Market Entry Strategies:
Pioneers Versus
Late Arrivals
By Gurumurthy Kalyanaram mand Ragu Gurumurthy
What is the best way to move into a new market? If you do not have a first-in advantage, attack the one who does.
A N T T O B E King of the
WMountain in a new mar-ketplace? Here is some advice: be first, or a close second, and do not pause for breath. Others want to be King of the Mountain too. Even though you have a huge advantage in being first, you can lose it in the blink of an eye over pricing or service or lag-ging technology. Aggressive competi-tors have a vast array of weapons to knock you down.
Today’s strategic planners, hav-ing created as much value as they could by cutting costs, are looking now
to grow domestic markets, as well as build new markets and revenues in such countries as Brazil, China, India, Malaysia and Mexico. Before striking out, though, they need the answers to some crucial questions:
Does it pay to be first with a prod-uct or service? Is being an innovator worth the risk? Is it better to wait and learn from the experiences of the first entrant to the market? What is the proper balance between the risks and rewards? If you are a pioneer, what can you do to prevent share erosion when a new player enters the market? If you are a late entrant, what strategies should you adopt to make your entry successful?
Studies show that in most cases, being first to the market provides a sig-nificant and sustained market-share advantage over later entrants. Still, lat-er entrants can succeed by adopting distinctive positioning and marketing strategies. Pioneers in most industries, once they have reached the status of incumbent, are powerful. Sometimes, however, they get complacent or are not in a position to cater to the growing or shifting demands of the marketplace.
Gurumurthy Kalyanaram is the Director of Master’s Programs in the School of Management at the University of Texas, Dallas. Dr. Kalyanaram received his Ph.D. from the Massachusetts Institute of Technology. Ragu Gurumurthy is a principal in the communications, media and technology practice at Booz-Allen & Hamilton. He focuses on helping companies with growth and share-retention strategies. Mr. Gurumurthy Kalyanaram has worked with telecommunications companies in the United States and Europe with market-entry strategies, forecasting technology evolution, distribution strategies and product/service innovation processes.
Pioneers with a distinctive presence in the marketplace need to be in a position to react, or even better, anticipate potential entrants and increase the barriers to their entry. For example, a pioneer may be in a position to reduce its price and decrease the value of the business for a new entrant.
New entrants can take advantage of gaps in the offerings of these aging pio-neers, or find innovative ways to mar-ket their product or service.
Pioneers with a distinctive pres-ence in the marketplace need to be in a position to react, or even better, antic-ipate potential entrants and increase the barriers to their entry. For example, a pioneer may be in a position to re-duce its price and decrease the value of the business for a new entrant, or it can block entrance entirely by control-ling key distribution channels.
Whether a late entrant or a pio-neer seeking to foil newcomers, it helps to have a thorough understand-ing of the entry and defensive strate-gies available, a good sense of timing and a game plan for decision-making.
BASIC STRATEGIC PLANNING
Competitive strategies typically de-pend on the market environment and the positioning and product portfolio of the existing players. These are the basics:
Reduce price to penetrate an existing market. By introducing a product at a lower price than the pio-neer’s, a latecomer can attract new customers who would not have oth-erwise purchased such a product –– in effect expanding the total market. Reduced price can also induce the pi-oneer’s current customers to switch. Still, this strategy is likely to result in reduced margins for the new entrant compared with other players in the market, unless the new entrant’s cost of production is relatively cheaper. This can be adopted by both the in-cumbents and pioneers.
Improve a product or service, with focus on a niche market. Compa-nies can compete by being innovative in the marketplace. The innovation may be radical or incremental. One ex-ample of incremental innovation is an enhanced version of an existing prod-uct. The enhanced product can compete directly with ex-isting products, or it can be positioned to attract a small-er segment of the existing market. In addition, the im-proved product or service can sometimes attract new customers that are not the current target for the exist-ing product or service. For example: potential satel-lite-based wireless service providers are currently offer-ing a new feature called glob-al coverage. This service could both complement and replace options available to current customers –– but most of the potential players in the marketplace are targeting either trav-eling professionals who need to be in constant touch or the rural market, in which the cost-to-provision telecom-munications infrastructure is very high and satellite-based options help gov-ernments offer ubiquitous telecommu-nications services. In both cases the telecommunications market is ex-panded, generating additional revenue.
Target new geographic markets for existing products. As markets ma-ture in the home base, companies tra-ditionally look outside to more lucrative markets. Most consumer goods com-panies, for instance, are setting their sights on China. Many heavy equip-ment manufacturers are targeting new-ly emerging markets that will need trac-tors and cranes for building. Faced with intense competition and maturation in the local markets in the United States, regional Bell operating companies such as BellSouth are expanding into emerg-ing markets such as Brazil.
Develop new channels of distri-bution to access new markets or better penetrate existing ones. Going global is not the only solution. Sometimes the risk and the investment required to penetrate international markets may not be worth the return. Focusing on existing markets, where your company has a good understanding of the envi-ronment, can prove less risky and bring quicker successes. This can be accom-plished by repositioning the product or service through marketing, advertis-ing, packaging and so on. For instance, Dell Computer went after the mass market by having customers place their orders directly with Dell by phone, fax or computer. This direct channel revolutionized the method of selling computers to the end users, including corporate clients.
In addition to choosing the ap-propriate marketing strategy, it is cru-cial to determine the timing of the in-troduction of any new product. This is especially true in high-tech industries, in which product life cycles are short and it is difficult for late entrants to catch up and extract reasonable re-turns. In most cases, if you are enter-ing second or later in such a market, you should do so immediately after the pioneer.
PIONEERING ADVANTAGE:
FICTION OR REALITY?
Put simply, it costs the most to be the first, for two reasons:
1) the product innovation re-quires a higher investment in research and development than does product imitation, and
2) the necessary marketplace ed-ucation and testing forces the pioneer to spend heavily on advertising and promotion. A second entrant enjoys the fruits of the pioneer’s labor.
Are there higher returns on mar-ket share and investments to offset the pioneer’s increased costs and rela-tively higher risks? Companies such as the Hewlett-Packard Company and the 3M Company, which generate growth through innovation, garner more than 60 percent of their revenues from prod-ucts introduced over the most recent three-year period. Obviously, these companies have succeeded in pio-neering at a very high level.
Does this occur in other industries and in countries other than the United States? In fact, numerous studies have found that later entrants in a market achieve a lower market share than ear-lier entrants –– and that this holds true in a variety of product categories and industries, such as consumer pack-aged goods, industrial goods and phar-maceuticals. Even when a company’s tangible (e.g., financial) and intangible (e.g., brand equity) resources and business skills are considered, early entrants continue to hold market-
EXHIBIT I
FORECASTED MARKET SHARE RELATIVE TO THE PIONEERING BRAND
Entry Urban et al. Kalyanaram and Berndt et al.
