Ch15 Marketing Strategies for New Market Entries
15.1: How New is New?
- There are six categories of new products based on their degree of newness as perceived by both the company and the target customers:
· New- to-the-world products: True innovations that are new to the firm and create an entirely new market (10%).
· New product lines: A product category that is new for the company introducing it, but not new to customers in the target market because of the existence of one or more competitive brands (20%).
· Additions to existing product lines: New items that supplement a firm’s established product line. These items may be moderately new to both the firm and the customers in its established product-markets. They also may serve to expand the market segments appealed to by the line (26 %).
· Improvements in or revisions of existing products: items providing improved performance or greater perceived value brought out to replace existing products. These items may present moderately new marketing and production challenges to the firm, but unless they represent a technologically new generation of products, customers are likely to perceive them as similar to the products they replace (26%).
· Repositionings: Existing products that are targeted at new applications and new market segments (7%).
· Cost reductions: product modifications providing similar performance at lower cost (11%).
- A product’s degree of newness to the company, its target customers, or both helps determine the amount of complexity and uncertainty involved in the engineering, operations, and marketing tasks necessary to make it a successful new entry. It also contributes to the amount of risk inherent in those tasks.
- Introducing a product that is new to both the firm and target customers requires the greatest expenditure of effort and resources. It also involves the greatest amount of uncertainty and risk of failure because of the lack of information and experience with the technology and the target customers.
- The marketing challenge is to build primary demand, making target customers aware of the product and convincing them to adopt it.
- Products new to the company but not to the market often present fewer challenges for R&D and product engineering.
15.2: Objectives of New Product and Market Development
- Primary objective of most new product and market development efforts is to secure future volume and profit growth.
- A business’s objectives for its new entries influence the kind of entry strategy it should pursue and the marketing and other functional programmes needed to implement that strategy.
- If a business is concerned primarily with defending an already strong market share position in its industry, it may prefer to be a follower.
- Usually entering new product markets only after an innovator, a follower relies on superior quality, better customer service, or lower prices to offset the pioneer’s early lead. This strategy usually requires fewer investments in R&D and product development, but marketing and sales still are critical in implementing it effectively.
- Strategic objectives attained by successful new market entries:
· Defend market share position
· Establish foothold in new market
· Preempt market segment
· Maintain position as product innovator
· Exploit technology in new way
· Capitalize on distribution strengths
· Provide a cash generator
· Use excess or off-season capacity
15.3: Market Entry Strategies: Is it Better to Be a Pioneer or a Follower?
I. Pioneer Strategy
v Successful pioneers are handsomely rewarded.
v It is assumed competitive advantages inherent in being the first to enter a new product- market can be sustained through the growth stage and into the maturity stage of the product life cycle, resulting in a strong share position and substantial returns.
v Some of the potential sources of competitive advantage available to pioneers are shown below:
Exhibit 15.2 Potential advantages of pioneer and follower strategies
Pioneer / Follower• / Economies of scales and experience. / • / Ability to take advantage of pioneer’s
positioning mistakes.
• / High switching costs for early adopters. / • / Ability to take advantage of pioneer’s product mistakes.
• / Pioneer defines the rules of the game. / • / Ability to take advantage of pioneer’s
marketing mistakes.
• / Distribution advantage. / • / Ability to take advantage of the latest
technology.
• / Influence on consumer choice criteria and
attitudes. / • / Ability to take advantage of pioneer’s limited resources.
• / Possibility of pre-empting scarce resources.
1. First choice of market segments and positions- The pioneer has the opportunity to develop a product offering with attributes most important to the largest segment of customers or to promote the importance of attributes that favor its brand. The pioneer’s brand can become the standard of reference customers use to evaluate other brands. This can make it more difficult for followers with me-too products to convince existing customers that their new brands are superior to the older and more familiar pioneer. If the pioneer has successfully tied its offering to the choice criteria of the largest group of customers, it also becomes more difficult for followers to differentiate their offerings in ways that are attractive to the mass-market segment. They may have to target a smaller peripheral segment or niche instead.
2. The pioneer defines the rules of the game- The pioneer’s actions on such variables as product quality, price, distribution, warranties, post sale service, and promotional appeals and budgets set standards that subsequent competitors must meet or beat. If the pioneer sets those standards high enough, it can raise the costs of entry and perhaps pre-empt some potential competitors.
3. Distribution advantages- The pioneer has the most options in designing a distribution channel to bring the new product to market. This is particularly important for industrial goods where, if the pioneer exercises its options well and with dispatch, it should end up with a network of the best distributors. This can exclude later entrants from some markets. Distributors are often reluctant to take on second or third brands. This is especially true when the product is technically complex and the distributor must carry large inventories of the product and spare parts and invest in specialized training and service.
For consumer package goods, it is more difficult to slow the entry of later competitors by pre-empting distribution alternatives. Nevertheless, the pioneer still has the advantage of attaining more shelf-facings at the outset of the growth stage. By quickly expanding its product line following an initial success, the pioneer can appropriate still more shelf space, thereby making the challenge faced by followers even more difficult. And as many retailers are reducing the number of brands they carry in a given product category to speed inventory turnover and reduce costs, it is becoming more difficult for followers with unfamiliar brands and small market shares to gain extensive distribution.
