Posted in Marketing and Strategy Terms, Total Reads: 876
Definition: Deterrence Strategy
Deterrence strategy is the strategic action undertaken by any already existing group or business such that the potential entrants/ new firms are discouraged from entering into the prevailing competitive scenario. The concept of deterrence strategy is predominantly used in marketing scenario where an existing business discourages the entrants from the market by undertaking deterrent strategies.
These strategies aim to act as barriers to entry and such hostile actions often include product differentiation, predatory pricing and expansion of capacity to accommodate lower production cost through economies of scale. Hence, the new entrants are thoroughly deterred in this manner since they do not have an established customer base and source of finance.
For e.g.: Let suppose ABC company is an old player and CDF is a potential entrant. Let us examine a few deterrent strategic scenarios: case 1: ABC is a monopoly producer of goods and hence, it enjoys a supernormal benefit of having entire customer base and hence, the profits. Once it sees a potential entry, it can deter CDF’s entry by limit pricing by which it produces a higher quantity at a lower rate as compared to the monopoly level. Hence, it becomes infeasible for CDF to enter the market. Case 2: ABC being an existing player in the market has a first mover advantage and hence, can influence the entry of the potential entrant CDF. Here, we can safely assume that CDF can only make assumptions about ABC’s cost structure. Hence, ABC can deter the only means of entry of CDF by charging a price much lesser than the monopoly level and thus, CDF is deterred from entry in a number of similar markets at low cost since it would be highly infeasible for new company to do so. This can be compared to the war between British airways and virgin Atlantic over the transatlantic route.