How can companies discourage potential competitors from entering their field?

Entry diversion: a new mechanism for industry mobility

This video is based on research by Bilgehan Uzunca and Bruno Cassiman

Established firms in an industry are constantly threatened by new companies, firms and business. How can companies discourage potential competitors from entering their field?

In his research findings, Esade Professor Bilgehan Uzunca reveals a new mechanism to deter potential competitors: entry diversion. Rather than deterring potential competitors from the industry entirely, established firms can invest in entry barriers to divert or re-direct their competitors towards entering other submarkets in the same industry.

Original research publication: Uzunca, B & Cassiman, B. Entry diversion: Deterrence by diverting submarket entry, Strategic Management Journal (2020)

VIDEO TRANSCRIPT

Established firms in an industry are constantly threatened by new companies, firms and business that want to enter into competition. The threat of entry is such that typically established firms feel the need to protect their profits by investing in strategic “entry deterring actions” to discourage the new players to enter into their field. Among the traditional entry barrier actions, you may find:

  1. Established brand identities
  2. Limit pricing
  3. Excess capacity
  4. Exclusive distributor agreements
  5. Intellectual property/patents
  6. Economies of scale
  7. Industry-specific barriers to entry

However, there is no proof that investing in deterring actions is effective. In reality, entry hardly stops behind an industry-level barrier.

Therefore, what would be a better strategy for deterring potential competitors?

This research tells us that rather than deterring potential competitors from the industry entirely, established firms can invest in entry barriers to divert or re-direct them into entering other submarkets in the same industry!

Submarkets are specialised product clusters where the technologies they use, the product/services they offer, and the customer segments they target, matters.

Entry diversion is this new mechanism where it is more feasible for both established firms and potential competitors:

  • It is cheaper for an established firm to invest in diverting actions rather than to block them entirely from the industry.
  • New players will still be able to enter other submarkets–where they are more likely to succeed–in the industry (rather than stay out of the industry entirely).

Entry diversion allows us to reinterpret how entry accommodation happens, even when entry is accommodated into the industry, it might be diverted towards different submarkets.

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