Order (1986) Urban (1992) (1994)
% % %
First 1.00 1.00 1.00
Second 0.71 0.76 0.70
Third 0.58 0.64 0.57
Fourth 0.51 0.57 0.49
Fifth 0.45 0.53 0.44
Sixth 0.41 0.49 0.40
Source: Adapted from Kalyanaram et al., “Order of Market Entry: Established Empirical Generalizations, Emerging Empirical Generalizations, and Future Research”
EXHIBIT II
ORDER OF MARKET ENTRY AND ACCOUNTING PROFIT
Consumer Goods Return on Investment
Business (%)
Market Pioneers 25
Early followers 19
Late entrants 16
Industrial Goods Return on Investment
Business (%)
Market Pioneers 24
Early followers 19
Late entrants 15
Source: Adapted from Lambbkin, M.B. (1988), “Order of Entry and Performance in New Markets” share advantage.
What is the magnitude of market-share penalty for later entrants? A 1995 study by Gurumurthy Kalyanaram and others in Marketing Sci-ence suggests that the new entrant’s forecasted market share divided by the first entrant’s market share equals, very roughly, one divided by the square root of order of entry of the new entrant. (See Exhibit I.) Therefore, if there are two players in the market, the first entrant will have a market share of 59 percent and the second entrant will have a market share of 41 percent (which is 70 percent of 59 percent). This is validated in the cel-lular industry in several countries in Europe in which the average market share of the first entrant in Belgium, France, Germany, Italy, the Nether-lands and Spain is 58.5 percent and the second entrant is 41.5 percent. The figures are consistent with the re-sults in Exhibit I since the second en-trant has about 70 percent of the pio-neer’s market share. (See Exhibit III.)
Why do early entrants so fre-quently enjoy a higher market share? First, consumers in general are risk averse. If a product or service pro-vides enough satisfaction, consumers do not want to risk switching to a new product. Second, the pioneer be-comes the prototype for the product category. Later entrants are compared to the pioneer, and always somewhat unfavorably. Whenever consumers think of photocopying for example, Xerox is the name that jumps to mind. Third, consumers learn best the at-tributes of early entrants. More knowl-edge translates into more strongly held beliefs and great confidence in choice. And lastly, early entrants are able to secure the best positioning in the marketplace.
Does the pioneering advantage manifest itself in return-on-investment metrics apart from market share? Yes, after substantial research and devel-opment investments, being early in the market is rewarding. Research shows that the pioneers enjoy a higher return on investment in both consumer and industrial goods. (See Exhibit II.) This research and development investment.
EXHIBIT III
WESTERN EUROPE: ANNUAL NET ADDITION MARKET SHARE — 1996
Country Operator Order of Entry Date of Entry Net Annual
Market Share
Belgium Belgacom Mobile 1 January 1994 80%
Belgium Mobistar 2 August 1996 40% European Average*
France France Telecom 1 July 1992 55%
France SFR 2 December 1992 45% First
Germany Mannesmann 1 June 1992 52% Entrant:} 58.5%
Germany T Mobil 2 June 1992 48% Second
Entrant:} 41.5%
Italy Telecom Italia Mobile 1 October 1992 68%
Italy Omnitel Pronto Italia 2 October 1992 32% *Minus Britain
Netherlands PTT Telecom 1 July 1994 55%
Netherlands Libertel 2 September 1995 45%
Spain Telefónica Moviles 1 July 1995 61%
Spain Airtel 2 September 1995 39%
Britain Vodafone 1 July 1992 42%
Britain Cellnet 2 January 1994 31%
Britain-DCS1800 One-2-One 3 September 1993 7%
Britain-DCS1801 Orange 4 April 1994 20%
Source: Global Mobile, May 1997; Booz-Allen & Hamilton analysis and continuous new product launch is through another learning curve, when AGILITY NEEDED also used as an entry barrier by sever- there is already a robust supplier of FOR LATE ENTRANTS al pioneers service. Another frequent constraint The picture, however, is not always so A recent analysis of the evolution is access to property to build the rosy for pioneers and bleak for late en- towers, since the first en- trants. In some industries and some When consumer learning trants have already seized geographic areas, pioneers have lost
is limited, the pioneering the ideal sites for cover- market-share advantage relatively advantage is likewise age. This, in turn, may re- quickly. This can happen for any of bound to be limited. Quire the later entrant to in- several reasons:
Consumer learning vest larger amounts in
1) An entrenched pioneer may network infrastructure to not be offering a superior level of cus-becomes very difficult if gain similar coverage. tomer service the product becomes Given these hurdles, it can
2) A new technology may have complex and technical. Take two to three years be changed the cost equation, so that a For example, when picture fore a challenger achieves new entrant can offer similar or better phones were introduced coverage competitive with service at a lower cost. in the late 1970’s, the incumbent’s.
3) The new entrant may have demarket did not respond In addition to coverage veloped a new way to access the marand related quality of serket, with an innovative distribution because consumers could vice, another huge barrier strategy. not find occasions to use to entry for new entrants is.
4) The latecomer may simply be the product. the issue of number porta pricing aggressively, targeting select-
bility. Customers would ed segments by taking advantage of
of wireless markets in Europe indi- have to get a new cellular number the incumbent’s tendency to average
cates that first entrants are also mar- when they switch carriers since they pricing across all segments.
ket leaders in most countries. (See Ex- cannot take the same phone number In what situations is the pioneer-
hibit III.) Pioneers in cellular service with them as is done in land line net- ing market-share advantage muted?
establish a presence in the market- works. In general customers do not For a start, when consumer learning is
place, build brand equity and create like to change their phone number, es- limited, the pioneering advantage is
an excellent distribution network. Al- pecially in Europe, where customers likewise bound to be limited. Con-
so, a peculiarity of this industry is that receive calls in their mobile phones. sumer learning becomes very difficult
the quality of service is primarily de- Thus, we see the inherent advantages if the product becomes complex and
termined by coverage. Having evolved to being first in the market in the wire- technical. For example, when picture
over time, the first entrant’s network less industry: control of ideal sites; phones were introduced in the late
usually has much better coverage. freedom to evolve and fine-tune net- 1970’s, the market did not respond be-
The customers become used to en- work coverage; building of brand loy- cause consumers could not find occa-
hanced coverage over time. So new alty by offering superior customer sions to use the product.
entrants have to invest significantly to service; locking in customers by sub- The pioneering advantage is also
achieve this same coverage — an ef- sidizing equipment for an extended limited in a cluttered market: If there
fort that is capital intensive and time period under fixed-service contracts, are many available brands, consumers
consuming. All new networks have ini- and gaining control of key channels of react by becoming confused.
tial bugs that take time to fix. Sub- distribution. Moving beyond such issues, what
scribers are just not willing to go can later entrants do to overcome any
Inherent market-share disadvantage? for the early entrants comes from high First, the later entrant should differen- er trial penetration. If the later entrant tiate itself substantially in the minds of can generate greater trial market share, the consumers. Such positioning can then its disadvantage can be over be accomplished through substantial come. Sample-product trial is an appropriate mechanism. For exam Later entrants canple, in consumer goods, position themselves as consumers can be supplied with variety enhancers, a sample product for trial. In nonrather than as consumer goods, other creative replacements or mechanisms must be designed.
