Market Dominance as a Precursor of Market Failure: Emerging ...

Proceedings of the 29th Annual Hawaii International

Conference on System Sciences - 1996

Market Dominance as a Precursor of Market Failure: Emerging Technologies and the Competitive Advantage of New Entrants Eric K. Clemons, David C. Croson, and Bruce W. Weber Operations and Information Management Department The Wharton School, University of Pennsylvania threats,Indeed, we arguedthat a phenomenoncalled death spiral could result.

Abstract Dominant players in a number of industries have pursued policies that may once have been effective, but that now make their markets attractivetargetsfor

New Entrants and Death Spiral Our previous research suggests that in a wide range of ndustries, dominant players enjoying near-monopoly positions ‘but often required to provide universal access to their services) can be seriously damaged by new entrants “cream skimming’ -- seeking only customers in the most attractive segments of the market (Clemons and Weber, 1994). An nsurance carrier, USAA, is able to cream-skim through its access to a preferred risk pool, namely, retired military officers and their families. Because of behavioral and lifestyle :endencies, this group is statistically lower risk and can Jrofiiably be offered lower rates.

new entrants.The strategiesof new entrantsrely on lower overhead costs, new technologies, and alternative distribution channels, and the active targeting of profitable customers.Dominant firms will struggle to respond to the threats, and may find that their existing resources,customers,and contractslim it their ability to react.

1.

Introduction

The mere fact that Blue Cross allows its customers tc :hoose their doctors, and to continue to use their curreni ohysicians, while most HMOs do not, creates an advantage ‘or HMOs: patients whose medical needs require them to see [heir health care providers often are the most likely to have developed professional relationships with their current doctors, and are most likely to resist changing physicians. Thus, Blue Cross will systematically retain patients who require regular medical care, while HMOs will systematically attract more o the patients who require fewer services, and are lesz expensive to serve. HMOs further attract their targeted1 cu&omers through more comprehensive “wellness” coverage. To respond, Blue Cross must raise premiums, increasing its deductibles, or reducing coverage. These actions only accelerate the loss of attractive customer segments to HMOS.

Information technology (IT) makes it possibleto segment customers accurately,identifying those that make significant contributions to profitability and those from whom revenuescannot cover expenses. New entrantsin many industriesreadily apply IT and data-basedmarketing techniquesto attract the most profitable market segments. After a new entrant’s attack, the established,historically dominant provider finds its customers base eroded and its profitability reduced. This paper will describe the problem and explore the responsesavailableto establishedfirms.

Moreover, emerging IT applications will enable HMOs to target their selected patients more accurately, DlaCinQ even greater pressure on existina insurance carriers. If these existing carriers naively increase rates further, attempting to preserve their profitability, they will merely accelerate their loss of attractive market share, and create additional opportunities for competitors to cream-skim, placing still more pressure on their margins. We have termed such self-reinforcing collapse of a breviouslv dominant blaver. “death soiral.” I

We have argued that dominant players have frequently relied upon a simple practice of uniform averagepricing, even in the presenceof a customer base for which they incur widely varied costs of servide. We have shown that this simplistic pricing

strategycreatesa market that attractsnew entrants with more sophisticatedpricing strategies,and that the loss of market shareto these new entrantscan createa self-reinforcing loss of additional market share. We named this phenomenon death spiral. Dominant players a adopting similar segment-basedstrategies and continuing in average cost pricing while new entrants pursue targeted strategies, face growing

Often, the establishedplayers have engagedin average cost pricing; this can provide comfortable profitability when their customers are representative of the entire market and when competitors are not cream-skimming. New entrants, however, are 262

