Entry Strategies I
Week 4
Entry Strategies I Commitment / Value Chain Reconfiguration
Process of Planning Entry
Attractiveness of new market entry
Choice of market
Choice of entry type
Entry strategy
Commitment (I/II) A credible commitment of the entrant to stay in the market may stop incumbents retaliating Types of commitment High sunk cost investments •
Production capacity
•
R&D
•
Advertising
Exit from other strategic market segments and focus on entry
Commitment (II/II) Example: Market entry of Deutsche BA Deutsche BA
no entry
Lufthansa
entry
retaliation
no retaliation
Deutsche BA Deutsche BA Lufthansa
Commitment: Deutsche BA invests in additional airplanes
exit 0 10
4 4
-3 6
stay -5 6
-4 -4
Value Chain Reconfiguration (I/II) Innovators enter the market with inferior products which appeal to price-sensitive buyers Incumbents ignore the threat since mainstream customers don’t want those products Over time the products improve and take large chunks of the market from incumbents Market leaders can hardly respond because they find it difficult to replicate entrants’ low-cost business models
Value Chain Reconfiguration (I/II) Example: Bloomberg Began in 1981 to provide basic financial data to small investment analysts and brokers Gradually improved its data offerings / analysis and substantially disrupted competitors Dow Jones and Reuters
Competitive Strategy Tobias Kretschmer Professor of Management, LMU Munich
© 2013 LMU Munich
Week 4
Entry Strategies II Judo Economics / Niche Market
Judo Economics (I/IV) Entrant Sets a price (pL) lower than the incumbent’s price (pH)
Limits its capacity to serve a small proportion (xE) of the market (x) Signals the incumbent that it does not increase its capacity drastically in the future
Judo Economics (II/IV) Incumbent Loses some profits by giving market share (xE) to the incumbent
Can exclude the entrant and fight back the whole market by setting its own price marginally lower than the entrant‘s one (pL) Incurs (in the short run) losses through this price reduction (pH - pL)
Judo Economics (III/IV) Incumbent does not attack the entrant if
pH xE
Entry Strategies I Commitment / Value Chain Reconfiguration
Process of Planning Entry
Attractiveness of new market entry
Choice of market
Choice of entry type
Entry strategy
Commitment (I/II) A credible commitment of the entrant to stay in the market may stop incumbents retaliating Types of commitment High sunk cost investments •
Production capacity
•
R&D
•
Advertising
Exit from other strategic market segments and focus on entry
Commitment (II/II) Example: Market entry of Deutsche BA Deutsche BA
no entry
Lufthansa
entry
retaliation
no retaliation
Deutsche BA Deutsche BA Lufthansa
Commitment: Deutsche BA invests in additional airplanes
exit 0 10
4 4
-3 6
stay -5 6
-4 -4
Value Chain Reconfiguration (I/II) Innovators enter the market with inferior products which appeal to price-sensitive buyers Incumbents ignore the threat since mainstream customers don’t want those products Over time the products improve and take large chunks of the market from incumbents Market leaders can hardly respond because they find it difficult to replicate entrants’ low-cost business models
Value Chain Reconfiguration (I/II) Example: Bloomberg Began in 1981 to provide basic financial data to small investment analysts and brokers Gradually improved its data offerings / analysis and substantially disrupted competitors Dow Jones and Reuters
Competitive Strategy Tobias Kretschmer Professor of Management, LMU Munich
© 2013 LMU Munich
Week 4
Entry Strategies II Judo Economics / Niche Market
Judo Economics (I/IV) Entrant Sets a price (pL) lower than the incumbent’s price (pH)
Limits its capacity to serve a small proportion (xE) of the market (x) Signals the incumbent that it does not increase its capacity drastically in the future
Judo Economics (II/IV) Incumbent Loses some profits by giving market share (xE) to the incumbent
Can exclude the entrant and fight back the whole market by setting its own price marginally lower than the entrant‘s one (pL) Incurs (in the short run) losses through this price reduction (pH - pL)
Judo Economics (III/IV) Incumbent does not attack the entrant if
pH xE
