Market Entry Rationale

James patel
Economic Strategy
MP3
What is the role of timing in deciding to enter or exit a market? Firms decide to enter a market based on current and historical information, but time lags can change the economic environment. What are the risks a firm faces in deciding to enter or exit a market? Again, use examples from current economic events or events. Apply your statements to these events. Timing is an essential factor in making entrance and exit market decisions; this is due to the fact that profitable markets that yield high returns will draw firms while constant losses prompts firms to pursue exit strategies. Consequently, a firm needs to monitor industry trends to enter and exit at a time advantageous to their operations (when profits are expected.) Entrance and exit decisions require evaluating several factors that determine both the risk of new entrants and potential reasons to exit a market. These include economies of scale, product differentiation, capital requirements, access to distribution channels and cost disadvantages independent of scale. Economies of scale reduce the per-unit cost of a product as the number of units being produced increases. This is a common barrier in larger industries--. If a new competitor wanted these markets, the company would have to enter the market producing a large quantity at the same low price as competitors or the company would have to compete with a cost disadvantage and little chance at being profitable. Because economies of scale exist in the industry, it deters smaller competitors from entering into the market while encouraging competitors that cannot produce an acceptable quantity to exit the market. This is true for the soybean industry which maintains an oligopoly market structure with Mosanto setting a production standard that smaller firms are unable to emulate. In addition to economy of scale, product differentiation is another entrance/ exit factor in any major industry. There are many competitors that have remarkably identifiable brand names and customer loyalty due to quality (Rolex, BMW etc.). Consider some of the strongest competitors in the chocolate industry --Hershey Foods Corporation, Farley Candy Company, World’s Finest Chocolate, Inc., Merckens Chocolate Company, and Ghirardelli Chocolate Company--these companies have established brand names and customer loyalty, which creates a considerable entry barrier for new companies. A new company must increase spending to overcome the reputation and large customer base of the existing companies. Conversely, an established company that utilizes its assets to differentiate a product cannot exit the industry due to increased investment in specialized assets, which cannot be sold until the venture has failed completely. In making these market decisions, a firm must also analyze the presence of large capital requirements that are required in their prospective industry. Large capital requirements create an entry barrier for new entrants because it requires the company to have a significant source of capital to get started. The large capital investment entails costs for items such as production equipment, labor, raw materials, and research and development. In addition to these costs, a new company would need to spend a large amount of money on advertising and marketing to overcome product differentiation. Consequently a company that enters an industry requiring significant start-up capital will only exit if their operation is about to falter and are more likely to withstand losses due to the sizable nature of their initial investment. Additionally, the expense and network that must be present to obtain access to distribution channels should also be factored in to the decision-making process. A new company must acquire distribution channels for their products. This requires the company to create a network of buyers, which is time and money intensive. Furthermore, the new companies have to compete for shelf space in stores with the larger players in the industry that have existing distribution channels are already established. This also creates an exit barrier as established companies are reluctant to relinquish the network they have devoted ample time to develop. Cost disadvantages independent of scale such as patents, favorable access to raw materials, government subsidies and polices create barriers of entry for new companies. For example, if an industry produces food for the end consumer, companies in the industry must meet several government standards. For these companies, the Food and Drug Administration is the government agency that sets the guidelines and regulations. These regulations increase barrier to entry for new companies such industries while making it difficult for current companies that have been approved to exit a regulated industry. A current example of this is the banking industry which, due to the subprime mortgage crisis, is facing increased control and regulation by the Federal Government making it virtually impossible for new entrants and very difficult for established institutions to exit this volatile market.
References
Besanko, D.; Dranove, D,; Shanley, M, & Schaefer, S. (2010). Economics of strategy, (5th ed). Hoboken, NJ: Wiley.
Coulter, M. (2010). Strategic Management in Action. Upper Saddle River: Prentice Hall.

References: Besanko, D.; Dranove, D,; Shanley, M, & Schaefer, S. (2010). Economics of strategy, (5th ed). Hoboken, NJ: Wiley. Coulter, M. (2010). Strategic Management in Action. Upper Saddle River: Prentice Hall.