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Proceedings of the 1996 Hawaii International Conference on System Sciences (HICSS-29) 1060-3425/96 $10.00 © 1996 IEEE


frequently able to capture market share by seeking only the most attractive customersand by offering them preferential pricing, thus damaging the establishedplayers. Ultimately, the use of average cost pricing on the remaining, more costly-to-serve, customers requires the establishedplayer to raise prices, driving away more accounts. Without a responseto the cream-skimmingnew entrants,the resultis the demiseof the establishedplayer. The threatof “deathspiral”is particularlyevident in the credit card industry and in insurance. Both industriesare mature,and have customersthat differ significantly in their profitability to the service provider. New entrants have priced offerings to attract certain profitable segments of the market, leaving the establishedplayers with less profitable customers. Credit cards. Credit card customerswith reliable incomesthat borrow actively on the card have aboveaverageprofitability. Tenured school teachershave secureincomesand a low risk of defaulting,but may earnlessin the summermonths,leadingto borrowing on the card. Using demographicand predictivedata, card issuerssuch as Signet Bank have targetedlow risk, high income borrowers,and have attractedthem away from establishedbank card issuerswith lower annual fees and reduced interest rates. The establishedplayers are left with fewer profitable accounts, and unless they respond may find themselvesretainingonly the least attractivesegments to serve.


We have been surprisedat how widespreadthe cream-skimming/death spiral phenomenonappearsto be, and even more surprisedat how rarely dominant playersseemableto developeffectiveresponses.This paperdetailsthe factorsthat must be presentfor death spiralto ensue,the role of IT in enablingor facilitating eachof them and the conditionsunder which it may be impossiblefor the incumbentto respond. In brief, the widespreadappearanceof death spiral no longer appearssurprising, nor is incumbents’difficulty in counteringtheir smaller attackers.Section2 provides an exampleof a new entrantsuccessfullyattackingthe previouslydominantplayer. Section 3 examinesthe conditionsunder which this attack is easy, attractive, and likely to succeed, and explores the role of information technology. Section 4 provides some specific case examples of such successful attacks enabledby informationtechnologyand higlhlights the role of IT. Section5 concludesthe paperby sketching out strategiesavailableto defenders. 2.

Case Example: USWest

Providing phone and telecoms servicesin both urbanand rural regionshighlights the vulnerabilityof establishedfnms facing the threatof cream-skimming new entrants, Cities, such as Denver, are:attracting aggressivenew providersof phone and telecommunicationsservices.(Lower Manhattan alreadyhas five competitorsoffering local phone service.:)Denver’s population density and commercial activities make customers there lower cost to serve than those elsewhere in Colorado. With uniform pricing imposedby stateregulators,the Denvercustomersare the sourceof most of USWest’s profits in the state. The new providers can undercut USWest’s rates in Denverandwill gain marketsharethere.

Insurancerisks and claims experience vary across customersand customer segments[6]. DirectLine, a subsidiaryof Royal Bank of Scotland, hasidentified severallower-risk segmentsof the U.K. propertyand casualtyinsurancemarket. By avoiding segmentsof the market likely to generateclaims e.g., single, male car drivers under age 28 - lower prices can be offered. DimctLine chooses its prospective customers and solicits them directly through the mail with marketing materials that highlight substantial reduction in premiums from switching. Insurance.

USWest faces the dilemma of either matching the reducedratesof their new rivals, or losing what is profitable market share for them. Historically, USWesthasusedthe profits from Denverto subsidize the rest of Colorado,where costs are higher. In fact, new attackerscanbe the bw price entrantseven when

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Exit and flexibility restrictions on dominant players - Regulatorsconcernedwith public welfare will thwart attempts by established players to withdrawal from unprofitable regions or eliminate serviceto costly-to-servemarket segments.

USWest is the low cost provider. The options opento USWest are: Cut prices in Denver while leaving rest of the state’s rate structure unchanged,undermining revenuesand profitability. Regulators, however, could pressure USWest to cut their ratesstatewidefor fairness.

Each of these factors - contestable markets, differential cost structure, flexibility restrictions - is generaland is affectedby information technology.

Lose share in Denver, and apply for rate increases elsewherein the state, creating the window for death spiral, Again, regulatorsmay choosenot to allow the increases.

