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Customer Ties and Status Help Firms Entering New Markets

10/17/2003 --

ANN ARBOR, Mich.---Market relationships and social networks can play an important role in helping firms gain access to customers in newly entered markets, according to a new study by Michael Jensen of the University of Michigan Business School.

Jensen, assistant professor of corporate strategy and international business, suggests that a buyer and supplier who have existing ties in a current, or ¿old,¿ market are more likely to form a subsequent relationship with each other upon entering a ¿new¿ market.

Similarly, a buyer is more likely to form a relationship with a supplier in a new market if the supplier holds a higher, rather than lower, status position in the old market.

In his study, Jensen examines the entry of commercial banks into the investment banking market from 1991 to 1997 and assesses the relative value of network resources, describing how they interact in a competitive business environment.

¿The results suggest that firms must evaluate their current network resources to determine how those resources can be leveraged in new markets before they decide to enter them,¿ Jensen says.

His research shows that commercial banks that have existing market relationships with commercial-banking customers, or that hold prominent positions in the network of competing firms in the commercial-banking sector, are more likely to become lead managers on bond issues when they enter investment banking.

The study suggests that network resources are valuable, and can be deployed outside the market in which they originate---representing an important base for market entry that has been overlooked in prior research.

¿Firms often participate simultaneously in multiple networks and frequently enter new markets dominated by completely different networks,¿ Jensen says. ¿These networks can influence the structure and level of competition, which have the potential to affect the rate of entry and the performance of individual firms after entry.¿

The value of market relationships increases as trust develops between partners, Jensen says. Firms often prefer to repeat past relationships because this enables them to share resources and information while limiting their search for new partners and escalating their commitment to past partners. Thus, relationships based in one market may be valuable in another market because they enable firms to work more effectively together.

Network status, he adds, is also a potentially valuable resource in market entry because it functions as a market signal that firms can use to infer the value of establishing exchange relationships with entering firms when more direct market information is unavailable, uncertain or ambiguous. The advantages of occupying a particular status position in one market often can be carried over into another market to provide value there as well.

In short, leveraging old-market network resources into new markets helps firms facilitate their entry by either reducing the marketing uncertainty or increasing the value of their exchanges with customers.

Jensen examines the complex interaction between market relationships and network status, and concludes that these two network resources are substitutable but not additive. For example, a commercial bank¿s network status in the old or new market decreases in importance as the bank leverages its commercial banking connections to gain access to investment banking clients and then uses these new relationships to reduce the status advantages of the incumbent investment banks.

¿The relative appropriateness of different network strategies may change over time,¿ Jensen says. ¿Network status works primarily through reducing market uncertainty, whereas market relationships work mainly by increasing exchange value. So, network status may be viewed as a means of gaining the new market relationships that allow trust to develop between banks and their customers, which in turn reduces the importance of status in subsequent exchanges.¿

For more information, contact:
Bernie DeGroat
Phone: 734.936.1015 or 734.647.1847