Limited demonstration of usage substitutes for the or prototypes is possible in softpioneers. An example is ware products, and test usage is Orange, the late-entry possible in automobiles. Also, cellular service distributing the product through provider in Britain, new channels such as direct marwhich successfully keting (think of the Lands’ End nudged aside the catalogue or the Mary Kay cosmetics parties) or a home-shop-pioneers.
Ping-network channel would place the product in the hands of changes in either the product or promore consumers. motion strategies. For example, the The later entrant can also segChrysler Corporation redefined perment the market, focusing on a particceptions of its minivans by introducing ular target. By providing appropriate Caravan, a two-door van. The Ford Corvalue, the later entrant can extract ad poration’s Windstar, expected to be a ditional rents. A good example of this marquee van, substantially lost its is the competition among the Internaglamour to the Caravan. When the Gentional Business Machines Corporation, eral Motors Corporation decided to Compaq Computer and Dell Computer reposition its Oldsmobile, it changed in the personal-computer market. Fi not only its product but also its advernally, later entrants can position themtising copy. The new copy appealed to selves as variety enhancers, rather consumers over 30 years old, project than as replacements or substitutes for ing the image of a younger profession the pioneers. al woman via this voice-over: “This car An example is Orange, the late-en is not only for your father’s generation, try cellular service provider in Britain, but it’s for you too.” which successfully nudged aside the A second route for later entrants pioneers. Orange entered the market is to discover creative ways to increase almost 30 months after the first enproduct trial. At best, one study has trant, Vodafone, and nine months after found that the market-share advantage One-2-One, and with technology similar to One-2-One’s. Orange, however, has followed a very aggressive entry strategy.
It has not only invested heav-ily in the network over the first two years of introduction, but also devel-oped aggressive pricing strategies. Or-ange seized a third of Britain’s total market’s first quarter 1996 growth by offering about a 30 percent savings to end users, compared with Vodafone and Cellnet. The pricing strategy was effective enough to compensate for Or-ange’s relatively poor network cover-age. (This rapid increase in penetra-tion of new subscribers decreased in the second quarter, after Vodafone and Cellnet lowered the price differentials in key segments.) Thus, aggressive pricing tactics, investment in network infrastructure and innovative market-ing tactics such as aggressive adver-tising and creative service bundling have made Orange a credible player.
Different markets require different strategies. What worked for Orange in Britain, for example, will not work for new entrants in Scandinavia. There, the incumbent’s monopolies are not driven by profits from the wireless in-dustries, and thus they price their wire-less services below the average price for the rest of Europe. This is a signifi-cant barrier to entry for new players, especially since entering the industry requires a high capital investment. So the key source of differentiation for new entrants in such situations is go-ing to be creative marketing, innovative advertising, new service packages and superior customer service. This is especially true since the incumbents offer a relatively poor level of customer service, a concern to end users.
Later entrants can also succeed by attacking high-growth markets par-ticularly when there is a significant shift in the industry. Such shifts can be due to changes in regulation, or tech-nological breakthroughs that improve the product, or breakthroughs that improve the process of manufacturing and delivering the product. The clas-sic example is MCI’s success in pene-trating the long-distance market and winning a regulatory battle with the AT&T Corporation.
Another strategic option for the later entrant is micro-segmenting the customer base — that is, targeting high-value customers who are able and willing to pay a higher price for the product or service relative to the cost incurred in catering to that seg-ment. For example, the competitive- to the personal computer market, capis a low-cost industry and it will be diftured the lead in the 1980’s by developficult for them to survive. Pricing belowing the technology and using its powvariable cost, however, is illegal in mosterful marketing engine. Later, Compaq countries. On the other hand, new enand Dell fundamentally redefined the trants traditionally focus on a few key business. Compaq reduced the cost by changing the Usually, however, manufacturing process and technological innovation having superior logistics. gives a company an edge Dell, in addition to using an for only a time, since efficient manufacturing incumbents catch on fairly process and superb logistics, quickly. Given that this invented the mail-order or direct channel to access end is the case, new entrants users, who by now were com should support their fortable with personal cominnovations with effective puter technology. I.B.M. was positioning, appropriate not able to react to these changes fast enough and lost pricing and aggressive advertising.
its lead in the 1990’s.
access providers (now Competitive Local Exchange Carriers, or CLECS), in order to provide local telecommu-nications services, basically skimmed the best customers of the regional Bell operating companies by offering a lower price. This was possible be-cause the regional companies had adopted an average price scheme partly dictated by the Federal Com-munications Commission.
Innovators have also been suc-cessful in entering markets with a sig-nificantly better technology. Usually, however, technological innovation gives a company an edge for only a time, since incumbents catch on fairly quickly. Given that this is the case, new entrants should support their innova-tions with effective positioning, appro-priate pricing and aggressive advertis-ing. For example, I.B.M., a later entrant.
DEFENSE STRATEGIES
FOR PIONEERS
Even as new entrants attempt to re-define the business or formulate niche strategies to attack profitable indus-tries and market segments, pioneers can fight back to retain their competi-tive advantage. The major strategies for the pioneers:
1) increase the barriers to entry for later entrants,
2) innovate faster than the late-comers, and
3) build a market-responsive and flexible organization.
In most markets both pioneers and later entrants operate with incom-plete information. Pioneers can take advantage of this by using effective sig-naling mechanisms as a deterrent. For example, pioneers can cut price, sig-naling to potential new entrants that it segments of the market –– typically those that are subsidizing the cost to serve other segments of the incum-bents. So, it is important for pioneers to understand their end-user segments and to adopt a differential pricing scheme to extract optimal rent from each of the segments.
Pioneers can also attempt to lock up the key channels of distribution, making it difficult for new entrants to get access to the market. In several indus-tries and countries, however, it is not possible to get exclusive distribution rights. Pioneers can also offer special types of enhanced customer service packages or reward programs to make it harder for key customers to switch.
Another route, especially in the high-tech industries, is for a pioneer to remain innovative and launch the next generation of products –– or at.
Another route, especially in the high-tech industries, is for a pioneer to remain innovative and launch the next generation of products — or at least announce the next generation of products, thus deterring the entry of competition. The Intel Corporation’s strategy in this regard is an example.
least announce the next generation of products, thus deterring the entry of competition. The Intel Corporation’s strategy in this regard is an example.