3.1. Contestability Contestabilityis intensified by the winding down of regulatory monopolies by the emergenceof new, low-cost distribution channels,and by restrictions on repricing and on exiting certain segments of the market. Contestability is increased by the end of regulatorymonopoliesin many industries,and by new technologiesthat reduce the m inimum required scale to compete in an industry. In many cases, scale advantages enjoyed by larger firms have been eliminated through technology outsourcing or other new technologies. For instance, ATM, cable, and wireless technologies make it easy to be a targeted telco. Alternative electronic distribution channelsalso intensify differential cost structuresand contestability. Insurance policies for Royal Bank of Scotland’s DimctLine am marketed directly to selected householdswithout an agent or intermediaries. The cost advantagesenableDirectLine to further undercut the premiums charged by establishedplayers. Exit restrictionsare often imposed by regulatorsand public officials eager to maintain “fairly” priced telephone, banking and other services in all areas and to all customersegments. Dominant firms may not be able to cut back services to unprofitable segments or regions.

It appearsthat USWest’s existing market share, their investment in wire and switches, and regulatory obligations to serve its various customers “fairly” under its regulatorsconcept of fairness. Thesefactors present a significant barrier to stable, future profitability. In the long term, new entrantswill attack USWest’s most attractive market, using new technologies such as ATM, and switched video. Unlike the twisted pair copper wire and hierarchical switching structure owned by USWest, the new technologies are scaleableand open new routes and toll structures. 3.


Critical Factors and Strategic Responses

The prototypical problem facing dominant, established service providers with heterogeneous customershas three components: Newly contestable market - alternative providers are able to offer servicesto customers,who face little or no switching low costs. Historical average cost pricing in the presence of differential cost structure - Establishedplayersonce could set prices basedon the averagecost of serving a broad range of customers. This implied cross-subsidy (e.g., Denver phone customersrates subsidizebelowcost service to remote areas) has attracted new entrants to just those segmentsthat are now paying prices greaterthan thatjustified by costs,

3.2. Differential Costs The problems facing established players are heightenedby differential costs for serving market segments combined with “average cost” pricing policies that effectively over-charge attractive customers to cross-subsidize other customer

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segments.We now bluntly refer to average cost pricing as “simplistic historicalpricing errors”. Differential cost structures are generally compatible with average cost pricing only in the presenceof regulatorypolicy, or high cost of accurate information-baseddiscrimination among customers. Stockmarketssuchas the New York Stock Exchange (NYSE) are regulated by the SecuritiesExchange Commission(SEC) and provide a form of universal service,i.e., they executebuy and sell ordersfrom all traders [5]. Traditionally, Rule 390 has required Exchange member firms to bring their customers’ orderto the floor of an exchange.In recentyears,offexchange,third markets run by firms that are not membersof the NYSE have attractedorder flow by cutting and even rebating commissionson low-risk trades. Third marketdealers“profile”their orderflow to include only low-risk orders from uninformed investors. Third market dealers, by choosing the customers from whom they will accept orders, threatenthe averagecost pricing approachusedby the NYSE. Average cost pricing and the nondiscriminatoryorder handling (i.e., not attemptingto screen arriving orders by riskiness) at the NYSE becomeuntenableas the Exchangelosesmore small, low-risk orders, and as the costs associatedwith serving the remaining order flow increases,Raising ratesto reflect higher costswill, of course,only drive more ordersoff exchange. Insurance providers face differential costs in servingprospectivepolicy-holders[6]. Age, sex, and smoking habits are often usedto set premiums. Life insurancepolicies, however, are often sold without regard to other data that can further refme the classificationof an individuals level of risk. For instance,right-handedpeoplehave slightly higher life expectationthan lefties. No insurancecarrier known to us offers preferentialratesto righties,but onceone did so successfully,the remainingcarrierswould find a disproportionatenumber of the higher-risk, less profitableleft-handedcustomers. Often, established firms with heterogeneous customerbaseshave taken no actions to determine

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Conference on System Sciences -

