Entry and Exit

A. Tony Prasetiantono Week 12

Exit
Exit is the withdrawal of a product from a market, either by a firm that shuts down completely, or by a firm that continues to operate in other markets. Eccentric Restaurant (owned by Oprah Winfrey) exited the Chicago market. Renault and Peugeot exited the US market.

Entry (1)
An entrant may be a new firm diversifying its product line: the firm already exists but had not previously been in that market. An entrant may also be a firm diversifying geographically: the firm sells the same product in other geographic markets.

Entry (2)
Recent new entrants in various markets include Dreamworks (motion picture studio, Steven Spielberg); British Midlands (airline service), and Amazon.com (which sells books over the internet).

Study on Entry and Exit in the US, 2003

Entry and exit will be pervasive. Entrants and exiters tend to be smaller than established firms. A typical entrant will be only one-third the size of a typical incumbent. Most entrants do not survive 10 years, but those that do grow precipitously. Entry and exit rates vary by industry.

Some Implications for Strategy (1)

When planning for the future, the manager must account for an unknown competitorthe entrant. Not many diversifying competitors will build new plants, but the size of their plants can make them a threat to incumbents.

Some Implications for Strategy (2)

Managers should expect most new ventures to fail quickly. However, survival and growth usually go hand in hand, so managers of new firms will have to find the capital to support expansion. Managers should know the entry and exit conditions of their industry. Entry and exit are powerful forces in some industries, but relatively unimportant in others.

Barriers to Entry (1)

Barriers to entry are those factors that allow incumbent firms to earn positive economic profits, while making it unprofitable for newcomers to enter the industry. Barriers to entry may be structural or strategic. Structural entry barriers result when the incumbent has natural cost or marketing advantages, or benefits from favorable regulations.

Barriers to Entry (2)

Strategic entry barriers result when the incumbent aggressively deters entry. Entry-deterring strategies may include limit pricing, predatory pricing, and capacity expansion.

Structural Entry Barriers

Control of essential resources: an incumbent is protected from entry it controls a resource necessary for production. Economies of scale and scope Marketing advantages of incumbency: an incumbent can exploit the umbrella effect to offset uncertainty about the quality of a new product that it is producing.

Predatory Pricing
Predatory pricing refers to the practice of setting a low price in order to drive other firms out of business. The predatory firm expects that whatever losses it incurs while driving competitors from the market can be made up later through the exercise of market power.

Barriers to Exit
To exit market, a firm stops production and either redeploys or sell off its assets. A change in ownership that does not entail stopping production is not considered as exit. Exit barriers can keep a firm in the market. Firms will enter the industry as long as the market price exceeds the minimum level of average.

Case Study: Virgin Blue (1)

Virgin Blue, a discount carrier, began operations in September 2000, in Australia. It sets up operations in a smaller Australian city, Brisbane, rather than Sydney-Melbourne, which is dominated by Qantas (and sometime Ansett, before its bankruptcy).

Case Study: Virgin Blue (2)

It operated only one model of airplanethe Boeing 737, resulting in simpler and less expensive maintenance. It ordered newer models of the aircraft, like the Boeing 737-700, which were more fuel-efficient than earlier versions of the aircraft. It did not make seat assignments

Case Study: Virgin Blue (3)

Tickets did not include meals, but food was made available to passengers inflight if they decided to purchase it. Only time will tell whether Virgin Blue can maintain its current growth, or whether Qantas or Ansett will risk a costly war to try to drive Virgin from the market. What about the current situation?