How to Understand [any] Industry's Structure: Capital Requirements
Capital is not only necessary for fixed facilities but also for customer credit, inventories, and start-up losses.
Following Customer Switching Costs is Capital Requirements and this explains how the need for large amounts of financial resources (mostly money) to compete creates a large barrier to entry into an industry.
Capital is not only necessary for fixed facilities but also for customer credit, inventories, and start-up losses.
Fixed Facilities
These relate to physical buildings, machinery, and equipment needed to produce goods or provide services in the industry. For instance, a manufacturing company requires a factory and specialized equipment which represents a significant fixed cost and investment.
Customer Credit
This refers to the extent to which a company allows its customers to buy its products and services on credit. Offering credit is a way to attract more potential customers, but it also involves a risk that the customers may not pay, and the company may encounter losses.
Inventories
These include the materials and goods an organization must keep on hand to meet customer demand. The larger and more diverse the inventory, the more capital that will be needed.
Start-up Losses
These are the losses that a company may incur in the early stages of an industry, due to such factors as up-front advertising costs, market research, R&D expenses, and other initial costs associated with establishing a new business.
In cases where capital is required for unrecoverable expenditures such as Advertising or R&D, the barrier is even tougher. For many, however, just capital requirements may not be enough deterrent as inventors can offer to fund said business if returns are attractive and capital markets are efficient. There are large pools of private equity investors with considerable resources to fund attractive ventures.
Also, the level of capital needed to enter an industry varies depending on the industry and the specific requirements to operate in it.