Long term growth: why are barriers to entry deemed THE driver?

kent02's picture
Rank: Senior Monkey | banana points 67

as the title states, i very well understand why barriers to entry play an extremely important role in a sucessful growth story, and, generally altough not necessarily, investing story but that being said, i think that the other forces (here i am referring to Porter's framework) [i am thinking labour cost/war prices/etc] do make a great difference in the long term growth prospects of a company.

still, wherever i read something on the topic, be it financial papers or financial thesis or books, everyone seems to be on the same page and because i definetely don't pretend to be better than any of these guys (perish the thought!) i would very like to understand why this is (assuming this is effectively the correct view, that is)

as always, many of the contributors of this forum are finance professionals and thus i feel obliged to thank you in advance for your very precious time, should it be even only for the time you had to spend to read these few lines.

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Comments (2)

May 2, 2014

Not entirely sure what you're asking, but here's how I see things w.r.t. barriers to entry:

1) Corporate View:
BTE are hugely important here. The goal of a company is to maximize its value and deliver that value to shareholders. This is done through: increasing cash flow from its existing assets, increasing the expected growth rate of cash flows in the future, increasing the duration of the high growth period, and reducing risk. The high growth period here represents economic profit (the marginal difference between investing in the firm and the next best capital alternative). But there can't be economic profit if there aren't barriers to entry even if industry growth and external factors are all beneficial. New entrants ensure that. Therefore, BTE are far more important to an industry's prospects than other factors (which help in the case that BTE exist).

2) Investor View:
Everything above still holds, but you also have to consider price. A competitive industry may be a great investment if it's fallen out of favor. Similarly, a monopolist be too highly valued.

May 3, 2014