Finally, a responsive and flexible organization may be the most produc-tive route, especially when the struc-ture of an industry changes drastically or there is a seismic shift in the regula-tory environment. In the telecommu-nications industry, for instance, the 1996 Telecommunications Act has fun-damentally changed the rules of the game, leaving almost all the markets open for competition. This has forced both the regional Bell operating com-panies and the long-distance carriers such as AT&T and MCI to revise their strategies. Aging pioneers in other in-dustries have also followed the strate-gy of attack as best defense, targeting potential new entrants’ home bases — be it geographic or product markets. As Fuji penetrated the photographic film market in the United States, for ex-ample, the Eastman Kodak Company’s strategy was to attack Fuji in its home market. This strategy met with mixed results, due to the tight controls in the Japanese market.
The underlying parameters for all these strategies are that companies should be aware of the market dynam-ics and have an organization
that is flexible with the right cul-ture to adapt, not only reacting to potential competition but al-so proactively developing their strategies. It is easier to lose a market-share point than it is to gain one.
An example of a good blocking strategy is Vodafone’s decision to lower its prices in key market segments to match those of its new competitor, Orange, thereby reducing the price differential between the two companies. While doing this, Vodafone kept its average price in the market constant and extracted more rent from cus-tomers who were not targeted by the competition.
Managers should have a feel for the marketplace, to correctly estimate the switching barriers for customers and set the price differential accordingly.
Another example in the wireless industry is the case of cellular compa-nies in the United States. These com-panies have undertaken a suite of coun-terattacks, including innovative service packages and special deals on the equip-ment for one-year contracts, thereby in-creasing the switching barriers for the customers. This has also slowed the penetration of personal -communications- services (P.C.S.) players among the cellular customer base. But as these companies, which offer a service similar to cellular but based on a different tech-nology, build their networks and offer enhanced services, they will inevitably begin to attract cellular customers un-less cellular companies can offer simi-lar features in the long run. Meanwhile, both the P.C.S. companies and the cel-lular companies have launched aggressive advertising campaigns.
KEY SOURCES OF DIFFERENTIATION
It is important to note that in the case of the telecommunications industry, pio-neering advantage can be sustained only through continuous investment in building network infrastructure and the offering of superior customer service –– the two key sources of differentiation. In the wireless industry, customers are repeat purchasers, since their contract terms typically last for only one year and the cost of handsets is dropping rapidly. This situation could enable a late entrant to compete effectively by developing a good network infrastruc-ture and by gaining access to good dis-tribution networks. This is evident from the fact that the incumbents in several countries have not been able to sustain their lead and the differences between early entrants and second entrants are decreasing rapidly. For example, in Britain, Vodafone had an 18-month ad-vantage over its prime competitor, Cell-net, with similar technology. Three years after the launch of Cellnet, how-ever, the difference in market share in annual net additions between Voda-fone and Cellnet is only 11 percent. Vodafone has been able to retain its lead in the recent past only by fighting back efficiently on the customer-service di-mension and by developing creative ser-vice-bundling strategies.
MARKETING-STRATEGY
FRAMEWORK
Having thoroughly analyzed the var-ious strategies adopted by success-ful pioneers and later entrants, we have developed a framework both can employ to formulate strategies for growth, penetration or share re-tention, as the case may be.
The first component in our frame-work involves developing an under-standing of the dynamics of the market. The critical areas to be analyzed are:
1) those fundamental drivers of technology that may cause a signifi-cant shift in the market;
2) changes in governance, such as any shifts in regulatory policies that might have a marked impact on the in-dustry structure;
3) the size and growth of the po-tential market, and
4) the competitive profile.
Several qualitative and quantita-tive tools are available to assist in evaluating these critical issues. For instance, the model developed by F.M. Bass, the Bass model (1969, 1987), and the Booz-Allen & Hamilton model (1997) are highly useful for forecasting market size and growth. Competitive assessment on the other hand, is pri-marily done by conducting extensive secondary research on the key players. Our experience indicates that more than 60 percent of relevant information can be found in public sources and that
MARKETING-STRATEGY FRAMEWORK UNDERSTAND MARKET DYNAMICS CAPABILITY ASSESSMENT AND OFFERING Understand Competitor’s Market Access: Non-Product
Understand Channel Economic Market Size Positioning; Product/Service Related Industry Options Characteristic and Growth Strengths For Existing Offering Sources of Assessment Needs and Weaknesses Markets Differentiation.
• Economics of scale
• Current target
• Products and
• Availability of
• Features of new
• Customer service
• Cost of and scope market services offered channels products
• Necessary to manufacturing
• Technology drivers
• Key segment (including
• Access to key
• Service-evolution access to key
• Cost of bringing trends characteristics substitutes) segments plans market segments to market
• Effect of external
• Domestic versus
• Key segments factors such as global market targeted regulation
• Market’s implicit
• Pricing and public policy and explicit needs positioning STRATEGY FORMULATION Develop Assess Options Develop Product Market and Select Core Benefit Strategic Options Optimal Option Proposition
• Develop strategic
• Implementability risk
• Value proposition of segmentation based
• Economic the offering to key on needs and new assessment segments service offering–cost
• Branding strategy
• Positioning and –potential revenue targeting strategy
• Pricing and promotion
• Channel/market access
Source: Booz-Allen & Hamilton
the challenge lies in the gathering and synthesis of this information.
The second component of the framework involves conducting an in-ternal assessment of your company’s capabilities and product offerings. Product or service development is an iterative process between developers and researchers, one involving mar-ketplace feedback. Once a product is defined and the positioning deter-mined, it is important to understand the economics of manufacturing. In a competitive environment in which a technology edge is short-lived, try to think beyond simply making a good product in an economical way. Com-panies need to evaluate and develop non-product-related sources of differ- entiation, such as customer service, innovative ways to access end-users, creative marketing partnerships with other services such as frequent flyer programs, and so on.
At the completion of external and internal assessment, a company is ready for the final component of the framework: the actual development of the product strategy. Strategic ele-ments here include segmentation, po-sitioning and decisions on marketing instruments.
One of the most important strate-gic elements is the timing of product entry. Should the company be the first to enter the market or a later entrant? Just what are the risks and rewards? Again, there are some important tools available to facilitate scenario plan-ning and decision making. These in-clude the formulation suggested by Dr. Kalyanaram in the journal Market-ing Science (1995) and market share models by Dr. Kalyanaram and Glen L. Urban (1992) and by Dr. Urban and others (1986), again in Marketing Sci-ence. Other useful approaches for product strategy are the lead-user technology proposed by Eric Von Hippel, and the “wargaming” simula-tion analysis methodology developed by Booz-Allen. Thus, based on the market, internal and product strate-gic assessments, an optimal strategy can be formulated.
