How to enter a new market

4-1 - How to enter a new market

This weeks lecture covers:

1. Process of planning entry
2. Choice of markets - Market attractiveness
3. Choice of markets - Structural Entry Barriers
4. Choice of markets - Strategic Entry Barriers
5. Entry Strategies - Commitment
6. Entry Strategies - Judo Economics
7. Entry Deterrence - Structural Entry Barriers
8. Entry Deterrence - Limit Pricing
9. Entry Deterrence - Pre-emption

4-2. Choice of markets - Market attractiveness

1. Process of planning entry
2. Market attractiveness defined by Porter's Five Forces

1. Process of planning entry

1. Evaluate attractiveness of new market entry
2. Choose a market based on its attractiveness and entry barrier
3. Choose an entry type
4. Choose an entry strategy

Porter

1. More Competition = Less Attractive
2. Less Supplier = Less Attractive
3. Less Buyers = Less Attractive
4. More Entry Barriers = More Attractive
5. More Substitutes = Less Attractive

4-3 Choice of markets - Structural Entry Barriers

1. What are Entry Barriers
2. Structural Entry Barriers
3. Strategic Entry Barriers

2. Structural Entry Barrier

Control of essential resources - Control of resoures - DeBeers / diamonds - Control the Supplier capacity - Minnetonka / liquid soap - Patents: Sony and Philips / CD - Control the Distribution channel: Coca Cola / fast food chains - Control the location: Supermarkets - Control of Timing: Airlines / Arrival slots at airports - Rationing by government: Taxi cabs license; mobile phone spectrum

Economies of scale and scope - Minimum efficient scale: Semiconductor production or industries with large fixed costs - Cost advantages of incumbents thru experience of economies of scope: Airframe production - Doubling of production means 20% reduction in price - Reuse some parts i.e. economies of scope.

Marketing advantages of incumbents - Brand loyalty: Frequent flyer programmes - Switching costs: 1-year mobile phone contracts

4-4 Choice of markets - Strategic Entry Barriers

1. What are Strategic Entry Barriers

Considers deterring if 1. incumbent still earns profit 2. changes entrant's expectations

Potential Actions - Block Entry - Accommodate Entry

Decide by comparing the NPV of each option.

4-5 Entry Strategies - Commitment / Value Chain Reconfiguration

1. Commitment
2. Value Chain Reconfiguration
3. Judo Economics
4. Niche Markets

Types of commitment 1. High sunk cost investments - Production capacity - R&D - Advertising 2. Exit from other strategic market segments and focus on entry

Value Chain Reconfiguration - Innovators enter the market with inferior products. - Incumbents ignore the threat. - Over time the products improve and take large chunks of the market

Example: Bloomberg - basic financial data to small investment analysts and brokers - gradually improve data offerings and analysis

4-6 Entry Strategies - Judo Economics / Niche Market

1. Judo economics
2. Niche strategies

These strategies work when incumbents cannot retaliate because the cost of retaliation is much larger than the cost of accommodation

Consider an entrant with low price pL against an incumbent with high price pH. Entrant goes after a market xE out of a total market of x.

Incumbent does not retaliate if: pH xE < (pH - pL) x where left side represents cost of accommodation right side represents cost of retaliation

An example of judo economics working is Amazon vs. Barnes & Noble.

4-7 Entry Deterrence - Structural Entry Barriers - Commitment

Situation is that potential entrants are expected: 1. patent runs out 2. technology advances

Incumbent can either: 1. Block entry - costs money => lower profits 2. Accommodate entry - costs margins => lower profits

Raising Entry Barriers

Control of essential resources - Get exclusive access to essential resources - Control the supply route so it dries up

Economies of scale / scope - Lower costs through scale - Leverage experience advantage - Increase technological lead

Develop marketing advantages - Build brand loyalty - Raise switching costs for consumers - get people to buy complementary products - GO launcher and similar

Commitment - Commit to an aggresive behaviour after entry. - To eliminate moves that are profitable to the entrant

4-8 Entry Deterrence - Limit Pricing & Predatory Pricing

Both refer to aggresive pricing. Limit Pricing is before entry. Predatory is after entry has happened

Limit Pricing - Keep price low in spite of monopoly position - Signal to the potential entry - "low demand" (market may appear unattractive) - "low cost incumbent" (dangerous competitor) - Works only in presence of incomplete information

Example: Ferries and Eurotunnel

Predatory Pricing - Charging low prices (even below marginal costs) in the current competition - to induce exit - Works only in presence of incomplete information

Example: UK newspaper industry - Times vs Independent

4-9 Entry Deterrence - Pre-emption

Invest so that you can produce cheaply. - Over-investing - Pursue horizontal product differentiation - Choose locations of outlets more densely than optimal

Example - Coffeeshops at LSE