How to Understand [any] Industry's Structure: Incumbency Advantages Independent of Size
These advantages can include early entry into the market, a broad network of agents or partners, and a focus on user experience or customer service.
Following Capital Requirements is, Incumbency Advantages Independent of Size.
Incumbent /ɪnˈkʌmbənt/
One who currently holds a particular position
This refers to the benefits or advantages that established and existing companies in an industry have, regardless of their size. These advantages are irrespective of the company’s size and may, therefore, act as a barrier to entry for newer or smaller companies.
An incumbent company may have established a reputation for quality, reliability, or customer service, making it hard for new entrants to compete. The incumbent may have an established distribution network, access to preferred supply chains or raw materials, and relationships with key customers or suppliers.
There are various advantages that incumbent companies may possess over new entrants in an industry. These advantages can take many different forms such as:
Proprietary technology
Established companies may have unique technologies or intellectual property that they have developed or acquired over time. This can give them an advantage over new entrants, who may not have access to the same technologies or may be unable to replicate them.
Access to the best raw material sources
Established companies may have already secured relationships with the best suppliers or have made significant investments in supply chain management, which improves their access to high-quality raw materials at lower costs.
Government subsidies
Some companies may benefit from government subsidies or other forms of preferential treatment, such as favourable tax treatment or access to government programs designed to promote economic growth.
Favorable geographic location
The location of a company's headquarters, manufacturing facilities, or distribution centers can also play a role in its advantages relative to new entrants. For example, a company with a distribution center located near a major transportation hub may be able to deliver products to customers more quickly and at a lower cost than a new company in a less-favorable location.
Cumulative experience that has allowed incumbents to learn how to serve efficiently
Established companies may have been in business long enough, allowing them to continually learn from past mistakes and fine-tune their service processes to maximize efficiency and productivity.
Legal enforceability of advantages
Established companies may have access to legally enforceable advantages, such as patents that protect their technology from being copied by others.
Also, incumbents can benefit from economies of scale (read here), which lower the cost of production or service delivery as the output volume increases. This advantage can make it difficult for new entrants to match the incumbent company’s prices while making a profit.
For instance, Coca-Cola has established a reputation and brand recognition worldwide over the years and its dominance makes it difficult for new companies to break into the market, despite offering comparable products. Consumers have a familiarity and loyalty to Coca-Cola, making it challenging for new entrants to compete.
Let’s go over how this has played out in the several instances
Incumbency Advantages Independent of Size: Fintech
Paypal & Venmo (2013)
In 2013, online payments pioneer PayPal acquired mobile payments platform Venmo. This move made PayPal the largest digital wallet provider in the US market and allowed them to leverage its already-established brand recognition and customer base to dominate the mobile payments space.
JP Morgan Chase’s Chase Pay platform (2015)
JP Morgan Chase, one of the largest banks in the US, launched their own digital payments platform called Chase Pay in 2015. Thanks to their existing customer base and established relationships with merchants, the platform quickly gained traction, and now boasts millions of credit and debit cards in circulation.
TransferWise & Monzo Partnership (2016)
In the UK, digital bank Monzo partnered with online money transfer platform TransferWise to offer international transfers to their customers. This partnership allowed Monzo, a relatively new player in the market, to leverage TransferWise's established infrastructure and reputation to offer a valuable service to their own customers.
Quickteller by Interswitch (2002)
Quickteller, a digital payments platform owned by Nigerian fintech company Interswitch, has since become one of the market leaders in the Nigerian fintech space. Thanks to their early entry into the market, strong brand recognition, and established relationships with banks, Quickteller is often a top choice for customers looking to make digital payments in Nigeria.
These companies have leveraged various incumbency advantages independent of their size to gain a foothold in their respective spaces. These advantages can include early entry into the market, a broad network of agents or partners, and a focus on user experience or customer service.
This can make players sweat to enter the market and compete effectively, as they may struggle to build the same level of trust and recognition with customers, and may also not have the same level of access to crucial partnerships and networks.
Incumbency Advantages Independent of Size: Music
The Big 3’s Control Over Distribution Channels
UMG, Sony, and Warner are the three biggest record labels in the world, thanks to their size and established relationships with distribution channels such as physical stores, airplay, streaming services, etc. The Big 3 often secure preferential treatment of their artists, such that a new artist may have a seemingly ‘superior’ product or service and still struggle to break into the market due to the advantages these established players enjoy.
In some cases, established labels may even use their incumbency advantages to engage in anti-competitive practices, such as exclusivity agreements with distribution channels or manipulating chart rankings, further cementing their hold on the market.
Jay-Z's Tidal streaming platform
Tidal is a music streaming service owned by Jay-Z and several other high-profile artists. At its launch in 2015, the service sought to differentiate itself from rivals like Spotify and Apple Music by offering exclusive content and better royalty rates for artists. However, despite its early momentum, Tidal struggled to attract new subscribers and has struggled to compete with larger, more established players in the industry.
Incumbency Advantages Independent of Size: E-Commerce
Amazon's dominance of the US market
Amazon has established a virtual monopoly in the US market. This is due in part to the company's huge customer base, which has allowed them to leverage their already-established brand recognition and customer loyalty to dominate the market. Amazon's large scale also makes it easier for them to offer unique and innovative solutions, such as same-day delivery and smart home devices.
Jumia's early entry into the Nigerian market
Jumia, a Nigerian-based e-commerce company, was founded in 2012 and has since become one of the largest e-commerce platforms there. Their early entry into the Nigerian market allowed them to establish a strong brand presence, which is difficult to replicate for new entrants. Also, Jumia's ability to cater to unique African nuances, such as offering multiple payment options, further entrenched their incumbent advantages.
Alibaba's dominance in China
Alibaba, the Chinese e-commerce behemoth, has established a significant advantage, thanks to its large scale and established distribution network. In China, where Alibaba originated, the company controls an estimated 80% of the e-commerce market, thanks in part to its ability to offer exceptional customer service and personalized recommendations.
When you consider the pre-existing advantages of established players such as a loyal customer base, an established supply chain network, and huge customer data, you’ll see why new entrants might struggle to compete effectively.