Pioneers Versus
Late Arrivals
By Gurumurthy Kalyanaram mand Ragu Gurumurthy
What is the best way to move into a new market? If you do not have a first-in advantage, attack the one who does.
A N T T O B E King of the
WMountain in a new mar-ketplace? Here is some advice: be first, or a close second, and do not pause for breath. Others want to be King of the Mountain too. Even though you have a huge advantage in being first, you can lose it in the blink of an eye over pricing or service or lag-ging technology. Aggressive competi-tors have a vast array of weapons to knock you down.
Today’s strategic planners, hav-ing created as much value as they could by cutting costs, are looking now
to grow domestic markets, as well as build new markets and revenues in such countries as Brazil, China, India, Malaysia and Mexico. Before striking out, though, they need the answers to some crucial questions:
Does it pay to be first with a prod-uct or service? Is being an innovator worth the risk? Is it better to wait and learn from the experiences of the first entrant to the market? What is the proper balance between the risks and rewards? If you are a pioneer, what can you do to prevent share erosion when a new player enters the market? If you are a late entrant, what strategies should you adopt to make your entry successful?
Studies show that in most cases, being first to the market provides a sig-nificant and sustained market-share advantage over later entrants. Still, lat-er entrants can succeed by adopting distinctive positioning and marketing strategies. Pioneers in most industries, once they have reached the status of incumbent, are powerful. Sometimes, however, they get complacent or are not in a position to cater to the growing or shifting demands of the marketplace.
Gurumurthy Kalyanaram is the Director of Master’s Programs in the School of Management at the University of Texas, Dallas. Dr. Kalyanaram received his Ph.D. from the Massachusetts Institute of Technology. Ragu Gurumurthy is a principal in the communications, media and technology practice at Booz-Allen & Hamilton. He focuses on helping companies with growth and share-retention strategies. Mr. Gurumurthy Kalyanaram has worked with telecommunications companies in the United States and Europe with market-entry strategies, forecasting technology evolution, distribution strategies and product/service innovation processes.
Pioneers with a distinctive presence in the marketplace need to be in a position to react, or even better, anticipate potential entrants and increase the barriers to their entry. For example, a pioneer may be in a position to reduce its price and decrease the value of the business for a new entrant.
New entrants can take advantage of gaps in the offerings of these aging pio-neers, or find innovative ways to mar-ket their product or service.
Pioneers with a distinctive pres-ence in the marketplace need to be in a position to react, or even better, antic-ipate potential entrants and increase the barriers to their entry. For example, a pioneer may be in a position to re-duce its price and decrease the value of the business for a new entrant, or it can block entrance entirely by control-ling key distribution channels.
Whether a late entrant or a pio-neer seeking to foil newcomers, it helps to have a thorough understand-ing of the entry and defensive strate-gies available, a good sense of timing and a game plan for decision-making.
BASIC STRATEGIC PLANNING
Competitive strategies typically de-pend on the market environment and the positioning and product portfolio of the existing players. These are the basics:
Reduce price to penetrate an existing market. By introducing a product at a lower price than the pio-neer’s, a latecomer can attract new customers who would not have oth-erwise purchased such a product –– in effect expanding the total market. Reduced price can also induce the pi-oneer’s current customers to switch. Still, this strategy is likely to result in reduced margins for the new entrant compared with other players in the market, unless the new entrant’s cost of production is relatively cheaper. This can be adopted by both the in-cumbents and pioneers.
Improve a product or service, with focus on a niche market. Compa-nies can compete by being innovative in the marketplace. The innovation may be radical or incremental. One ex-ample of incremental innovation is an enhanced version of an existing prod-uct. The enhanced product can compete directly with ex-isting products, or it can be positioned to attract a small-er segment of the existing market. In addition, the im-proved product or service can sometimes attract new customers that are not the current target for the exist-ing product or service. For example: potential satel-lite-based wireless service providers are currently offer-ing a new feature called glob-al coverage. This service could both complement and replace options available to current customers –– but most of the potential players in the marketplace are targeting either trav-eling professionals who need to be in constant touch or the rural market, in which the cost-to-provision telecom-munications infrastructure is very high and satellite-based options help gov-ernments offer ubiquitous telecommu-nications services. In both cases the telecommunications market is ex-panded, generating additional revenue.
Target new geographic markets for existing products. As markets ma-ture in the home base, companies tra-ditionally look outside to more lucrative markets. Most consumer goods com-panies, for instance, are setting their sights on China. Many heavy equip-ment manufacturers are targeting new-ly emerging markets that will need trac-tors and cranes for building. Faced with intense competition and maturation in the local markets in the United States, regional Bell operating companies such as BellSouth are expanding into emerg-ing markets such as Brazil.
Develop new channels of distri-bution to access new markets or better penetrate existing ones. Going global is not the only solution. Sometimes the risk and the investment required to penetrate international markets may not be worth the return. Focusing on existing markets, where your company has a good understanding of the envi-ronment, can prove less risky and bring quicker successes. This can be accom-plished by repositioning the product or service through marketing, advertis-ing, packaging and so on. For instance, Dell Computer went after the mass market by having customers place their orders directly with Dell by phone, fax or computer. This direct channel revolutionized the method of selling computers to the end users, including corporate clients.
In addition to choosing the ap-propriate marketing strategy, it is cru-cial to determine the timing of the in-troduction of any new product. This is especially true in high-tech industries, in which product life cycles are short and it is difficult for late entrants to catch up and extract reasonable re-turns. In most cases, if you are enter-ing second or later in such a market, you should do so immediately after the pioneer.
PIONEERING ADVANTAGE:
FICTION OR REALITY?
Put simply, it costs the most to be the first, for two reasons:
1) the product innovation re-quires a higher investment in research and development than does product imitation, and
2) the necessary marketplace ed-ucation and testing forces the pioneer to spend heavily on advertising and promotion. A second entrant enjoys the fruits of the pioneer’s labor.
Are there higher returns on mar-ket share and investments to offset the pioneer’s increased costs and rela-tively higher risks? Companies such as the Hewlett-Packard Company and the 3M Company, which generate growth through innovation, garner more than 60 percent of their revenues from prod-ucts introduced over the most recent three-year period. Obviously, these companies have succeeded in pio-neering at a very high level.
Does this occur in other industries and in countries other than the United States? In fact, numerous studies have found that later entrants in a market achieve a lower market share than ear-lier entrants –– and that this holds true in a variety of product categories and industries, such as consumer pack-aged goods, industrial goods and phar-maceuticals. Even when a company’s tangible (e.g., financial) and intangible (e.g., brand equity) resources and business skills are considered, early entrants continue to hold market-
EXHIBIT I
FORECASTED MARKET SHARE RELATIVE TO THE PIONEERING BRAND
Entry Urban et al. Kalyanaram and Berndt et al.
