New entrants in many industries are able to challenge the business
of historically dominant firms. In many markets, dominant players
have pursued pricing and service policies that, although once
highly effective, now make their markets attractive targets for
aggressive new entrants. The entrants' strategies rely on lower
overhead costs, new technologies, alternative distribution channels,
and the active targeting of profitable customers. Several factors
will make it possible for entrants to attack dominant players;
simplistic historical pricing mistakes or policies of promising
or providing universal service will make it attractive for new
entrants to attack. Restrictions on the flexibility of incumbents--both
externally and internally imposed--may make it difficult for dominant
players to defend themselves effectively against attack by more
flexible entrants with cream-skimming strategies and newer technology.
We develop a set of alternatives for incumbent firms facing increasing
"contestability" in their markets and the threat of
agile entrants.
Key words and phrases: banking , contestability , death spiral , dominant firms , insurance , market entry , market segmentation , strategic use of information