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which customersare most expensiveto serve,or are the best revenueproducers. This createsa significant opportunityfor attackersto developpredictivemodels to direct targeted attacks on the most profitable segmentsof the market;theseattackers’models,while often less accurate than those establishedplayers could developto exploit their existing data advantage, are frequently far superior to the targeting mechanismsemployedby dominant firms [8]. Thus, the poor pricing structuresemployed by dominant playersoften createsconditionsthat encourageattack. When combinedwith easeof entry, dominantplayers without effectiveresponsesface deathspiral [4]. The next section explores conditions under which defendersmay fail to developeffectiveresponses. 3.3. Flexibility Restrictions Many traditionally dominant firms face restrictionson pricing and on market exit t.hatmake it difficult to retain profitability when faced with new, cream-skimming entrants. Moreover, in the absenceof flexibility, sunk costs such as local loop telephony equipment and switches in place become “stranded assets”with little value. Established firms facing more flexible entrants with new technologiesand new strategieshave little chanceto competeeffectively. Regulatory policies including restrictions on branchclosingsand mandateduniversalservicemake it difficult to scaleback unprofitable operationsand regions when a dominant firm faces a competitive threat. Legal contractsthat cannot be canceledor terminatedwithout cause (e.g., whole life insurance policies cannotbe repricedto existing policyholders) limit firms abilitiesto retrenchor repriceto eliminate cross-subsidization in their customerbase. Corporate governanceor culture (e.g., the NYSE takes all customer orders without distinction or price discrimination;the use of an agencysalesfoirceto sell insurancecannot easily be terminated) may restrict organizationsin responding to the threat of death spiralcausedby cream-skimmingnew entrants.


The information infrastructure itself may representa significant restrictionon the flexibility of establishedplayers. Accountingsystemsdevelopedin the early stagesof data processingmay not provide the information needed for customer profitability analysis. 3.4. Strategic Options and the Role of Information Technology The factors noted - contestable markets, differential cost structure, flexibility restrictionscombine to make it difficult for a dominant firm to respondto cream-skimmingnew entrants. However, severalstrategicoptions are availableto established, but threatenedfirms: Death spiral - A dominant firm that does not respond will likely fall into death spiral. Profitable customerswill be lost, and market sharein attractive regionswill shrink. Break away from historical pricing mistakes Repricing products and servicesto reflect their costs ends the cross-subsidy that created the creamskimming opportunityin the fnst place. Unprofitable customers will have to pay higher fees and face increasedrates,while chargesto attractiveregions and profitablecustomerswill be reducedin order to protectthis market sharefrom poaching. Regain flexibility - A threatenedfirm can adjust its cost structure by adopting new technologies or opening up new, lower-cost distribution channels. The dominant,but threatenedfirm may needto shed infrastructure, including bank branches, insurance salesagents,and expensivebut outdatedtechnologies in order to have a cost structurethat rivals that of the new entrants, In implementing these options, IT can play a number of roles. For instance,IT has been used to eliminate the information asymmetry between a securities trader and his or her exchangecounterparties. In securitiestrading, impatienceof a trader



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for the executionof an order is often a good indicator of the riskinessand information contentof his or her trade. Several of today’s most successful offexchangetrading systems, Posit and the Crossing Network, am based on batched “crossings” of submittedbuy and sell orders. Since the crossings occur only at a few selectedtimes per day, a trader using such a system is effectively and credibly “signaling”that they are low-risk [4],[7]. Thus, a trading systemcan be used to provide a signal that reducesthe information asymmetry faced by other traders. Other tradersnow are encouragedto price a safe,patientorder below what they chargean higherrisk orderthat is for immediateexecution. Uniform, average cost pricing used by the establishedplayersprovides comfortableprofitability when their customersrepresentthe broad market and when no competitors are cream-skimming. New entrants,however,have a strong incentivesto capture market share by seeking only the most attractive customersand by offering them preferentialpricing. Responses that we expectto be effective are to reprice and eliminate cross-subsidiesacross customersand products,and to regainflexibility by introducinglowcost distribution channels - such as self-service bankingkiosks,or 800-numberservicelines to reduce the needfor salesagentsand field serviceoffices- to reducethe expenseof servingcustomers. 4. Examination of Additional CaseStudies 4.1. Hong Kong Retail Banking Hong Kong Shanghai Bank Corp.‘s (HKSB) rivalry with Citibank in Hong Kong is an example of a cream-skimmingentrantsuccessfullyattackinga dominant, establishedplayer. Notably, Citibank has not targeted HKSB’s broad marketplace. Rather, Citibank has developed distribution channels for productsand servicesthat are attractiveonly to certain customersegments- not coincidentally,this group contains almost all of those customers that are profitablefor HKSB to serve. The newly contestable consumerbanking market in Hong Kong has opened up an avenuefor opportunisticcream skimming by



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Citibank, who is now HKSB’s most dangerousand profitablerival.

