Question

What is the most favorable corporate strategy option to enter an industry that is protected by high barriers to entry? Why?

Answer 1

Before entering any such market a deep analysis of the market structure and scope should be studied. Generally, when an industry is being protected by high barriers to entry deals with a less differentiated product, mass marketing is possible and in such industry, demand is price elastic. Price elasticity is said to be the effect of a price change or a change in the quantity supplied on the demand for a product or service.

The most favourable strategy followed by corporates under such circumstances is "Penetrating Pricing".

Penetrating pricing is entering a market with a very low price initially to cater to the customers . This low pricing helps a new product or service penetrate the market and attract customers away from competitors. When penetration pricing is done at an extreme level it is being called predatory pricing. It is also known as undercutting of prices of a product and service.

It is very common and usual for a new entrant to use a penetration pricing strategy to compete efficiently in the marketplace with a higher barrier to entry. Price is said to be one of the easiest ways to differentiate new entry or product among existing market players. Advantages of penetrating pricing:

1)Helps to Capture market share

2)Helps in Creation of  brand loyalty

3)Switching of customers from competitors become easy as low price attracts the buyers.

4)Low pricing helps to create demand and utilize economies of scale

5)Fighting with competitors and becoming one of the competitors is possible.

Examples of such penetrating pricing is Smartphone market,utility providers.