FFB-Post 14
In our previous post, we delved into the concept of economies of scale. Today, let’s shift our focus to another significant business advantage: legal barriers.
Understanding Legal Barriers
Legal barriers provide companies with protection through legal contracts and government regulations. These barriers can create a monopoly or near-monopoly status, making it difficult for competitors to enter the market.
Monopoly Through Government Regulations:
- Singapore Stock Exchange: In Singapore, government regulations stipulate that there can only be one stock exchange in the country, leading to a monopoly. This is in stark contrast to countries like the USA, which has multiple exchanges like the NYSE and NASDAQ, and India, with exchanges like BSE and NSE.
Patents and Intellectual Property:
- Pharmaceutical Industry: Patents play a crucial role in protecting products and intellectual property. Drug companies often use patents to shield their products from competitors. For example, Johnson & Johnson patented the formulation for Tylenol (paracetamol). This not only protected their product but also allowed them to build a strong brand presence. Today, people commonly refer to paracetamol as Tylenol, showcasing the power of brand building under patent protection.
Other Examples of Legal Barriers:
- Telecom Industry: In many countries, telecom companies operate under strict government licenses, limiting the number of players in the market. This creates a high entry barrier for new companies, giving established players a significant advantage.
- Utilities: Electricity and water supply companies often enjoy monopolistic or oligopolistic status due to government regulations that restrict competition. These companies benefit from stable, long-term contracts and minimal competition.
Strategic Use of Legal Barriers:
While patents and legal protections provide an initial advantage, it’s crucial for businesses to use this protection period wisely. Building a strong brand during this time ensures they maintain market dominance even after patents expire. Companies that successfully leverage legal barriers not only fend off competition but also create lasting value for investors.
Investing Insight:
When considering investments, look for companies with robust legal barriers. These barriers can provide stability and a competitive edge, ensuring long-term profitability.
Stay Tuned:
In our next post, we will explore the concept of high switching costs, another crucial advantage in the business world. Understanding these costs will help you identify companies that can retain customers and maintain steady revenue streams.
For Post 15 – Click Here -> High Switching Costs