New Industry Entry Decision based on Risk Decision-Making Model

Transcription

1 Appl. Math. Inf. Sc. 6-3S, (2012) 837 New Industry Entry Decson based on Rsk Decson-Makng Model Yebao Xu and Yunchao Du School of Management, Wuhan Unversty of Technology, Wuhan P.R.Chna Emal: Receved: 23 Feb. 2012; Revsed 16 May 2012; Accepted 01 Aug. 2012ved: May 9, 2012; Revsed May 10, 2012; Accepted May 20, 2012 Abstract: Wth the rapd development of the world s economy, many companes have to face new challenges. Thus, a few of them decde to leave ther ntal ndustry and try to explore new ndustry, tryng to fnd new proft growth rate. However, durng the process they encounter many potental rsks. In the end, some of them may dsappear from the market. Ths paper focuses on new ndustry and the characterstcs of ts entry process. Based on the thought of queung theory, rsk decsonmakng model of new ndustry entry s constructed. Due to ths model, the nstant expected profts and the optmal entry occason of a company enterng new ndustry durng dfferent perods s concluded. Combned wth ts rsk preference and strategc goals, the entry behavours of a company are analysed. Fnally, the countermeasures after enterng new ndustry of a company are dssected. The am of ths paper s to help companes to avod rsk enterng new ndustry ratonally. Keywords: New ndustry entry, queung theory, rsk decson-makng. 1 Introducton Faced wth great pressure from market competton and ferce competton of nternal ndustry, many companes choose to enter new ndustry for hgher operaton proft, whch s manly lmted to low ndustry proft and poor ablty for developng ndustry proft space. However, there are many uncertantes n new ndustry, so some companes forecast of new ndustry may show dfferentatons from realty, whch can lead to falure enterng new ndustry. Thus, buldng scentfc decson-makng model of new ndustry entry, weakenng the nfluence of uncertanty, reducng rsk of new ndustry entry and provdng decson-makng bass for a company enterng new ndustry can be both meanngful for theory and practce. Quanttes of domestc and overseas experts have never stopped researchng decson-makng theory of new ndustry entry. Accordng to entry barrers theory, these barrers to entry can be the fundamental condton of mperfect competton market structure. If none entry barrers exst, every company s able to freely enter or qut one knd of market. Thus, the market can reach the perfect competton condton or compettve condton (the latter was another deal standard of market structure proposed by Baumohl n 1982). Although entry barrers are one of most sgnfcant factors affectng market structure, they dd not appeal economsts Appled Mathematcs & Informaton Scences An Internatonal 2012 NSP Natural Scences Publshng Cor. attenton untl the 1950s. Ben dd groundbreakng research on these n 1956, whch started to cause boom on barrer theory research n ndustral organzaton. Cournot, Antone Augustn ( ) frst rased game theory n duopoly model. In 1944, Von Neumann and Morgenstern establshed the game theory bass n coauthored book <Game Theory and Economc Behavor>. Wth the development of game theory, knds of scholars put t nto use n decson-makng study. In the theoretcal research on ndustral structure, Mchael Porter constructed fve forces model, who thought ndustral compettors, potental ntruders, substtutes, supplers and buyers decded the earnng power of the ndustry. And the theory provdes theory bass for decson-makng on ndustry entry. 2 The process of new ndustry entry Makng reasonable and scentfc entry decson needs to combne wth the entre entry process, but not focuses on sngle actvty. The process of a company enterng new ndustry can be concluded as followng four stages: (1) Searchng stage, when decson-makers transform decdng ndustry to searchng target one. Durng ths perod, a company should search and apprase some new ndustres, and whch can be ft for entry standard s lsted the new target ndustry. (2) Preparng stage, when

