Strategic Market Entry: Planning and Execution

Posted on Jan 31, 2025 in International Trade

Chapter 9: Strategic Market Entry

Planning

Market Entry → Yes or No → Choice of Market → Market X, Y, or Z → Choice of Entry Type → Entry Strategy

Market Attractiveness

Market attractiveness is related to the following factors:

  • Market size
  • Market growth rate
  • Number of competitors
  • Product differentiation
  • Cost structure
  • Current prices
  • Current returns
  • Barriers to entry

Barriers to Entry

Barriers to entry allow incumbents to operate profitably while making entry relatively unattractive. These barriers include:

  • Economies of scale: Entry requires large volumes or results in a cost disadvantage, with incumbents having greater experience, yielding cost advantages.
  • Economies of scope: Early mover advantage and technological advantages for incumbents.
  • Marketing advantages: Incumbents benefit from brand loyalty, brand image, and switching costs.
  • Scarce resources controlled by incumbents:
    • Natural resources
    • Trained personnel
    • Supplier capacity
    • Patents
    • Distribution channels
    • Location
    • Timing
    • Rationing by governments

Advantages for Entrants

Entrants may have these advantages:

  1. Activities in related markets:
    • Products
    • Customers
    • Distribution channels
    • Brand image
    • Technology
    • Experience curve effects
    • Complementarities
  2. Special advantages in overcoming barriers to entry:
    • Product innovation
    • Differentiated products for niche markets
    • Process innovation
    • Financial prowess
    • New distribution channels
  3. Second-mover advantages:
    • Reduced uncertainty as the pioneer has tested the market
    • Opportunity to learn from the pioneer’s mistakes

Strategies for Entrants

  • Commitment: A credible commitment from the entrant to stay in the market may prevent incumbents from retaliating. Possible forms of commitment include:
  1. High sunk cost investments in production and capacity, research and development, and marketing.
  2. Exit from other strategic market segments to focus on entry.
  3. “Up the ante” by making profits in other strategic market segments contingent on successful entry.
  • Niche market: If the incumbent’s retaliatory measures cannot be focused on individual niche markets, entry into niche markets may proceed without retaliation. “Across-the-board retaliation” may be too expensive for the incumbent.

Strategies for Incumbents

  1. Raise barriers to entry:
    • Economies of scale and scope: Lower costs through economies of scale, experience advantages, and increased technological lead.
    • Marketing advantages: Build brand loyalty and raise switching costs for customers.
  2. Sunk cost: Investment in capacity expansion or cost reduction, brand loyalty, research and development, and distribution channels.
  3. Pre-emption cost: Reduce variable costs of production via suitable investments below the level that would be optimal without the threat of entry or choose locations of outlets more densely than would be optimal without the threat of entry.
  4. First-mover advantage
  5. “Spoil the entrant’s appetite”
  • Limit pricing: Keep prices low despite a monopoly position. As demand is low, the market may appear unattractive, and the low-cost incumbent becomes a dangerous competitor. The incumbent’s pricing may change if the entrant actually enters.
  • Predation: Aggressive retaliation against entry, although unprofitable, may establish a reputation to prevent future entry.