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Michael Jensen
  Michael Jensen

Dominant Firms Use Inclusive and Exclusive Strategies to Manage Competition

11/2/2005 --

Incumbent firms use strategic affiliations to reduce or neutralize threats to their favorable market positions posed by new firms entering the marketplace.

ANN ARBOR, Mich.—A recent study of the entry of commercial banks into the U.S. investment-banking industry following deregulation suggests that dominant firms strategically use affiliations to manage competition from new entrants to the marketplace and to protect the industry status quo.

The incumbents' choice of partners is greatly influenced by the amount of perceived threat the newcomers pose to their favorable market positions and current ways of doing business.

Michael Jensen, assistant professor of strategy at the University of Michigan's Stephen M. Ross School of Business, reports that commercial banks were included in collaborative relationships when they gained only small market shares and, therefore, posed little threat to the dominant investment banks. On the other hand, commercial banks faced exclusion from valuable underwriting affiliations when their market shares grew beyond a certain threshold and proved threatening to the incumbent firms.

Regardless of the market shares of the entering firms, however, the dominant investment banks were most likely to react by using cooperative and competitive affiliation strategies because they had the most to lose from the market entry of new competitors.

"An exclusive strategy implies that the incumbent firms avoid collaborating with the entering firms, thus making it more difficult for those firms to gain experience and legitimacy in the new market," Jensen said. "An inclusive strategy, in contrast, implies that incumbent firms favor collaborations with the entering firms because those firms possess complementary resources or because collaborations co-opt the newcomers into existing business norms and practices. The more the entering firms threaten the dominant incumbent firms, the greater the likelihood they will experience exclusion."

Jensen bases his findings on an analysis of changes that occurred in the investment-banking industry between 1991 and 1997. The industry was deregulated in 1989, allowing for the gradual market entry of commercial banks, which threatened to take market shares away from the dominant investment banks, increase competition and move the industry toward universal banking.

The incumbents, in turn, faced the decision of whether to engage the incoming commercial banks, rather than other incumbent investment banks, as co-managers in strategic alliances, underwriting syndicates and research consortia. By affiliating with commercial banks, dominant investment banks ran the risk of legitimizing future competitors, but by spurning such collaborations, they lost access to new financial resources and additional customers.

"The importance of inter-firm relationships as a response to market entry extends beyond merely managing competitive intensity to reproducing advantageous industry structures," Jensen said. "This study illustrates how incumbent firms attempt to prevent or delay moving to new industry logics by strategizing with whom they collaborate."

"Understanding market entry is important for entering and incumbent firms. Entering managers may underestimate how difficult it is to move up the market hierarchy if they depend on collaborations with incumbent firms to expand beyond the current customers they brought from their old market to new customers."

Written by Claudia Capos

For more information, contact:
Bernie DeGroat
Phone: (734) 936-1015 or 647-1847