Lecture Unit 5: Market Entry & Exit decisions (1/2) Flashcards
What are entrants ?
= Entrants are firms that produce and sell in new markets
How do entrants threaten incumbents?
- The market share of the incumbents is reduced
- Price competition is intensified
What are the different forms of entry?
- An entrant may be a brand new firm
- An entrant may also be an establi-shed firm that is diversifying into a new product/market
For what is the form of entry important?
= important for
- analyzing the costs of entry and
- the strategic response by incumbents
What is an Exit, and what are the different forms?
= is the withdrawal of a prodcut from a market
Forms:
- A firm may simply fold up
- A firm may discontinue a particular product or product group
- A firm may leave a particular geographic market segment
What are greenfield entrants?
= desribes firms that entry a markets as a completly new firm
What are the key insights found by the Dunne, Robters and Samuelson (DRS) study in the U.S?
- entrants (exiters)) are smaller than incumbents (surviivors)
- most entrants fail quickly the one that don´t, grow precipitously
- over 5-year horizon the typical industry experienced 30 to 40 % turnover
- about 50% of entrants were diversified firms, and the rest were greenfields
- conditions in an industy that encouraged entry, also fostered exit
Dunne, Robters and Samuelson (DRS): What do diversifiny firms do?
- diversifing firms built plants on the same sclae as incumbents
- size of exiters is about the 1/3 of the average firms
- withtin 10 years of entry, 60% of the entrants leave the industry
What are the implications for managers based on the Dunne, Robbers and Sumelson (DRS) Study?
- Managers should account for the unknown future competitors (As part of planning for the future)
- Managers should be aware of the entry and exit conditions of the industry and how these conditions change over time
- Diversifying firms pose a greater threat to the incumbents since they tend to build bigger plants than other entrants
- Managers of new firms need to find capital for growth since survival and growth go hand in hand
What is the cost benefit analysis a potential entrant does?
= compares the sunk cost of entry with the present value of the post-entry profitstream
What is meant with sunk cost of entry and PV of post entry profit stream?
- Sunk costs of entry range from investment in specialized assets to obtaining government licenses
- Post-entry profits depend on demand and cost conditions as well as post-entry competition
What are barriers to entry?
Barriers to entry are factors that
- allow the incumbents to earn economic profit while
- making it unprofitable for the new firms to enter the industry
What are the two types of barriers to entry?
- structural barriers (natural advantages), and
- strategic barriers (incumbents’ actions to deter entry)
When do structural barriers to entry exist?
- incumbents have cost advantages
- incumbents have marketing advantages
- incumbents are protected by favorable government policy and regulations
How can companies create strategic barriers?
- expanding capacity,
- resorting to limit pricing, and
- resorting to predatory pricing
How can markets be characterized? (typology of entry conditions Bain)
- whether the existing barriers to entry are structural or strategic, and
- whether entry deterring strategies are feasible
What are the 3 possible entry conditions of a market?
- Blockaded entry
- Accommodated entry
- Deterred entry
When is an entry considered blockaded? Name examples!
- when the incumbent does not need to take any action to deter entry
- Existing structural barriers are effective in deterring entry
Examples: Rail transportation, electric and gas utilities, television, radio communications
What is accomodated entry?
- With accommodated entry,
- the incumbents should not bother to deter entry
What are the conditions that lead to a accommodated entry?
- typical market with growing demand or rapid technological change
- Structural barriers may be low and
- strategic barriers may be ineffective or not cost effective
What is deterred entry?
- Entry is not blockaded
- Entry deterring strategies are effective in discouraging potential rivals
- Deterred entry is the only condition under which the incumbents should engage in predatory acts
Which entry conditions should exist so that incumbents should engage iin predatory acts?
- Deterred entry is the only condition under which the incumbents should engage in predatory acts
Why is there an assymmetry between incumbents and entrants?
- What is sunk cost for incumbents is incremental cost for the entrants
- Established relationships with customers and suppliers are not easy to replicate
- Learning curve effects
- Switching costs for customers
Exaample: Google maps vs. Apple maps, Android vs Apple IOS
What are the different types structural barriers?
- Control of essential resources by the incumbent
- Economies of scale and scope
- Marketing advantages of the incumbent
How can a incumbent “control essential resources”?
Name examples?
- sources of certain inputs may be limited and the incumbents may be in control of these limited source
- patents can prevents rials from imitating a firm´s products
- Special know-how that is hard for the rivals to replicate may be zealously guarded by the incumbents
Examples: Solar cell producing comp. Pharmaceutical companies
What are the implications if an incumbents has economies of scale?
- If economies of scale are significant, potntial entrants may face cost disadvantages
What is economies of scale?
- refers to the cost advantages that a firm can achieve by increasing its production scale
- leading to a decrease in average costs per unit due to factors such as bulk purchasing, efficient production techniques, and
- spreading fixed costs over more unit
What are economies of scope? (Types of structural barriers)
- Economies of scope refer to the cost advantages that a firm can achieve by producing a variety of products using the same operations or resources,
- leading to a decrease in average costs due to shared or complementary resources and capabilitiies
What are the consequences for the entrant if an incumbents has economies of scope? (types of structural barriers)
- Entrants can face cost disadvantages due to economies of scope
When do economies of scope in production and markeitng exist?
Production:
- when multiple product lines are produced in the same plant
Marketing:
- economies of scope are due to the upfront cost of achieving brand awareness by entrants
What is the markeitng advantage for the incumbent?
- can exploit the brand umbrella to introduce new products more easily than new entrants can
What is the brand umbrella? What is the benefits of the brand umbrella
=brand umbrella can make it easy for the incumbent to negotiate the vertical channel (example: it is easier to get shelf space with an established brand)
What is the risk of exlpoiting the brand name?
If the new product is unsatisfactory, customer dissatisfaction may harm the image of the existing products
Barriers to Exit:
What is:
- P(entry)
- P(exit)
What happens when:
P(Entry) is greater than P(exit)?
- P(entry): minimum price that will induce a firm to enter an industry
- P(exit): minimum price that will induce an incumbent to stay in an industry
if: P(entry)) > P(exit):
exit barriers drive a wedge between P(Entry) and P(Exit)
How do sunk costs act as a barrier to exit?
- Sunk costs make the marginal cost of staying low (additional cost of continuing operation)
- Obligations and commitments to suppliers and employees are sunk costs as well.
What are barriers to exit?
Exit barriers often stem from sunk costs:Obligations a firm must meet whether or not it ceases operations (often originally barriers to entry), e.g
- Labor contracts
- Commitments to purchase raw materials
- Cost of purchasing patent rights
- relationship specific assets (low resale value)
- government regulations (restrict or make it more costly for firms to exit)
Why might relationship-specific assets be a barrier to exit?
Relationship-specific assets may have low resale value.
How can government regulations act as a barrier to exit?
Government regulations can
- restrict or make it costly for firms to exit an industry.
Incumbent has economies of scale what may be the incumbent strategic reaction?
- An incumbent’s strategic reaction to entry may be to further lower the price and cut into entrant’s profits
- If the entrant succeeds, intense price competition may ensue