ATMs, kiosks, and telephone service centers, especiallyto smallbalanceaccounts.

HKSB’s customerbaseis characterizedby “Love ‘em’s”and “Kill you’s.”It is believedthat 20 percent of its customersgenerateall HKSB’s profits and 60 percent of the customerscost HKSB money. A typical “kill you” is a low balanceretail customerthat performshis or her transactionsin the branchwith a teller. HKSB faces several of the critical factors identifiedabovethat will erodetheir pro&ability and makea responsedifficult to formulate.

Citibank attackingHKSB in Hong Kong is an example of what, in US telecoms,is called “The Dormer Pass” scenario:Citibank, under pressurein the U.S., attacksas a new entrantoutsideof its region. Similarly, the regional Bell operating companies (RBOCs) in the U.S. are invading each others’most attractivemarketsegments- cellular,cable,network facilities management, and high capacity teleconferencing services.

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4.2. Off-Exchange Trading Systems in LIondon

Several exit restrictions prevent HKSB from easily restructuring itself to defend its profitability. HKSB’s infrastructure,especiallyits branch network, cannot be shed although the branchesvalue will diminish as Citibank takes customeraccountsaway,

Until recently, the London Stock Exchange (LSE) faced few threats to its control of nearly all equities trading in the U.K. A new rival, TradePoint, is began operations on 21 September 1995 and is attemptingto attract trading to its fully electronic trading system. TradePoint provides anotherexampleof a new entrant seekingto creamskim attractive business from a dominant organization,and its impact on the viability of LSE memberfirms could be significant[4].

Public pressurecommitsHKSB to maintainingan extensivebranch network, and to providing lowcost banking servicesto the broad populationin Hong Kong.

Strategicoptionsopento HKSB are: Death spiral. In the absenceof an effectiveresponse,

the profitability of HKSB’s consumerbank will fall as rivals target the attractive customer segmentsand leave HKSB the costly-to-serve,low revenue “kill yous.” Differential pricing strategies such as charging

small accounts for access to branch tellers, and applying fees to low balanceaccountsto recoverthe costsof providing services. Pursue technological alternatives including new,

alternativemeans of distribution, and cost-reducing alternativesthat do not exclude the “kill yous” entirely.HKSB’s ability to respondmay dependon its ability to distribute banking products with fewer tellets and branches and by encouraginguse of

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In the U.S., off-exchangesystemshave:attracted investors that use passive, inexpensive:trading methods. In a competingdealer market such as the L-SE, investors buy from and sell tie dealer intermediaries(the LSE’s market maker firms) at quoted bid and ask prices. Historicahy, financial intermediariesin London took the other side of all trades; their profits from dealing with customers whose trades posed little risk to them more than covered their losses to customers whose superior information made their trades more risky for intermediaries. The I-SE faces competition from TradePoint and several other recently introduced “fourth market” off-exchange systems tlhat cross investors’orderswithout the involvementof a broker or a dealerat the middle of the bid and ask spread. Developingan effective responseis difficult for the LSE’s memberfirm intermediariesbecauseinvestors frequentlyhave a betterunderstandingof the masons



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systemcan combineto preservethe market makers’ profits and the existenceof centralmarket. Note that to avert death spiral, the LSE could embrace technologicalalternatives,and adopt the strategyof the.off-exchangeproviders by providing differential pricing for different types of order executions,but do so with a singlecentralmarket.