2 838 Yebao Xu, Yunchao Du: New Industry Entry Decson based on Rsk decson-makers should nvestgate, collect and handle the nformaton of the new ndustry a company plans to enter. Owng to ths, new ndustry can be determned. Ths perod can be least apperceve and many potental entrants decde not to entry new ndustry at the fnshng of preparng perod. (3) Enterng perod, when a company selfpostons after makng entry decson. The company begns to open up new products and markets so as to foothold n new ndustry. (4) Extended perod, when company s strategc focus moves from entry strategy to long-term strategy. Wth the development of the process, the ext barrers are rasng. The focus of what a company should consder s on whether contnung or ncreasng nvestment to keep the proft growth n the new ndustry. 3 Decson-makng model of new ndustry entry of a company 3.1 Expected proft of new ndustry entry Suppose the forecast of target ndustres the company searches has only two results: expected forecast and unexpected forecast, α represents the probablty whch actual stuaton of new ndustry s the expected forecastng result and queue length L shows the total number of companes n new ndustry; L reflects the th company s capablty sort n new ndustry. Then expected proft v of the th company can be calculated as followng: v F L, L ) (1) ( v F v F v, and can L L L L be supposed. λ can be defned as the rate of company entry, and μ can be defned as the rate of company ext. Settng the ntal queue length of the th company searchng new ndustry s L 0, tme nterval from searchng to enterng new ndustry s t, and tme nterval from searchng new ndustry to recent s T, t can be concluded that: L L ( ) (2) 0 T L0 ( t g( s), s ( t) L ) (3) (4) Then puttng (2), (3), (4) nto (1) can get v, whch s a functon related wth T and t : v G T, t ) (5) ( Accordng to (5), nstant expected proft of company entry at anytme and dfferent perod after enterng can be obtaned. 3.2 Optmal entry occason of a company On the one hand, f t s too early to enter, lack of nformaton can lead the company to wrong decson; on the other hand, that t s too late can let the company fall behnd and gan low proft n the new ndustry, whch s harmful for subsequent work development. To sum up, choosng the rght to enter s crucal. The moment when decson makers determne to entry the new ndustry s T =t, L=L and accordng to (5), expected proft of ths moment s a t functon. When t s nfntesmal along wth mnmal, entry rsk of the company s qute large and expected proft s nfntesmal. As tme goes on, expected proft starts to ncrease and the number of entrants becomes bgger. What s more, the expected proft declnes agan untl the entrant number extends to some degree. It can be easly known that equaton (5) has maxmal value, and let dv dt the best occason t* when the company s entry proft s maxmum can be easly gotten: thus solve the equaton: dv dv F L F L F( L, L ) ( ) (6) dt dt L t L t ds dl dl ( ) dt ds dt dt, dt can be supposed (when new ndustry reaches stable stuaton, λ>μ). 3.3 The company and ts decson-makng behavor The basc dscrmnant that reflects decson makers determnng to enter a new ndustry s defned: the expected proft v of new ndustry entry s larger than that v0 of current ndustry, thus v> v 0. At the same tme, the company s decson-makng s also affected by many entry factors, such as rsk psychologcal types, companes entry strategy, current ndustry and potental development of entry ndustry. Owng to ths, the company may not choose optmal occason t* to enter. Some even enter new ndustry when v<v 0 s satsfed. (1) The company s rsk preference and entry decson-makng Seekng for hgher rsk gans s goal gude of adventure type of companes. In addton, under the

3 Yebao Xu, Yunchao Du: New Industry Entry Decson based on Decson 938 nfluence of takng a profteerng atttude, decsonmakers wll magnfy, who thnk nformaton amount can ncrease more rapdly as tme goes on. And accordng to the soluton to equaton (6), optmal entry occason becomes smaller, whch means rskers wll choose to enter new ndustry n advance, compared wth rsk neutral decsonmakers. These rskers make every effort to obtan hgher proft, advantageous poston and advancers advantage.[8] On the contrary, the goal orentaton of conservatve decson-makers s to avod rsks to a large extent. Slow and steady mnd makes the conservatve relatvely narrow, and they beleve that the best tme to enter s when the new ndustry nformaton s n complete state. Accordng to equaton (6), the best entry occason s gettng extended, and the conservatve wll delay entry occason compared to the other entrants, n order to reduce the cost of tral and error to enter. (2) Decson-makng analyss of when expected entry proft s smaller than current ndustral proft Puttng v 0 nto (5), the earlest entry occason t L and the latest one t H of the company can be gotten. And when entry occason t s between t L and t H, the company s expected entry proft s larger than that of current ndustral proft, that s v>v 0. v v MAX v 0 0 t L Optmal entry regon Chart 1 General revew of the company s optmal entry occason choosng As t s shown n Chart 1, assumng that the company s expected entry proft curve s parabola (dfferent ndustres may be dfferent), the best occason regon for the company to enter can be determned. As v s the nstant expected proft and the new ndustry s dynamc, some decson-makers do not wegh short-term profts and choose to enter n the condton when v<v 0 s satsfed. Decsonmakers beleve that the development of new ndustres have great potental, whch s stablty and slow. Thus the company can change ther compettve poston and contnue to obtan profts hgher than v 0 by captal nvestment, technology nnovaton, new market development and other t * t H t ways. As t has a hgh rsk when the company enters n the condton when v<v 0 s satsfed, the company choosng to enter n ths perod usually has a strategc vson, scentfc management methods, great strength, and extensve experence n enterng new ndustry. 4 Countermeasure analyss after new ndustry entry Assumng that there s a complete nformaton status for companes enterng a new ndustry, the nformaton s no longer proftable, and the proft for the new ndustry company gan v F( L, L ) s.the basc way for companes mprovng ts profts s to reduce the number L of new ndustry companes, and to mprove ts compettve advantages n the ndustry, reducng L. Thus, there are two basc countermeasures after company entered. 4.1 Countermeasure analyss for decreasng L (1) Increasng the entry barrers Companes may establsh defense league wthn the ndustry to capture hghly proftable market, and set low proft market trap, n order to force the new entrants to face the exstng and to mprove the entry of market development costs. Companes may also play ts frst mover advantage to set a stable and effcent supply chan system wth best suppler and purchaser, such as sgnng exclusvty contract, cuttng off the best supply chan of raw materals, labor and any other resources for new entrants. Economy scale could also be appled n the felds of advertsng and technology nnovaton, whch may be acheved by ncreasng advertsng expenses and speedng up the updatng of techncal renewal. Then, the new-ns have to afford the same advertsng and technology costs based on ts current small scale, thus, the potental or new entrants have to realze that t may need huge advertsng and technology nvestment to swtch consumers loyalty and preferences for exstng or creatng ther own new consumer. The dffculty of fnancng and hgh rsk of advertsng nvestment s set as the bg barrers to the potental or new entrants enterng the target ndustry. (2) Decreasng the profts for entrants It requres exstng company delberately reducng short-term profts to ensure long-term proft possblty n order to effectvely prevent the

