In this six-module course, you will learn how businesses and organizations behave in situations in which strategic decisions are interdependent, i.e. where my actions affect my competitors' profits and vice versa. Using the basic tools of game theory, we will analyse how businesses choose strategies to attain competitive advantage. This course is also available in Chinese. Please go to our course catalog to access the Chinese version of Competitive Strategy.
Structural Entry Barriers
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來自 Ludwig-Maximilians-Universität München (LMU) 的課程
竞争策略
1623 個評分
Ludwig-Maximilians-Universität München (LMU)
1623 個評分
課程 1（共 4 門，Specialization Competitive Strategy and Organization Design）
從本節課中
Entering a New Market
This module is about market entry. We first look at different tools to assess the attractiveness of a market – and then discuss strategies that have proven to be helpful for entering a new market, such as positioning and marketing strategies. We also look from the other perspective, and analyse what established businesses can do to keep new competitors out of the market.
與講師見面
Tobias KretschmerProfessor
Institute for Strategy, Technology and Organization
So welcome back, we're still in the business of analyzing the choice of
market. And in the last video we've looked at
defining the market attractiveness using Porter's Five Forces.
And sort of in passing, we also mentioned the entry barriers, the potential for
entrants to come in. And that's another very important aspect,
especially if we're dealing with a firm that looks from the outside into a
market. So let me now explain to you what exactly
we mean by entry barriers and how we can divide those maybe in two different
categories. So Entry Barriers formally speaking are
factors that allow an incumbent firm to earn positive economic profits
while making it unprofitable for newcomers to enter the industry.
And we can divide this into structural entry barriers which are basically about the
nature of the industry. They're about the position of the
incumbent within the industry. It's not necessarily about the
incumbent being special in any way. It's basically about the fact that
someone's in the market, and someone's outside the market.
But there are also strategic entry barriers and these strategic entry
barriers are the result of conscious specific strategic behavior by an
incumbent. This is basically the result of an
incumbent's aggressive action, with the express intention to keep entrants out of
the industry. So let's think about what structural
entry barriers are, first. One structural entry barrier could be if
you have control over essential resources.
What exactly does that mean? I guess the most classical way of thinking about this
would be if you have access to natural resources that others don't have.
DeBeers is the dominant player in the world diamond market.
And one way of attaining that position was by buying more or less all the supply
of many, many diamond producing countries.
So DeBeers, by buying up the supply, was able to create an essential resource or
to basically get hold and get control over an
essential resource. Supplier capacity is another essential
resource. So one interesting example here is a
small company called Minnetonka. Minnetonka invented liquid soap.
So the soap that we're using a lot now, that has more or less replaced, or almost
replaced, solid soap in many different settings.
So Minnetonka invented liquid soap but one of the problems was that this is
basically a consumer good. This is a cosmetic, that has a market
structure, or the market has a market structure, that's very much dominated by
large firms like Unilever, like Procter and Gamble and so on.
So how does a small firm like Minnetonka keep hold of the profits that can be made
from an innoviation like liquid soap? The way they did it, is not by trying to
protect liquid soap as such. They knew they wouldn't be able to do that.
But what they found out is that to make a successful product out of liquid soap
you needed small pumps, you needed plastic pumps.
And it turned out at the time of the invention of liquid soap,
it basically had hardly any use, right? So there was hardly any other use for
small plastic pumps. And so what Minnetonka simply did, is
they approached the very few firms that were able to produce plastic pumps
and simply bought up 2 years worth of supplies for plastic pumps.
And this meant that even though Unilever and Procter and Gamble were able to very quickly
replicate what liquid soap was about,
Minnetonka had a 2 year lead of launching products on the market for consumers
because they were the only ones with pumps.
Patents are another essential resource, basically a legally given resource.
So Sony and Philips invented the compact disc, and anyone who wanted to produce a
CD or wanted to produce a CD player had to ask for permission
and had to license the patents from Sony and Philips.
Which obviously gave Sony and Philips a big advantage over anyone else who wanted
to come into the market. Having access or having control over
a distribution channel is another important reason for an entry barrier
or is an important factor in creating entry barriers and having structural
entry barriers. So, Coca Cola for example signs exclusive
contracts with fast food chains. And that means that even if you have a
fantastic soft drink, if you have a fantastic product as such,
it's going to be difficult to get it to the end consumer because other firms have
signed up exclusively to selling Coca Cola soft drinks.