Order (1986) Urban (1992) (1994)
% % %
First 1.00 1.00 1.00
Second 0.71 0.76 0.70
Third 0.58 0.64 0.57
Fourth 0.51 0.57 0.49
Fifth 0.45 0.53 0.44
Sixth 0.41 0.49 0.40
Source: Adapted from Kalyanaram et al., “Order of Market Entry: Established Empirical Generalizations, Emerging Empirical Generalizations, and Future Research”
EXHIBIT II
ORDER OF MARKET ENTRY AND ACCOUNTING PROFIT
Consumer Goods Return on Investment
Business (%)
Market Pioneers 25
Early followers 19
Late entrants 16
Industrial Goods Return on Investment
Business (%)
Market Pioneers 24
Early followers 19
Late entrants 15
Source: Adapted from Lambbkin, M.B. (1988), “Order of Entry and Performance in New Markets” share advantage.
What is the magnitude of market-share penalty for later entrants? A 1995 study by Gurumurthy Kalyanaram and others in Marketing Sci-ence suggests that the new entrant’s forecasted market share divided by the first entrant’s market share equals, very roughly, one divided by the square root of order of entry of the new entrant. (See Exhibit I.) Therefore, if there are two players in the market, the first entrant will have a market share of 59 percent and the second entrant will have a market share of 41 percent (which is 70 percent of 59 percent). This is validated in the cel-lular industry in several countries in Europe in which the average market share of the first entrant in Belgium, France, Germany, Italy, the Nether-lands and Spain is 58.5 percent and the second entrant is 41.5 percent. The figures are consistent with the re-sults in Exhibit I since the second en-trant has about 70 percent of the pio-neer’s market share. (See Exhibit III.)
Why do early entrants so fre-quently enjoy a higher market share? First, consumers in general are risk averse. If a product or service pro-vides enough satisfaction, consumers do not want to risk switching to a new product. Second, the pioneer be-comes the prototype for the product category. Later entrants are compared to the pioneer, and always somewhat unfavorably. Whenever consumers think of photocopying for example, Xerox is the name that jumps to mind. Third, consumers learn best the at-tributes of early entrants. More knowl-edge translates into more strongly held beliefs and great confidence in choice. And lastly, early entrants are able to secure the best positioning in the marketplace.
Does the pioneering advantage manifest itself in return-on-investment metrics apart from market share? Yes, after substantial research and devel-opment investments, being early in the market is rewarding. Research shows that the pioneers enjoy a higher return on investment in both consumer and industrial goods. (See Exhibit II.) This research and development investment.
EXHIBIT III
WESTERN EUROPE: ANNUAL NET ADDITION MARKET SHARE — 1996
Country Operator Order of Entry Date of Entry Net Annual
Market Share
Belgium Belgacom Mobile 1 January 1994 80%
Belgium Mobistar 2 August 1996 40% European Average*
France France Telecom 1 July 1992 55%
France SFR 2 December 1992 45% First
Germany Mannesmann 1 June 1992 52% Entrant:} 58.5%
Germany T Mobil 2 June 1992 48% Second
Entrant:} 41.5%
Italy Telecom Italia Mobile 1 October 1992 68%
Italy Omnitel Pronto Italia 2 October 1992 32% *Minus Britain
Netherlands PTT Telecom 1 July 1994 55%
Netherlands Libertel 2 September 1995 45%
Spain Telefónica Moviles 1 July 1995 61%
Spain Airtel 2 September 1995 39%
Britain Vodafone 1 July 1992 42%
Britain Cellnet 2 January 1994 31%
Britain-DCS1800 One-2-One 3 September 1993 7%
Britain-DCS1801 Orange 4 April 1994 20%
Source: Global Mobile, May 1997; Booz-Allen & Hamilton analysis and continuous new product launch is through another learning curve, when AGILITY NEEDED also used as an entry barrier by sever- there is already a robust supplier of FOR LATE ENTRANTS al pioneers service. Another frequent constraint The picture, however, is not always so A recent analysis of the evolution is access to property to build the rosy for pioneers and bleak for late en- towers, since the first en- trants. In some industries and some When consumer learning trants have already seized geographic areas, pioneers have lost
is limited, the pioneering the ideal sites for cover- market-share advantage relatively advantage is likewise age. This, in turn, may re- quickly. This can happen for any of bound to be limited. Quire the later entrant to in- several reasons:
Consumer learning vest larger amounts in
1) An entrenched pioneer may network infrastructure to not be offering a superior level of cus-becomes very difficult if gain similar coverage. tomer service the product becomes Given these hurdles, it can
2) A new technology may have complex and technical. Take two to three years be changed the cost equation, so that a For example, when picture fore a challenger achieves new entrant can offer similar or better phones were introduced coverage competitive with service at a lower cost. in the late 1970’s, the incumbent’s.
3) The new entrant may have demarket did not respond In addition to coverage veloped a new way to access the marand related quality of serket, with an innovative distribution because consumers could vice, another huge barrier strategy. not find occasions to use to entry for new entrants is.
4) The latecomer may simply be the product. the issue of number porta pricing aggressively, targeting select-
bility. Customers would ed segments by taking advantage of
of wireless markets in Europe indi- have to get a new cellular number the incumbent’s tendency to average
cates that first entrants are also mar- when they switch carriers since they pricing across all segments.
ket leaders in most countries. (See Ex- cannot take the same phone number In what situations is the pioneer-
hibit III.) Pioneers in cellular service with them as is done in land line net- ing market-share advantage muted?
establish a presence in the market- works. In general customers do not For a start, when consumer learning is
place, build brand equity and create like to change their phone number, es- limited, the pioneering advantage is
an excellent distribution network. Al- pecially in Europe, where customers likewise bound to be limited. Con-
so, a peculiarity of this industry is that receive calls in their mobile phones. sumer learning becomes very difficult
the quality of service is primarily de- Thus, we see the inherent advantages if the product becomes complex and
termined by coverage. Having evolved to being first in the market in the wire- technical. For example, when picture
over time, the first entrant’s network less industry: control of ideal sites; phones were introduced in the late
usually has much better coverage. freedom to evolve and fine-tune net- 1970’s, the market did not respond be-
The customers become used to en- work coverage; building of brand loy- cause consumers could not find occa-
hanced coverage over time. So new alty by offering superior customer sions to use the product.
entrants have to invest significantly to service; locking in customers by sub- The pioneering advantage is also
achieve this same coverage — an ef- sidizing equipment for an extended limited in a cluttered market: If there
fort that is capital intensive and time period under fixed-service contracts, are many available brands, consumers
consuming. All new networks have ini- and gaining control of key channels of react by becoming confused.
tial bugs that take time to fix. Sub- distribution. Moving beyond such issues, what
scribers are just not willing to go can later entrants do to overcome any
Inherent market-share disadvantage? for the early entrants comes from high First, the later entrant should differen- er trial penetration. If the later entrant tiate itself substantially in the minds of can generate greater trial market share, the consumers. Such positioning can then its disadvantage can be over be accomplished through substantial come. Sample-product trial is an appropriate mechanism. For exam Later entrants canple, in consumer goods, position themselves as consumers can be supplied with variety enhancers, a sample product for trial. In nonrather than as consumer goods, other creative replacements or mechanisms must be designed.
