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Putting A Moat Around Your Business Using Michael Porter's Framework

Writer's picture: Claire HancottClaire Hancott
small business cash flow

When it comes to securing long-term profitability and business success, few concepts are as powerful as Barriers to Entry—a core component of Michael Porter’s Five Forces Framework. While originally developed in the 1970s to analyse industry competition, this strategy remains just as relevant today for businesses looking to increase profitability, protect market share, and enhance their overall valuation.


In this guide, we’ll explore how you can create barriers to entry in your own business, using practical, real-world examples.


What Are Barriers to Entry?

Barriers to entry are obstacles that make it difficult for new competitors to enter a market. If starting a business is too easy, competition will quickly flood the market, driving down prices and making profitability harder to sustain.


Take, for example, a home-baked brownie business. Anyone with a kitchen and an oven can start baking and selling brownies with little upfront investment. But as the business scales, introducing strategic barriers can create a competitive edge and limit the ability of new entrants to replicate success.


Key Types of Barriers to Entry

Here are some of the most effective ways businesses can create barriers to entry:


1. Capital Investment & Infrastructure

Many businesses require significant upfront investments, making it harder for newcomers to compete. For instance, upgrading from a home kitchen to commercial baking equipment and distribution networks creates a cost barrier that prevents smaller competitors from easily entering the market.


2. Cost Advantages & Economies of Scale

Larger businesses can reduce per-unit costs by bulk purchasing materials, automating production, or streamlining logistics. This enables them to sell at lower prices than smaller competitors, making it difficult for newcomers to match profitability.


3. Regulatory & Compliance Hurdles

Industries such as financial services, healthcare, and childcare require strict licensing and compliance with government regulations. These legal requirements discourage smaller players from entering without significant investment in legal expertise and infrastructure.


4. Customer Loyalty & Brand Recognition

Established businesses with strong customer relationships, brand loyalty, and proprietary data create powerful barriers. The more integrated your business becomes in your customers’ daily operations, the harder it is for a competitor to lure them away.


5. Proprietary Technology & Intellectual Property

Businesses that invest in unique technology, patents, or specialised expertise create an advantage that others can’t easily replicate. For example, a software company that develops a proprietary algorithm has a competitive edge that prevents simple copycats.


Building a Moat Around Your Business

The key to long-term profitability isn’t just generating sales—it’s about making your business defensible against competition. This is often referred to as building a moat, a term borrowed from Warren Buffett’s investment philosophy.


A business with strong barriers to entry has pricing power, higher margins, and sustainable growth, making it more valuable to investors and buyers.


Here are practical ways to start building your own business moat:


  • Invest in unique assets – Whether it’s advanced machinery, proprietary software, or specialized talent, acquiring unique assets gives you an edge.

  • Strengthen customer relationships – Implement loyalty programs, personalised service, and exclusive offers to increase customer retention.

  • Leverage brand authority – Position yourself as an industry leader through content marketing, strategic partnerships, and PR efforts.

  • Create subscription or membership models – Recurring revenue makes it harder for competitors to lure customers away.

  • Secure legal protections – Patents, trademarks, and copyrights protect your innovations from being copied.


Conclusion

Building barriers to entry isn’t just about keeping competitors out—it’s about increasing the profitability, defensibility, and valuation of your business. Whether you’re a startup or an established enterprise, understanding and applying these principles will help ensure long-term success.


If you’re looking to evaluate your business’s financial health and explore ways to enhance its resilience, take advantage of our Free Finance Health Check today.


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