for its high-powered sales techniques.

2. Economies of scale and scope

When economies of scale are significant, established firms operating at or beyond the minimum efficient scale (MES) will have a substantial cost advantage over smaller entrant.

Amway use direct selling...
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