Limited demonstration of usage substitutes for the or prototypes is possible in softpioneers. An example is ware products, and test usage is Orange, the late-entry possible in automobiles. Also, cellular service distributing the product through provider in Britain, new channels such as direct marwhich successfully keting (think of the Lands’ End nudged aside the catalogue or the Mary Kay cosmetics parties) or a home-shop-pioneers.
Ping-network channel would place the product in the hands of changes in either the product or promore consumers. motion strategies. For example, the The later entrant can also segChrysler Corporation redefined perment the market, focusing on a particceptions of its minivans by introducing ular target. By providing appropriate Caravan, a two-door van. The Ford Corvalue, the later entrant can extract ad poration’s Windstar, expected to be a ditional rents. A good example of this marquee van, substantially lost its is the competition among the Internaglamour to the Caravan. When the Gentional Business Machines Corporation, eral Motors Corporation decided to Compaq Computer and Dell Computer reposition its Oldsmobile, it changed in the personal-computer market. Fi not only its product but also its advernally, later entrants can position themtising copy. The new copy appealed to selves as variety enhancers, rather consumers over 30 years old, project than as replacements or substitutes for ing the image of a younger profession the pioneers. al woman via this voice-over: “This car An example is Orange, the late-en is not only for your father’s generation, try cellular service provider in Britain, but it’s for you too.” which successfully nudged aside the A second route for later entrants pioneers. Orange entered the market is to discover creative ways to increase almost 30 months after the first enproduct trial. At best, one study has trant, Vodafone, and nine months after found that the market-share advantage One-2-One, and with technology similar to One-2-One’s. Orange, however, has followed a very aggressive entry strategy.
It has not only invested heav-ily in the network over the first two years of introduction, but also devel-oped aggressive pricing strategies. Or-ange seized a third of Britain’s total market’s first quarter 1996 growth by offering about a 30 percent savings to end users, compared with Vodafone and Cellnet. The pricing strategy was effective enough to compensate for Or-ange’s relatively poor network cover-age. (This rapid increase in penetra-tion of new subscribers decreased in the second quarter, after Vodafone and Cellnet lowered the price differentials in key segments.) Thus, aggressive pricing tactics, investment in network infrastructure and innovative market-ing tactics such as aggressive adver-tising and creative service bundling have made Orange a credible player.
Different markets require different strategies. What worked for Orange in Britain, for example, will not work for new entrants in Scandinavia. There, the incumbent’s monopolies are not driven by profits from the wireless in-dustries, and thus they price their wire-less services below the average price for the rest of Europe. This is a signifi-cant barrier to entry for new players, especially since entering the industry requires a high capital investment. So the key source of differentiation for new entrants in such situations is go-ing to be creative marketing, innovative advertising, new service packages and superior customer service. This is especially true since the incumbents offer a relatively poor level of customer service, a concern to end users.
Later entrants can also succeed by attacking high-growth markets par-ticularly when there is a significant shift in the industry. Such shifts can be due to changes in regulation, or tech-nological breakthroughs that improve the product, or breakthroughs that improve the process of manufacturing and delivering the product. The clas-sic example is MCI’s success in pene-trating the long-distance market and winning a regulatory battle with the AT&T Corporation.
Another strategic option for the later entrant is micro-segmenting the customer base — that is, targeting high-value customers who are able and willing to pay a higher price for the product or service relative to the cost incurred in catering to that seg-ment. For example, the competitive- to the personal computer market, capis a low-cost industry and it will be diftured the lead in the 1980’s by developficult for them to survive. Pricing belowing the technology and using its powvariable cost, however, is illegal in mosterful marketing engine. Later, Compaq countries. On the other hand, new enand Dell fundamentally redefined the trants traditionally focus on a few key business. Compaq reduced the cost by changing the Usually, however, manufacturing process and technological innovation having superior logistics. gives a company an edge Dell, in addition to using an for only a time, since efficient manufacturing incumbents catch on fairly process and superb logistics, quickly. Given that this invented the mail-order or direct channel to access end is the case, new entrants users, who by now were com should support their fortable with personal cominnovations with effective puter technology. I.B.M. was positioning, appropriate not able to react to these changes fast enough and lost pricing and aggressive advertising.
its lead in the 1990’s.
access providers (now Competitive Local Exchange Carriers, or CLECS), in order to provide local telecommu-nications services, basically skimmed the best customers of the regional Bell operating companies by offering a lower price. This was possible be-cause the regional companies had adopted an average price scheme partly dictated by the Federal Com-munications Commission.
Innovators have also been suc-cessful in entering markets with a sig-nificantly better technology. Usually, however, technological innovation gives a company an edge for only a time, since incumbents catch on fairly quickly. Given that this is the case, new entrants should support their innova-tions with effective positioning, appro-priate pricing and aggressive advertis-ing. For example, I.B.M., a later entrant.
DEFENSE STRATEGIES
FOR PIONEERS
Even as new entrants attempt to re-define the business or formulate niche strategies to attack profitable indus-tries and market segments, pioneers can fight back to retain their competi-tive advantage. The major strategies for the pioneers:
1) increase the barriers to entry for later entrants,
2) innovate faster than the late-comers, and
3) build a market-responsive and flexible organization.
In most markets both pioneers and later entrants operate with incom-plete information. Pioneers can take advantage of this by using effective sig-naling mechanisms as a deterrent. For example, pioneers can cut price, sig-naling to potential new entrants that it segments of the market –– typically those that are subsidizing the cost to serve other segments of the incum-bents. So, it is important for pioneers to understand their end-user segments and to adopt a differential pricing scheme to extract optimal rent from each of the segments.
Pioneers can also attempt to lock up the key channels of distribution, making it difficult for new entrants to get access to the market. In several indus-tries and countries, however, it is not possible to get exclusive distribution rights. Pioneers can also offer special types of enhanced customer service packages or reward programs to make it harder for key customers to switch.
Another route, especially in the high-tech industries, is for a pioneer to remain innovative and launch the next generation of products –– or at.
Another route, especially in the high-tech industries, is for a pioneer to remain innovative and launch the next generation of products — or at least announce the next generation of products, thus deterring the entry of competition. The Intel Corporation’s strategy in this regard is an example.
least announce the next generation of products, thus deterring the entry of competition. The Intel Corporation’s strategy in this regard is an example.
