The impact of barriers on market strategy

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Barriers are obstacles preventing entrant firm from being established in a particular market (Porter, 1980). Important barriers to entry. There are two main categories of barriers to entry, which are exogenous and endogenous (Shepherd, 1979). Exogenous barriers are those external market conditions which firm cannot control. However, endogenous barriers are created by the entrants firm through their market strategies and their competitive behavior.

Exogenous Barriers

First of all, there are cost advantages which allow the incumbents to benefit from the variable cost advantages which therefore forcing the entrant firm to achieve the scale effects and low costs.

Secondly, the product differentiation (Pehrsson,2004 ; Schlegelmilch and Ambos, 2004) which creates the customer loyalties and influence the relation between buyers and sellers. It also accompanying obstacles for the entrant trying to access the new customers (Johansson and Elg,2002).

Another important barrier is the extensive need for the capital in order to be successfully established in the market, as it is valid for the customer's switching costs (Gruca and Sudharshan, 1995 ; Karakaya and Stahl, 1989) This barrier is due to the costs that any potential customer faces trying to switch from one supplier to another. For example, costs may be allocated to employee retraining or changes in the product design.

The best allocation distribution channel is not easy to find by the new entrant firm or might be controlled by the competitors, creating customer access obstacles. ( Han et al.,2001; Pehrsson,2004). Other barriers may include the incumbents' brand loyalty ( Krouse, 1984)

Other barriers includes incumbent's brand loyalty, cost independent of scale, government policy, number of competitors, seller concentration and need for research and development, as well as, costs for adaptating technology to local market conditions.

Endogenous barriers

This barrier occurred by the competitive behavior in accordance with their market strategies. The important one may originate from the excess capacity. This is accompanied by the increase in pricing resulting in pricing strategy or promotional activity.

It highlighted in Karakaya and Stahl, 1989 that the incumbents may deter the entry of newcomers simply by creating expectations of fear for the incumbent's post-entry reaction.

According to the study of Gable et al (1995) the new entrants frequently need the extensive advertising and sales promotion. This happened vary depend on the degree of product and service differentiation attributed to the incumbent.

The impact of the barriers on strategy

Prior study ( Bonardi, 1999; Delmas and Tokat,2005 ; Haveman,1993; Pehrsson, 2007; Robinson and McDougall, 2001) had concluded the impact of the barriers to entry into two strategy components ,which are, product/market scope and the product differentiation. Pehrsson ( 2007 ) found that the impact of barriers was due to the breadth of the product/market scope of the firms, therefore the obstacles to access customers affect performance in a negative way if the firm has narrow product/market scope. As broad product/market scope access different customer types and delivered products thus more degrees of freedom in choosing the customers.

Robinson and Mcdougall (2001) studies the similar pattern of three barriers, economies of scale, capital need and product differentation. He concluded that there are negative effect of the capital need on return on sales was smaller for ventures pursuing a broad scope. As a result, the negative effects of all barriers were smaller for broad-scope ventures as regards shareholder wealth.

Change in government policy, such as, deregulation can stimulate the adjustments of the product/market scope of the incumbent. Pehrsson ( 2001) found that choices of customers made by both incumbents and entrant firms followed deregulations in the British and Swedish telecommunications industries.

As regards the product differentiation, Han et al. (2001) and Salavou (2004) found that market entrants' innovativeness reduced the impact of capital need. A firm's innovativeness reflects its way of pursuing product differentiation relative to their competitors ( Kustin, 2004).

The study of the literature also addresses the changes in barriers to entry due to deregulation and their effects on incumbents' differentiation. Russo (2001) found that technology differentiation was a common effect of the deregulation in the utility industry. Delmas et al. (2007) also advocate that differentiation is common in industries that is subject to deregulation.

First Mover Advantages

Makadok (1998) and Pehrsson (2004) highlighted that the entry timing advantages of the first and early-movers seem to be resistant to erosion by the entry of additional competitors in a market. Once the new competitor has entered the market, it is difficult to match the performance of the incumbent due to extensive customer loyalties established previously This created severe obstacles for the entrant firm to customer access.

Researchers found that switching costs of potential customers is perceived as more important for late entry than early entry in both industrial goods and consumer goods market. This supports the fact that the late market entrants will face the extensive obstacles to access customers due to the previous loyalties betweens the sellers and buyers.

Mode of Entry into China

China has now become the most important focus of the international investment. Many multinational corporations (MNCs) target such a large domestic market of China through the direct foreign investment (DFI). However there might be some issues which may occurs such as, cultural distance from China, questions of how to enter the Chinese market and how to choose the entry modes.

Entry modes are defined as the forms of capital participation in international enterprises. They are modes in which MNCs enter the intended host country through the investment. In term of property rights, entry mode is the ownership structure of a foreign subsidiary. There are two main entry modes; wholly-owned subsidiary and joint venture.

Usually, MNCs enter the host country through acquisition of an existing enterprises or setting up a new enterprise in the host country.

Transaction cost theory

Many literature in the past use the transaction cost theory to explain MNCs' international investment activities, including their entry mode choice.

There are three primary factors affecting MNCs' entry mode in the transaction cost framework. These include sociocultural distance between MNCs' home countries and the host country, technological nature of investment projects and the institutional and business environments and policies of the hose country.

Sociocultural distance

It refers to the difference in social culture between home and host countries. It is often argued within the transaction cost framework that the greater the sociocultural distance, the lower the degree of equity participation that MNC should aim for. As sociocultural distance creates enormous information needs, thus high costs. First of all, unfamiliar cultural environment with little knowledge of the local market and business practice could prevent MNCs to be able to transfer home technologies and management techniques to the new environment. This can be overcome by forming joint ventures with local firms thus the management can be turned partially over to the local partners, who generally know the market better. (Hymer,1976; Root,1987)

Secondly, when operating in a foreign culture at a distance increases business uncertainty and unpredictability, which could result in smaller investment involvement and smaller equity share in a joint venture.