Okay, so that creates a problem for potential entrants because the
distribution channel is already occupied, is already taken.
Location. Supermarkets will locate in particular malls, in particular shopping
malls, they will locate in a particular location.
So once they have that top spot, it's going to be very difficult for other
supermarkets to enter in a similar geography.
So you will see often in a shopping mall of some sort, you will often see just a single
supermarket. Why? Because other's cannot enter into this
shopping mall because it's already taken, the essential
resource of an attractive location in a mall is already taken.
Finally, timing. Airlines have as one essential resource landing slots, arrival slots, at
airports. And so this creates a situation where
sometimes an airline is bought simply for the fact that they have
landing slots at a particular airport. So that recently happened when British
Airways bought BMI, a smaller British carrier from Lufthansa.
For the main reason that they held landing slots at London's Heathrow
Airport, which British Airways wanted,
to expand their own network of flights.
And finally there can be structural entry barriers in the form of essential
resources by governments. Government mandated essential resources.
So for example taxi cabs come only in a limited number. So you have to have a
license to operate a taxi cab in most cities.
And these may be traded, these may be licensed out, these may be issued.
But in any case you cannot operate a cab legally if you don't have that badge, if
you don't have a license. Similar, but at a larger scale, if you
think about mobile phone networks. So mobile phone networks basically
operate on a particular spectrum. And that spectrum was given out by
governments. And there was a limited number of
carriers, of operators that could operate in this bandwidth of
spectrum. And if you don't have any of this
bandwidth then there's no way you can operate a mobile phone network
in a particular market. So governments may ration the number of
players that can be in the market. Another structural entry barrier are
economies of scale and scope and economies of learning.
So, what do I mean by that? First of all there might be something
like a minimum efficient scale to operate in an industry.
So you cannot produce just a few semi conductors, you cannot have a small
plant in which you produce semi conductors,
because that's going to make it much more expensive than other players in the
market, that produce at what's called the minimum efficient scale.
So, in other words to enter a market you have to reach minimum efficient scale.
And if that minimum efficient scale is large, then it's going to make it very
difficult for you to enter, okay? So semiconductors is one example but any
industry in which fixed costs are high and the marginal cost of production is
fairly low we are talking about a large minimum
efficient scale compared to the size of the market.
And that's going to make it difficult for entrants to come in.
There may also be cost advantages for incumbents through having gathered
experience or through economies of scope. So in the case of air frame or air craft
production, we have both. So experience simply means that if you
have produced a large number of planes already
then producing another one is relatively speaking particularly cheap.
So this can even be quantified, this has been quantified some time ago.
And it's been found that a doubling in the cumulative
quantity produced means a reduction of 20% in the cost of production.
So in other words if you've produced one plane already then producing a second
plane is 20% cheaper than producing the first one.
If you've produced 100 planes already then after producing 200 planes then the
200th plane is going to cost 20% less to produce than the 100th plane.
So that obviously means that if you've built up a large cumulative stock of
produced units it's going to make it very difficult for
an entrant to come in because they simply haven't gathered that experience.
There's also an advantage if you can reuse parts of a product in many different
related products. And that's again what we see in aircraft
production. So, for example you need engines, you need
seats, both in small planes an in large planes and even in medium sized planes.
So, what that means is that there is a cost advantage if a firm produces large
small and medium planes at the same time. Because they can reuse some of the parts,
some of the components of a product, in differently sized planes,
in different but related products. So this is what we call Economies of Scope.
A third structural entry barrier are marketing advantages of incumbents.
You may simply be able to build up some sort of brand loyalty by initiating signing up
your customers for frequent flyer programs,
frequent loyalty programs, frequent buyer programs if you wish.
This is something that makes it difficult or makes it less attractive for someone to
switch to a potential entrant. So someone who comes in would have to
come in with a much better product or a much cheaper product to make those people
switch. And a very similar mechanism is at play
when we talk about switching costs. So mobile telephony. Many people sign up
for long term contracts. And that means that for a period of one
year, two years, they're basically bound to one particular carrier.
And that creates a disincentive for an entrant because an entrant knows that if
these consumers are attached to an existing carrier,
it's simply difficult, it's simply less easy for them to gather consumers because
many existing consumers will be attached
through long term contracts. So to summarize, this was all about
Structural Entry Barriers. And we'll now take a next step. As you
remember there are Structural and there are Strategic Entry Barriers.
And we'll talk about strategic ones in the next video. So stay tuned.
