Market Entry Strategy

20.12.2020 | Business Know-How, Featured, Ideas & Models

For start-ups, opening up a market often turns out to be very difficult because there are many market entry barriers to overcome. Market entry barriers are factors that prevent or at least impede or slow down the goal of a successful and at the same time profitable market entry. Accordingly, they influence the long-term prospects on the market and can be subdivided as follows:

  • Institutional  barriers to entry: This refers to trade barriers or existing structures that are in the hands of competing producers or the state. These can basically be distinguished from each other as follows:

    • Size advantages: Economies of scale in operations discourage companies from potential market entry, as they would be forced to enter immediately with large volumes or assume a cost disadvantage. Economies of scale in production and research, as well as in distribution and financing, can be the barriers to entry in almost all areas of corporate activity.
    • Product differentiation: Bringing new products to market means breaking the brand loyalty of customers to existing products. This requires organizations considering market entry to invest heavily, especially in advertising, to achieve brand identification.
    • Capital requirements: Another barrier to market entry is the need to invest large amounts in order to establish oneself in an industry. This applies in particular to investments in unrecoverable expenses for entry advertising, research and development, or absorbing start-up losses.
    • Size-independent cost disadvantages: The existing companies on the market possess cost advantages which are unavailable to the new supplier, regardless of its size. These advantages relate to the gained experience, the proprietary technologies that can be legally protected by patents, access to information, government subsidies or even favored locations.
    • Access to distribution channels: The new supplier must carefully consider their potential distribution channels for its products. In many industries, these channels can be significantly limited, for example the standard retail space, so this can represent a major hurdle for the organization.
    • Government intervention: The state can restrict entry to an industry or even make it impossible with control mechanisms such as licenses, regulations, and safety rules, as well as by restricting access to raw materials.
  • Behavioral barriers to entry: They result from the behavior of customers and are mostly based on

    • perception,
    • preferences,
    • habits.
  • Intra-company barriers to entry: These have to do within one’s own company, for example

    • inaccurate knowledge of the market,
    • lack of business management experience,
    • lack of technical know-how.

When defining your corporate strategy, you need to consider how you will overcome the market entry barriers that apply to you in order to achieve your goals. Depending on your thrust, there are various options available to you for this purpose. Which one makes sense depends on whether they are aimed at your targeted customers (buyers), your competitors or your sales partners (sales intermediaries) and at what point in time you plan to enter the market.

Customer-oriented strategies

First of all, you should align your strategy according to your customers, whereby the following types of strategy can basically be distinguished:

Competitive strategies

While customer-oriented strategies aim to build up or secure competitive advantages with customers, competition-oriented strategies deal with the differentiation and future behavior of the company vis-à-vis its competitors. These can be classified as follows:

  • Collaboration Strategy: This is pursued by companies that do not have the resources to face competition and recognize that a higher return can be achieved by working together. Cooperation is pursued in order to be able to meet the demands of the market together, to exploit synergy effects (cost degression) or to avoid a competitive conflict.

  • Conflict strategy: Aggressive behavior is pursued toward competitors. The aim of a conflict strategy is to gain market share with the help of comparative advertising or low prices and ultimately to take over market leadership. In its most aggressive form, the goal is to drive competitors out of the market.

  • Evasion strategy: The aim is to withstand competitive pressure through innovative products that are difficult to imitate. The aim is to create isolated market segments, at least temporarily, in which market leadership can be achieved and defended for as long as possible. These strategies are successful if market entry barriers can be built up at an early stage and specialization effects can be achieved.

  • Adaption strategy: The company’s own behavior is adapted to the actions of competitors in order to maintain its current market position. However, this defensive behavior is only advisable in markets where there is little or no competitive pressure.

Intermediary-oriented strategies

Since retail is of paramount importance for the sale of products, a behavioral strategy must be defined not only vis-à-vis consumers and competitors, but also vis-à-vis sales intermediaries. First of all, a distinction can be made between push and pull strategies:

  • Push strategy:The company tries to directly influence retailers to list its products, i.e. to include them in the sales program.

  • Pull strategy: In doing so, the company primarily tries to create demand among consumers, for example through intensive advertising measures. This demand should be so high that retailers feel compelled to include the company’s product in question in their range.

However, only very few companies have the power to actually implement these two strategies. Instead, in most cases it is advisable not to underestimate the bargaining power of retailers and to respond appropriately to this. Several strategic approaches are available for this purpose (see Fig. 2.35).

  • Cooperation: Within the framework of intensive cooperation between producer and retailer, the behavior of both is to be coordinated in the sense of a partnership in such a way that both achieve the maximum profit.

  • Bypass: The company deliberately refrains from cooperating with retailers and tries to organize retail tasks itself, for example through direct sales or online stores.

  • Conflict: The power position as well as the demands of the trade are not considered. The manufacturer strives for a dominant power position, through which the trade is to be forced to adapt to the demands of the manufacturer.

  • Adaptation strategy: The company accepts the power position of retailers and responds to their demands to prevent delisting.

Timing Strategies

Finally, the strategy for the timing of the market entry must be defined

Choosing the right entry strategy

If you want to offer a new product to the market with a newly established company, you typically have to overcome the following difficulties:

  • Your company does not yet exist or has only recently been founded (liability of newness). Therefore, you do not yet have any well-founded company data on which to base your decisions.

  • You also do not yet have a long company history. As a result, you are not yet known in the market and you lack reference customers to whom you can refer in the context of customer acquisition.
  • The decision-making processes in the company are primarily shaped by you as a person. This means that the success of the company depends to an above-average extent on your abilities, your drive and your presence.
  • Your company is exposed to a dynamic, constantly changing environment and exhibits disproportionate, quantitative growth, especially at the beginning. Corresponding special features and design options in early development often go hand in hand with growth-related crisis phenomena (liability of adolescence).

  • They have few resources at their disposal, for example raw materials, machines, personnel and capital, so that bottlenecks can quickly occur (liability of smallness).

  • High start-up costs are required to set up production, for example, to purchase machinery, set up office space and business premises, and increase awareness, for example, through advertising.
  • Your company is not yet making a profit or generating sales, so there is a risk that it will become over-indebted or insolvent after a certain period of time.
  • Possibly a financing gap is closed by external capital providers, but they exert significant influence on your company.

Given these difficulties, your ability to define and implement an effective marketing strategy is usually limited. However, you also do not have to consider existing products -especially possible cannibalization effects by the new product- or sensitivities of employees, distributors and competitors. The marketing of start-up companies (entrepreneurial marketing) differs significantly from that of existing companies: