In a recession it is hard to get credit to start a business. Thus in this recession so called “high cost of entry” businesses are protected against new competitors by the current difficulty in getting credit for “high cost of entry” endeavors. During the coming hard economic times companies with cash reserves or access to cash will develop new products and procedures. Companies with a share of a “high cost of entry” market may well be able to survive and profit during the recession even with poor balance sheets and little new product development.
Companies with Cash Reserves in a High Cost of Entry Business
A few months ago the news was full of the discovery of a huge pool of oil deep beneath the continental shelf off the coast of Brazil. The amount of oil deep beneath the earth in this area is said to be larger than the largest Middle Eastern oil fields. However, the oil lies so deep within the crust of the Earth that the temperature and pressure of the oil field is extreme. New techniques and materials will be needed to extract this oil from such extreme depths. The cost of such an endeavor will be extraordinary either by government or big oil standards.
A handful of companies on this planet have the expertise and resources to capitalize on this discovery. Big oil made tremendous profits in 2008 and has cash reserves. Big oil has the expertise to develop projects like the new Brazilian oil field. Big oil has the cash reserves necessary to develop new techniques and materials that will not melt when drilling for and extracting the incredibly hot oil found in the Brazilian oil field.
Research and Development Stalwarts in High Cost of Entry Businesses
IBM was in the news recently as the company with the most new US patents in 2008. With a huge research and development team in place they do not need to go out and convince anyone of the promise of their enterprise in order to raise money during the recession. Companies like IBM and Cisco with lots and lots of older products as well as the money and talent to develop new ones will be safer from competition as the competitors find it hard to get credit to enter a high cost of entry business.
The High Cost of Entry and Developing Products from the Natural World
The pharmaceutical giants are another case in point of high cost of entry businesses. Once upon a time researchers went into the jungles of the world or (really) took samples from sewers of major third world cities looking for organisms that produce useful chemicals for treating cancer or natural antibiotics. The samples were taken back to the lab and tediously tested and processed to see if something useful showed up. Today researchers research the human genome to look for what kind of proteins, enzymes, etc. that they will find useful. They still foray into nature but just as often synthesize a promising chemical in the lab. Then entire buildings of expensive analyzers work in tandem to process new chemicals, categorize them and report ordered results.
Companies like Johnson and Johnson, Roche, Amgen, or Genentech, to name a few, have these systems in place. No matter how great a new idea might be during the recession it will be hard to get into a high cost of entry business that involves the kind of processing alluded to above.
Looking at the high cost of entry businesses of the world for who has high cost of entry product lines and/or lots of cash may be an excellent way to protect your assets and make a little cash during the recession.
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