Why Is It So Difficult for Small Businesses to Take Off?

Starting a business is a dream for many, but the reality is that most small businesses face significant challenges due to high barriers to entry and economies of scale. These advantages favor larger, established companies, making it difficult for smaller companies to compete.

High Barriers to Entry: The First Major Hurdle

Barriers to entry are obstacles that prevent new businesses from entering a market. These can be financial, regulatory, or competitive.

Costly Initial Investments

Many industries require significant capital just to get started. For example, purchasing equipment, securing retail space, or developing a product can be expensive. Established businesses already have the infrastructure and financial backing to maintain operations, while startups often struggle to secure funding.

Regulatory and Legal Hurdles

Government regulations, licensing requirements, and industry standards can act as major roadblocks. Large corporations have legal teams to navigate these complexities, while small businesses often face high costs in legal fees and permits. For instance, starting an alternative school requires substantial investment in certifications and approvals.

Brand Loyalty and Market Dominance

Established businesses often have a loyal customer base, making it harder for new companies to gain traction. Consumers tend to stick with familiar brands, and breaking into the market requires extensive marketing efforts that small businesses often can't afford.

Access to Distribution Channels

Retail shelf space, supplier relationships, and online platform visibility are often dominated by big companies. Small businesses frequently struggle to get their products noticed or distributed on a large scale, limiting their reach and potential sales.

Economies of Scale: Bigger Is Better

Once a company reaches a certain size, it benefits from economies of scale: the cost advantages that come with increased production and operational efficiency. This gives large corporations a significant edge over smaller businesses.

Lower Costs Per Unit

Big businesses can produce goods in bulk, reducing the cost per unit. This allows them to sell products at lower prices while maintaining profitability, something smaller businesses can't easily do.

Better Supplier Deals

Suppliers prioritize large businesses because they order in high volumes, often getting discounts or favorable credit terms. Small businesses, on the other hand, pay higher costs for materials and inventory, making it harder to compete on price.

Marketing Power

Larger companies have bigger marketing budgets, allowing them to dominate advertising channels, invest in customer retention, and expand their brand presence. Small businesses struggle to match this visibility, making customer acquisition much more difficult.

Technological Advantages

Big companies can afford cutting-edge technology, automation, and software that streamline operations and reduce costs. Small businesses often rely on manual processes, making them less efficient and more costly to operate.

How Small Businesses Can Compete

Despite these challenges, small businesses can still find ways to carve out a niche and grow.

Niche Targeting: Focus on specialized markets with unique offerings that larger companies might overlook.

Leveraging Digital Marketing: Use social media, SEO, and influencer partnerships to build brand awareness without massive ad budgets.

Strategic Partnerships: Collaborate with other small businesses or local organizations to share resources and boost visibility.

Customer Experience Focus: Provide exceptional customer service and personalized experiences to create loyal customers who prefer small businesses over corporate giants.

Sources:

Shopify: What Is Barrier to Entry? Definition and Guide (2024)
"What Is Barrier to Entry? Definition and Guide (2024)." Shopify, 2024, https://www.shopify.com/blog/what-is-barrier-to-entry

Indeed: What Is a Barrier to Entry? (With Types of Barriers to Entry)
"What Is a Barrier to Entry? (With Types of Barriers to Entry)." Indeed, https://ca.indeed.com/career-advice/career-development/barrier-to-entry

MarsDD: Barriers to Entry: Factors Preventing Startups from Entering a Market
"Barriers to Entry: Factors Preventing Startups from Entering a Market." MarsDD, https://learn.marsdd.com/article/barriers-to-entry-factors-preventing-startups-from-entering-a-market/

Investopedia: Barriers to Entry: Understanding What Limits Competition
"Barriers to Entry: Understanding What Limits Competition." Investopedia, https://www.investopedia.com/terms/b/barrierstoentry.asp