4 840 Yebao Xu, Yunchao Du: New Industry Entry Decson based on Rsk potental entrants, whch means that exstng companes have to reduce prces or ncrease dscount to lower entrants profts. The forecast of target ndustres n the company s the key pont of makng decson. The defender may nfluence the proft forecast of entrant by flterng adverse nformaton to the publc, n order to urge the entrant entry decson. The above countermeasures could reduce the entry rate of λ, and ncrease the qut rate μ. The company proft ncreased by formula (2) can be known that L decreases. 4.2 Analyss on mprovng compettveness (1) Market Development In the current market, t s not a wse choce to have frontal competton wth the companes wth bgger ndustry compettveness. The company must have ts market analyss and forecast structure to the potental market n order to dentfy target market. The ndustry market structure could be adjusted n the process of constantly developng new market, thus changng the ndustry competton structure. (2) Dfferentated marketng Dfferentaton s the most mportant way to surpass the compettors. The company can gan dfferentated compettve advantages and mprove the competton poston by contnuous product development and technology nnovaton. (3) Economy scale Huge nvestment of funds, human resource and materals make economy scale of the company possble. Compared wth other companes wthn the ndustry, greater cost advantages could be ganed, as the needed nvestment n the ndustry has been shared by the scale of the company. Improvng L s the basc way for the company to ncrease proft, as no matter whether a new ndustry tends to stable or not, whch mples L changng or not. Companes n greater compettve poston obtan hgher rval profts. 5 Concluson The company usually makes entry decson based on the expected proft obtaned when t enters dv dt a new ndustry. Let, the best entry occason t* can be gotten. The company could receve the most expected proft at the moment t*; the fundamental dscrmnant of company entry s v> v 0, that means when the expected proft v the company obtans s larger than recent ndustral proft standard v 0, the result s the occason the company enters s between the earlest enterng moment t L and the latest enterng moment t H. Because of the dfferent rsk and enterng strategy of a company, t often does not choose t* to enter, and even grabs the moment when v<v 0. Thus, the new ndustry proft can be changed by the behavor after enterng. As t demonstrates n ths paper, proft value after the company enterng s related to company numbers L and strength sort L. Basc countermeasure to ncrease proft s to lower L and enhance compettve poston L n the new ndustry. Acknowledgment Both of us thank for our supervsor s help and the scholars contrbuton. References [1] Mchael E. Porter, Compettve Advantages, Huaxa Press, Bejng (2003) [2] Yu Langchun, Poltcal Economcs, Economc Scence Press, Bejng (2001) [3] Operatons Research by Materal group from Tsnghua Unversty. Operatons Research Tsnghua Unversty Press, Bejng (2005) [4] Xe Kefan, Deng Fe, Yuan Shengjn, Search Analyss on expected profts of h-tech start-up companes, Technology Progress and Countermeasure, 6 ( 2005) [5] Lu Xa. Rsk Decson-Makng: Process, Psychology and Culture, Economc Scence Press, Bejng (1998) [6] Demsetz,H., Barrers to Entry, The Amercan Economc Revew, March, (1982), pp [7] Mchael E. Porter, Competton, Harvard Busness School Press, New York (1998) Yebao Xu, s a doctoral student n Management School of Wuhan Unversty of Technology, who has become an assocate professor n Wuhan Unversty of Scence and Technology Cty College. Hs research feld durng doctor s nvestment management, cost control and scence and technology educaton. He has already publshed about 10 papers n core journals at home and abroad. What s more, he has hosted or partcpated n many natonal and provncal researches.

5 Yebao Xu, Yunchao Du: New Industry Entry Decson based on Decson 948 Yunchao Du s a graduate student for a Master s degree, who s decdng to get a PhD. Hs research feld s rsk and fnancal management, cost control and nternal control. Durng grndng, he has wrtten many papers and partcpated n many natonal and provncal researches.