for their trades,and thus the risk of their trades,than the marketmakersdealingwith them. Today, with alternativesthat havebeendesigned primarily for less risky trades, the profitable customersof LSE member firms are increasingly likely to take their trades elsewhere,leaving market makerswith more loss-makingbusiness,W ithout the ability to distinguishsafefrom risky trades,however, we found that naively grantinglow-cost executionto protectmarketshareamongattractivecustomersleads to catastrophiclosses(Clemonsand Weber, 1995). Strategicoptionsopento the LSE and its membership are:

4.3. Signet Bank: Credit Card Issuance

Bank card issuers also have customer segments made up of “Love ‘em’s” and “Kill An issuing banks profits depend on you’d whether its cardholders pay their balance in full each month, or borrow at the rate set by the issuer. Issuers’ profits also depend on the risk of cardholders defaulting on their outstanding balances.

The Exchange members face growing losses and TradePointcapturessignificant low-risk tradingvolumes.

Death spiral -

By repricing their services,LSE market makerscan attemptto retain order flow from uninformedinvestors. Unfortunately,a dealerwill not be able to infer the true motivation for an investor order, and hencewill not know its riskinessuntil it is too late. Simplistic repricing strategies are not possibleif LSE market makersam requiredto serve all traders,and if they cannotaccuratelydiscriminate amongthe informed and the low-risk traders. Only if investors can credibly signal the risk of being the counterpartyto their orders, can the dealers price accuratelyand maintain the LSE’s position as the centralmarketfor equitiestradingin London.

Recognizing the variation in profit across customers,Signet Bank uses opportunistic cream skimmingby targetingand issuingto carefullychosen customers.Signet,now a major issuerof MasterCard and Visa cards;targetsprofitable card customersand uses tailored promotions to win them away from currentcard issuers,which includemajor card issuing bankssuchas Citibank and Chase. Promotionsoffer cardswith low APRs and reducedor no annualfees. Signet’s mailings sometimesassure customersthat they will be allowed to skip monthly paymentsat somepointsduring the yearif they so choose;finance charges,of course,would continueto accrue,making theseespeciallyattractiveto target.

Price flexibility -

Signaling systems for LSE order handling and routing - Simple signaling mechanismsthat reduce

Target customersfor Signet are high balance “revolvers”with reliableincomes. At present,Signet is successfullycapturing profitable accounts away from major competitorsusing its targeting models. Competitors unable to identify their profitable accountsor unwilling to offer them preferredratesare

or eliminate information asymmetries do exist (Spence,1973). Our recentpapershowsthat systems that allow marketmakersto infer a signaland perform differential pricing for their intermediationservices. Thesecan avert market makers’lossesand preserve the LSE’spositionas the dominaritexchange.

increasingly

losing

these

customers;

ultimately

dominantissuersmay find themselvesforced to raise their annual fees or interest rates to maintain profitability, accelerating the loss of profitable customers.We again see the phenomenonof cream skimming by a new competitor, resulting in less

While IT createsan off-exchangetrading threat, systemsalsoenablesophisticatedpricing strategiesfor the LSE dealers,basedon unforgeableand credible signaling from investors. Signaling via the trading

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attractivecustomerprofiles for dominant firms, and potentially death spiral unless a response is implemented.

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We expect that dominant, incumbent organizations in a range of industries will struggle to respondfor the following reasons:

The strategic options open to dominant card issuersare: Death spiral - A dominant issuer raising fees and rates in responseto the new entrant will eventually havea lessattractiveaccountbase,with fewer revenue producingborrowers. Signet’scompetitorsunableto identify profitableaccountsor unwilling to offer them preferred rates are increasingly losing these customers; ultimately they may find themselves forced to raise their annual fees or interest rates to maintain profitability, acceleratingthe collapse of profitability.

The public’s ’ expectations for universal services,and a resulting lack of exit flexibility in industries such as banking, insurance, and telecommunication Expectations for universal service with “fair” pricing, and a resulting lack of pricing flexibility Existing, “mispriced”contracts with customers, and a resultinglack of pricing flexibility Culture and the control exertedby the entrenched salesforce limiting firms’distribution opltionsand flexibility

DitTerential pricing - This may be easierthan in industriessuchas insurance,becausea card issuerhas mom freedom to reprice its portfolio after initial card Much of the industry seems to have iISSUanCe. adopted differential pricing, through fee and rate competition for the best customers, but without sufficient change in price or fee structure for the remainingaccounts;there has been a resultingloss of profitability; again, Dormer Pass scenario has appeared. 5.


