Lecture Unit 5: Market Entry & Exit decisions (1/2)

Question 1

What are entrants ?

Answer 1

= Entrants are firms that produce and sell in new markets

Question 2

How do entrants threaten incumbents?

Answer 2

• The market share of the incumbents is reduced
• Price competition is intensified

Question 3

What are the different forms of entry?

Answer 3

• 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

Question 4

For what is the form of entry important?

Answer 4

= important for

• analyzing the costs of entry and
• the strategic response by incumbents

Question 5

What is an Exit, and what are the different forms?

Answer 5

= 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

Question 6

What are greenfield entrants?

Answer 6

= desribes firms that entry a markets as a completly new firm

Question 7

What are the key insights found by the Dunne, Robters and Samuelson (DRS) study in the U.S?

Answer 7

• 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

Question 8

Dunne, Robters and Samuelson (DRS): What do diversifiny firms do?

Answer 8

• 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

Question 9

What are the implications for managers based on the Dunne, Robbers and Sumelson (DRS) Study?

Answer 9

• 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

Question 10

What is the cost benefit analysis a potential entrant does?

Answer 10

= compares the sunk cost of entry with the present value of the post-entry profitstream

Question 11

What is meant with sunk cost of entry and PV of post entry profit stream?

Answer 11

• 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

Question 12

What are barriers to entry?

Answer 12

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

Question 13

What are the two types of barriers to entry?

Answer 13

• structural barriers (natural advantages), and
• strategic barriers (incumbents’ actions to deter entry)

Question 14

When do structural barriers to entry exist?

Answer 14

• incumbents have cost advantages
• incumbents have marketing advantages
• incumbents are protected by favorable government policy and regulations

Question 15

How can companies create strategic barriers?

Answer 15

• expanding capacity,
• resorting to limit pricing, and
• resorting to predatory pricing

Question 16

How can markets be characterized? (typology of entry conditions Bain)

Answer 16

• whether the existing barriers to entry are structural or strategic, and
• whether entry deterring strategies are feasible

Question 17

What are the 3 possible entry conditions of a market?

Answer 17

• Blockaded entry
• Accommodated entry
• Deterred entry

Question 18

When is an entry considered blockaded? Name examples!

Answer 18

• 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

Question 19

What is accomodated entry?

Answer 19

• With accommodated entry,
• the incumbents should not bother to deter entry

Question 20

What are the conditions that lead to a accommodated entry?

Answer 20

• typical market with growing demand or rapid technological change
• Structural barriers may be low and
• strategic barriers may be ineffective or not cost effective

Question 21

What is deterred entry?

Answer 21

• 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

Question 22

Which entry conditions should exist so that incumbents should engage iin predatory acts?

Answer 22

• Deterred entry is the only condition under which the incumbents should engage in predatory acts

Question 23

Why is there an assymmetry between incumbents and entrants?

Answer 23

• 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

Question 24

What are the different types structural barriers?

Answer 24

• Control of essential resources by the incumbent
• Economies of scale and scope
• Marketing advantages of the incumbent

Question 25

How can a incumbent **"control essential resources"**? Name examples?

Answer 25

- 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

Question 26

What are the **implications** if an incumbents has **economies of scale**?

Answer 26

- If economies of scale are **significant**, potntial **entrants** may face **cost disadvantages**

Question 27

What is economies of scale?

Answer 27

- 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**

Question 28

What are economies of **scope**? (**Types of structural barriers**)

Answer 28

- 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**

Question 29

What are the **consequences for the entrant** if an **incumbents has economies of scope**? (**types of structural barriers**)

Answer 29

- Entrants can face **cost disadvantages** due to economies of scope

Question 30

When do **economies of scope** in **production** and **markeitng** exist?

Answer 30

**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

Question 31

What is the markeitng advantage for the incumbent?

Answer 31

- can **exploit the brand umbrella** to introduce **new** products more **easily** than new entrants can

Question 32

What is the brand umbrella? What is the benefits of the brand umbrella

Answer 32

=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)

Question 33

What is the risk of exlpoiting the brand name?

Answer 33

If the **new** product is **unsatisfactory**, customer **dissatisfaction** may **harm** the **image** of the existing products

Question 34

**Barriers to Exit**: What is: - P(entry) - P(exit) What happens when: P(Entry) is **greater** than P(exit)?

Answer 34

- **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)

Question 35

How do **sunk costs act as a barrier to exit**?

Answer 35

- 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.**

Question 36

What are **barriers to exit**?

Answer 36

**Exit** barriers often **stem from sunk costs**:Obligations a firm **must meet whether or no**t 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)

Question 37

Why might relationship-specific assets be a barrier to exit?

Answer 37

Relationship-specific assets may **have low resale value.**

Question 38

How can **government regulations** act as a **barrier to exit?**

Answer 38

Government **regulations** can - **restrict** or **make** it **costly** for firms to **exit an industry.**

Question 39

Incumbent has **economies of scale** what may be the incumbent **strategic reaction**?

Answer 39

- 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