4. Economies of scale and experience- Being first means the pioneer can gain accumulated volume and experience and thereby lower per unit costs at a faster rate than followers. This advantage is particularly pronounced when the product is technically sophisticated and involves high development costs or when its life cycle is likely to be short with sales increasing rapidly during the introduction and early growth stages.
As we shall see later, the pioneer can deploy these cost advantages in a number of ways to protect its early lead against followers. One strategy is to lower price, which can discourage followers from entering the market because it raises the volume necessary for them to break even. Or the pioneer might invest its savings in additional marketing efforts to expand its penetration of the market, such as heavier advertising, a larger salesforce, or continuing product improvements or line extensions.
5. High switching costs for early adopters- Customers who are early to adopt a pioneer’s new product may be reluctant to change suppliers when competitive products appear. This is particularly true for industrial goods where the costs of switching suppliers can be high. Compatible equipment and spare parts, investments in employee training, and the risks of lower product quality or customer service make it easier for the pioneer to retain its early customers over time. In some cases, however, switching costs can work against the pioneer and in favor of followers. A pioneer may have trouble converting customers to a new technology if they must bear high switching costs to abandon their old way of doing things. Pioneers in the development of music CDs, for instance, faced the formidable task of convincing potential buyers to abandon their substantial investments in turntables and LP record libraries and to start all over again with the new technology. Once the pioneers had begun to convince consumers that the superior convenience, sound quality, and durability of CDs justified those high switching costs, however, demand for CDs and CD players began to grow rapidly and it was easier for followers to attract customers.
6. Possibility of positive network effects- The value of some kinds of goods and services to an individual customer increases as greater numbers of other people adopt the product and the network of users grows larger. Economists say that such products exhibit network externalities or positive network effects. Information and communications technologies, such as wireless phones, fax machines, computer software, email, and many Internet sites, are particularly likely to benefit from network effects.[8] For instance, the value of eBay as an auction site increases as the number of potential buyers and sellers who visit and trade on the site increase. If the pioneer in such a product or service category can gain and maintain a substantial customer base before competing technologies or providers appear on the market, the positive network effects generated by that customer base will enhance the benefits of the pioneer’s offering and make it more difficult for followers to match its perceived value. And recent research suggests that the positive impacts of such network effects on pioneer survival and economic success are enhanced when the new products involved are relatively radical and technologically advanced. On the other hand, for the digital new products and services most likely to benefit from positive network effects, some of the other potential first-mover advantages may not be as relevant. For instance, because of the relatively modest fixed costs and low marginal costs of producing digitized information products like software and music, pioneers are unlikely to benefit from substantial economies of scale.
7. Possibility of pre-empting scarce resources and suppliers- The pioneer may be able to negotiate favorable deals with suppliers who are eager for new business or who do not appreciate the size of the opportunity for their raw materials or component parts. If later entrants subsequently find those materials and components in short supply, they may be constrained from expanding as fast as they might like or be forced to pay premium prices
II. Not All Pioneers Capitalize on Their Potential Advantages
v Surviving pioneers hold a significantly larger average market share when their industries reach maturity than firms that were either fast followers or late entrants in the product category.
v Some pioneers fail. They abandon the product strategy, go out of business, or get acquired before their industry matures.
v While a pioneer may have some potential competitive advantages, not all pioneers are successful at capitalizing on them. Some fail during the introductory or shakeout stages of their industries’ life cycles. And those that survive may lack the resources to keep up with rapid growth or the competencies needed to maintain their early lead in the face of onslaughts by strong followers.
III. Follower Strategy
v There may be some advantages to letting other firms go first into a product market. Let the pioneer shoulder the initial risks while the followers observe their shortcoming and mistakes. Possible advantages of such a follower strategy are:
1- Ability to take advantage of the pioneer’s positioning mistakes. If the pioneer misjudges the preferences and purchase criteria of the mass-market segment or attempts to satisfy two or more segments at once, it is vulnerable to the introduction of more precisely positioned products by a follower. By tailoring its offerings to each distinct segment, the follower(s) can successfully encircle the pioneer.
2- Ability to take advantage of the pioneer’s product mistakes. If the pioneer’s initial product has technical limitations or design flaws, the follower can benefit by overcoming these weaknesses. Even when the pioneering product is technically satisfactory, a follower may gain an advantage through product enhancements.
3- Ability to take advantage of the pioneer’s marketing mistakes. If the pioneer makes any marketing mistakes in introducing a new entry, it opens opportunities for later entrants. This observation is closely related to the first two points, yet goes beyond product positioning and design to the actual execution of the pioneer’s marketing programme. For example, the pioneer may fail to attain adequate distribution, spend too little on introductory advertising, or use ineffective promotional appeals to communicate the product’s benefits. A follower can observe these mistakes, design a marketing programme to overcome them, and successfully compete head-to-head with the pioneer. Marketing mistakes can leave a pioneer vulnerable to challenges from later entrants even in product categories with substantial positive network effects.
4- Ability to take advantage of the latest technology. In industries characterized by rapid technological advances, followers can possibly introduce products based on a superior, second-generation technology and thereby gain an advantage over the pioneer. And the pioneer may have difficulty reacting quickly to such advances if it is heavily committed to an earlier technology.
5- Ability to take advantage of pioneer’s limited resources. If the pioneer has limited resources for production facilities or marketing programmes, or fails to commit sufficient resources to its new entry, followers willing and able to outspend the pioneer experience few enduring constraints.