Competitive Strategy Chapter 4 New Market Entry

Attractivenss of new market entry => Choice of market => Choice of entry type => Entry strategy
Structural Entry Barriers
Factors that allow incumbent firms to earn positive economic profits, while making it unprofitable for newcomers to enter the industry
Structural & Strategic barriers.
1. Control over natural resources.
2. Supplier capacity.
3. Location
4. Economies of scale, economies of learnings.
5. Marketing advantages of incumbents.
6. Customer Loyalty
Strategic Entry Barriers
Maket Entry
Types of commitment
1. High sunk cost investments.
     Production Capacity.
     R&D.
     Advertising.
2. Exit from other strategic market segments and focus on entry.
e.g. Bloomberg
a. Innovators enter the market with inferior products which appeal to price-sensitive buyers.
b. Incumbents ignore the threat since mainstream customers don’t want those products.
c. Over time the products improve and take large chunks of the market from the incumbents.
d. market leaders can hardly respond because they find it difficult to replicate entrants’ low-cost business models.
Judo Economics
can only work when it is better for the incumbent to lose some market share to the entrant rather than to start a price war and fight back the market share for the entrant.
This is only the case if
a. The entrant has a production capacity that can serve a limited portion of the market only and the incumbent does not fear that the entrant wants to take over bigger portions of the market.
b. The incumbent has a big share of the market and would lose lots of profit when reducing the own price for all of its customers to undercut the entrant’s price.
c. The difference between the price of the entrant and pre-entry price of the incumbent is high, so that it hurts the incumbent to lower prices for all of its customers.
Commitment
Limit Pricing/Predatory Pricing
     * low demand
     * low cost incumbent
Pre-emption

Competitive Strategy Chapter 6 Designing products wisely

Bertrand paradox.
   a model prediction in which two firms in the same market reach a Nash equilibrium where both firms charge a price equal to marginal cost. If either firm were to lower its price it would gain the whole market and substantially larger profits. Since both companies know this, they will each try to undercut their competitor until the products are selling at zero profits. There paradox is that firms usually make positive profits in reality.
Differentiation is beneficial if consumer preferences are heterogeneous.
* Technical features.
* Durability
* Resale value
* Taste/Image
* Location
Horizontal differentiation/ Vertical differentiation. (Color/Mileage)
* Given equal prices, some consumers would choose product A whereas others would choose product B.
* Given equal prices, every consumer would choose product A over product B.
(i3, i5, i7 cpus <-> OEM makeer; economy, business, first class seats)
HORIZONTAL DIFFERENTIATION
Hotelling Bertrand model. Highly relevant for analysing product differentiation.
* Three generic strategies for creating a defendable position and outperforming competitors in an industry.
* These required different organisational arrangements, control procedures, incentive systems and resources.
Cost – Leadership
* Low-cost relative to competitors as strategic main theme
* Central elements of the strategy
     * Efficient-scale facilities
     * Rigorous cost reductions from experience.
     * Avoidance of marginal customer accounts.
Differentiation
* Differentiating the product or service, offering something that is perceived industry-wide as being unique
* Exemplary forms of differentiation
     * Design or brand image
     * Technology
     * Customer service
* Differentiation along multiple dimensions
Focus
* Focus on particular buyer group, segment of the product line or geographic market.
* Central rationale: Serving narrow strategic target group more effectively or efficiently than competitors.
* Lower costs or more differentiation with regard to single niche.
Stuck in the middle.
Firms that fail to develop their strategy in at least one of the three directions are in poor strategic position
* Firms lack the market share, capital investment, and resolve to “play the low-cost game”.
* Firms lack industry-wide differentiation to obviate the need for a lost cost position.
* Firms lack focus to create differentiation or low-cost position.
Ambidexterity
* Stuck in the middle does not mean that firms cannot pursue multiple strategies simultaneously.
* The pursuit of hybrid/ambidextrous strategies might lead to better results that following pure strategies.
* But tensions within organization need to be managed.