Outmodedinfrastructureand the desire to avoid “stranded assets”reducingfirms’pricing and exit flexibility In brief,

Conclusions

The problem of new cream-skimmingentrants attackingdominant firms is generaland visible in a range of industries. We expectthat more contestable marketswill emergesimilar to thosediscussedhere. Contestabilitywill intensify as a result of regulatory relaxation; alternative, less expensive distribution channels; and alternative, less scale-intensive operationsmade possible by outsourcingand thirdparty processingarrangements.The targetsfor new entrantswill exist, either becausethe dominantfirms lack accuratecost and revenue data to know what customersand market segmentsare profitable [8], or because these establishedplayers are required to continue average cost pricing in the presenceof differentialcosts.

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Contestability will make it possible for new entrantsto attack dominant players; IT supports alternative and less expensive distribution channelsand supportsoutsourcingof technology services;this facilitateseaseof entry. Historical simplistic pricing mistakes,oc policies of providing universal service, will make it attractivefor new entrantsto attack;‘II enables modelingand othertargetingstrategiesthat enable new entrantsto identify and market to the most attractivesegmentsof the market. Restrictions on flexibility of entrenched incumbentsmay make it difficult for dominant players to defend themselveseffectively, when attacked by more flexible new entrants with


6.

opportunistic cream skimming strategies and newer technology

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References

[l] Clemons, E., Row, M . and M . Thatcher, “An IntegrativeFrameworkfor Identifying and Managing the Sourcesof Large Scale IT Faihm?‘,Proceedings, HICSS-28, January1995.

Clearly, the advantagesof new entrants are structural,and cannot be attributedto slow decision processes and slow reaction time or outdated corporateculture of the incumbents[l]. Indeed, the very factorsdescribedin this paper are thosethat new managementteams and new strategiesalone cannot begin to redress.The following are suggestionsthat incumbentsmay pursue for developing an effective strategicresponseto creamskimmingnew entrants: l


[2] Clemons, E. and B. Weber, “Segmentation, Differentiation, and Flexible Pricing: Experiences with Information Technology and Segment-Tailored Strategies”,Jourm.l of Management Information Systems,Vol. 11, No. 2, Fall 1994,pp- 9-36.

Gain flexibility

[4] Clemons, E. and B. Weber, “Inter-Market Competition and Information Asymmetry: A Demonstration of Some Implications for Stock Exchanges”,Working Paper95-01-05,January1995.

Learn to lobbv effectively for nreservationof wlatory protectionas a monopolyprovider of a universal service, including describingthe social benefits associated with such a regulated monopoly (telephony) or risk pooling (life and healthinsurance) Efforts to gain regulatoryprotectionare likely to fail. It may thereforebe more effectiveto learn to lobby for a phased req&tov shift to free Comoetition, by explaining the social costs associatedwith rapid transitionand the associated economicdislocation

[S] Clemons, E. and B. Weber, “Alternative Securities Trading Systems: Tests and Regulatory Implications of the Adoption of New Market Technology”, Informtion Systems Research (fofthcoming),1995. [6] Rothschild,M . and J. Stiglitz, Y!q&brium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information”, QzuzrterZy Jownul of Economics, 90(3), 629-649,1976. [7] Spence, M . Market Signaling: Information Transfer in Hiring and Related Processes,

That is, establishedfnms should seek to gain time, and should use it effectively to prepare for heightenedrivalries.

Cambridge,MA, HarvardUniversity Press,1973. [8] Stuchfield, N. and B. Weber, “Modeling the Pro&ability of CustomerRelationships:Development and Impact of BZW’s BEATRICE”, Journal of Management Inform&ion Systems, Vol. 9, No. 2, Fall 1992,pp. 53-76.

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