By Joel Pereyi
Gokada and MAX missed a big opportunity!
Africa’s mobility sector according to Adetayo Bamiduro, the cofounder of MAX, is worth 100 billion USD.
Being the first tech startups into Nigeria’s bike mobility space, they could have owned and dominated that space before new entrants make entry into the market.
The growth strategy of these 2 brands is the same: Growth through Entry. This is the Growth Strategy most companies use.
In Growth through Entry, we have pre-entry strategies and post-entry strategies. Pre-entry strategies are strategies you use before new entrants come into your market, while post-entry strategies are those you use after they’ve entered.
Under Pre-entry strategies, we have: Deterrence Strategies: strategies you use to increase costs and risks to prevent new entrants from entering your market and Accommodation Strategies: strategies you use to soften competition after they have entered your market.
The focus is on Deterrence Strategies, so I will be sharing 4 Deterrence Strategies businesses all over the world use to defend their market positions and make it uneasy for new entrants to enter their space while they grow their market share and bottomline.
They Erect Structural Barriers
This can be done through licensing, regulation, etc. Most companies work with regulatory authorities or government to achieve this.
At major airports like Heathrow and Gatwick for example, landing slots are all taken by the main airline carriers. So, if you plan to set up a business flying London to New York, you will find it difficult to get access to a popular airport. This singular move helps the big airlines defend their market positions.
Another example are taxi cabs in New York City. To legally operate a taxi in NYC, a taxi cab must have a certificate called a “medallion.” Medallions are issued by the government. They are very limited in supply and they are not very easy to acquire.
They Reduce the Quality of Information on Costs and Demand
This move is also known as Signal Jamming.
Big investment decisions are hardly made on guesses or speculations. They are most often than not backed by data. And no matter how educated a guess is, it is what it is: a guess!
Signal Jamming is simply a way to keep those who plan to enter a new market guessing. They won’t know what your cost structure is. They won’t know for sure whether or not you’re profitable. And this will make it riskier for them to enter your market.
They Raise “Factor Costs”
Factor Costs represents the entire cost of each individual item needed to run a business or produce a product. They cover the costs of getting products, branding, marketing, etc. Beer brands use this tactic a lot. Sometimes, they invest heavily in advertising not necessarily for awareness, but to raise factor costs and scare new entrants.
I’m not sure how effective this would have been for Gokada or MAX considering the fact that the new entrants into their space have very heavy war chests. But that regardless, it is a tested and trusted Deterrence Pre-entry Growth through Entry strategy.
They Use Limit Pricing
Limit pricing is when a company sets prices sufficiently low to the point where a new firm will not be able to make any profit on entering the market. It is keeping pricing low as a deterrent to new entrants. The only caveat of Limit Pricing is that it is usually advantageous if and only if the firm setting prices low have true cost advantage.
When deterrence strategies are impossible or too costly, companies use accommodation strategies. Any new entrant into a new market will do either of these 3 things: Fight, Cooperate, or Restructure and Change the game. And this is why old players need to have post-entry strategies that will cover their bases on theses 3 fronts on standby.
Markets with high entry barriers usually have few players and thus high profit margins. While markets with low entry barriers have lots of players and thus low profit margins. So as first movers, you play a key role in determining the kind of sector you will be playing in in years to come.