Finally, a responsive and flexible organization may be the most produc-tive route, especially when the struc-ture of an industry changes drastically or there is a seismic shift in the regula-tory environment. In the telecommu-nications industry, for instance, the 1996 Telecommunications Act has fun-damentally changed the rules of the game, leaving almost all the markets open for competition. This has forced both the regional Bell operating com-panies and the long-distance carriers such as AT&T and MCI to revise their strategies. Aging pioneers in other in-dustries have also followed the strate-gy of attack as best defense, targeting potential new entrants’ home bases — be it geographic or product markets. As Fuji penetrated the photographic film market in the United States, for ex-ample, the Eastman Kodak Company’s strategy was to attack Fuji in its home market. This strategy met with mixed results, due to the tight controls in the Japanese market.
The underlying parameters for all these strategies are that companies should be aware of the market dynam-ics and have an organization
that is flexible with the right cul-ture to adapt, not only reacting to potential competition but al-so proactively developing their strategies. It is easier to lose a market-share point than it is to gain one.
An example of a good blocking strategy is Vodafone’s decision to lower its prices in key market segments to match those of its new competitor, Orange, thereby reducing the price differential between the two companies. While doing this, Vodafone kept its average price in the market constant and extracted more rent from cus-tomers who were not targeted by the competition.
Managers should have a feel for the marketplace, to correctly estimate the switching barriers for customers and set the price differential accordingly.
Another example in the wireless industry is the case of cellular compa-nies in the United States. These com-panies have undertaken a suite of coun-terattacks, including innovative service packages and special deals on the equip-ment for one-year contracts, thereby in-creasing the switching barriers for the customers. This has also slowed the penetration of personal -communications- services (P.C.S.) players among the cellular customer base. But as these companies, which offer a service similar to cellular but based on a different tech-nology, build their networks and offer enhanced services, they will inevitably begin to attract cellular customers un-less cellular companies can offer simi-lar features in the long run. Meanwhile, both the P.C.S. companies and the cel-lular companies have launched aggressive advertising campaigns.
KEY SOURCES OF DIFFERENTIATION
It is important to note that in the case of the telecommunications industry, pio-neering advantage can be sustained only through continuous investment in building network infrastructure and the offering of superior customer service –– the two key sources of differentiation. In the wireless industry, customers are repeat purchasers, since their contract terms typically last for only one year and the cost of handsets is dropping rapidly. This situation could enable a late entrant to compete effectively by developing a good network infrastruc-ture and by gaining access to good dis-tribution networks. This is evident from the fact that the incumbents in several countries have not been able to sustain their lead and the differences between early entrants and second entrants are decreasing rapidly. For example, in Britain, Vodafone had an 18-month ad-vantage over its prime competitor, Cell-net, with similar technology. Three years after the launch of Cellnet, how-ever, the difference in market share in annual net additions between Voda-fone and Cellnet is only 11 percent. Vodafone has been able to retain its lead in the recent past only by fighting back efficiently on the customer-service di-mension and by developing creative ser-vice-bundling strategies.
MARKETING-STRATEGY
FRAMEWORK
Having thoroughly analyzed the var-ious strategies adopted by success-ful pioneers and later entrants, we have developed a framework both can employ to formulate strategies for growth, penetration or share re-tention, as the case may be.
The first component in our frame-work involves developing an under-standing of the dynamics of the market. The critical areas to be analyzed are:
1) those fundamental drivers of technology that may cause a signifi-cant shift in the market;
2) changes in governance, such as any shifts in regulatory policies that might have a marked impact on the in-dustry structure;
3) the size and growth of the po-tential market, and
4) the competitive profile.
Several qualitative and quantita-tive tools are available to assist in evaluating these critical issues. For instance, the model developed by F.M. Bass, the Bass model (1969, 1987), and the Booz-Allen & Hamilton model (1997) are highly useful for forecasting market size and growth. Competitive assessment on the other hand, is pri-marily done by conducting extensive secondary research on the key players. Our experience indicates that more than 60 percent of relevant information can be found in public sources and that
MARKETING-STRATEGY FRAMEWORK UNDERSTAND MARKET DYNAMICS CAPABILITY ASSESSMENT AND OFFERING Understand Competitor’s Market Access: Non-Product
Understand Channel Economic Market Size Positioning; Product/Service Related Industry Options Characteristic and Growth Strengths For Existing Offering Sources of Assessment Needs and Weaknesses Markets Differentiation.
• Economics of scale
• Current target
• Products and
• Availability of
• Features of new
• Customer service
• Cost of and scope market services offered channels products
• Necessary to manufacturing
• Technology drivers
• Key segment (including
• Access to key
• Service-evolution access to key
• Cost of bringing trends characteristics substitutes) segments plans market segments to market
• Effect of external
• Domestic versus
• Key segments factors such as global market targeted regulation
• Market’s implicit
• Pricing and public policy and explicit needs positioning STRATEGY FORMULATION Develop Assess Options Develop Product Market and Select Core Benefit Strategic Options Optimal Option Proposition
• Develop strategic
• Implementability risk
• Value proposition of segmentation based
• Economic the offering to key on needs and new assessment segments service offering–cost
• Branding strategy
• Positioning and –potential revenue targeting strategy
• Pricing and promotion
• Channel/market access
Source: Booz-Allen & Hamilton
the challenge lies in the gathering and synthesis of this information.
The second component of the framework involves conducting an in-ternal assessment of your company’s capabilities and product offerings. Product or service development is an iterative process between developers and researchers, one involving mar-ketplace feedback. Once a product is defined and the positioning deter-mined, it is important to understand the economics of manufacturing. In a competitive environment in which a technology edge is short-lived, try to think beyond simply making a good product in an economical way. Com-panies need to evaluate and develop non-product-related sources of differ- entiation, such as customer service, innovative ways to access end-users, creative marketing partnerships with other services such as frequent flyer programs, and so on.
At the completion of external and internal assessment, a company is ready for the final component of the framework: the actual development of the product strategy. Strategic ele-ments here include segmentation, po-sitioning and decisions on marketing instruments.
One of the most important strate-gic elements is the timing of product entry. Should the company be the first to enter the market or a later entrant? Just what are the risks and rewards? Again, there are some important tools available to facilitate scenario plan-ning and decision making. These in-clude the formulation suggested by Dr. Kalyanaram in the journal Market-ing Science (1995) and market share models by Dr. Kalyanaram and Glen L. Urban (1992) and by Dr. Urban and others (1986), again in Marketing Sci-ence. Other useful approaches for product strategy are the lead-user technology proposed by Eric Von Hippel, and the “wargaming” simula-tion analysis methodology developed by Booz-Allen. Thus, based on the market, internal and product strate-gic assessments, an optimal strategy can be formulated.
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