Description
W
ANT TO BE King of the
Mountain in a new marketplace?
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 lagging
technology.
Aggressive
competitors
have a vast array of weapons to
knock
you down.
Today’s strategic planners, having
created
as much value as they
could
by cutting costs, are
looking now
BEST PRACTICE
Market Entry
Strategies:
Pioneers Versus
Late Arrivals
By Gurumurthy Kalyanaram and 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.
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 product
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 youare 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 significant
and sustained market-share
advantage
over later entrants. Still, later
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.
1
I s s ue 12
1
Thi r d Quar t e r ’ 98
W
ANT TO BE King of the
Mountain in a new mar-
ketplace? Here is some
advice: be ?rst, 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 ?rst, 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 ?rst 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 ?rst
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 ?rst to the market provides a sig-
ni?cant 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.
B E S T P R A C T I C E
Market Entry
Strategies:
Pioneers Versus
Late Arrivals
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.
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 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.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
By Gurumurt hy Kal yanaram and Ragu Gurumurt hy
2
Thi r d Quar t e r ’ 98
New entrants can take advantage of
gaps in the offerings of these aging pio-
neers, or ?nd 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
2
I s s ue 12
B E S T P R A C T I C E
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.
3
I s s ue 12
3
Thi r d Quar t e r ’ 98
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 dif?cult 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
?rst, 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., ?nancial) and intangible
(e.g., brand equity) resources and
business skills are considered, early
entrants continue to hold market-
B E S T P R A C T I C E
First
Second
Third
Fourth
Fifth
Sixth
Berndt et al.
(1994)
1.00
0.71
0.58
0.51
0.45
0.41
Kalyanaram and
Urban (1992)
Urban et al.
(1986)
Entry
Order
1.00
0.76
0.64
0.57
0.53
0.49
1.00
0.70
0.57
0.49
0.44
0.40
% % %
Return on Investment
(%)
25
Return on Investment
(%)
Consumer Goods
Business
Industrial Goods
Business
Market Pioneers
24 Market Pioneers
Early followers
Late entrants
19
16
Early followers
Late entrants
19
15
EXHIBIT I
FORECASTED MARKET SHARE RELATIVE
TO THE PIONEERING BRAND
EXHIBIT II
ORDER OF MARKET ENTRY AND
ACCOUNTING PROFIT
Source: Adapted from Kalyanaram et al., “Order of
Market Entry: Established Empirical Generalizations,
Emerging Empirical Generalizations, and Future Research”
Source: Adapted from Lambbkin, M.B. (1988),
“Order of Entry and Performance in New Markets”
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Thi r d Quar t e r ’ 98
share advantage.
What is the magnitude of market-
share penalty for later entrants? A
1995 study by Gurumurthy Kalya-
naram and others in Marketing Sci-
ence suggests that the new entrant’s
forecasted market share divided by
the ?rst 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 ?rst 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 con?dence 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
B E S T P R A C T I C E
Belgium
Belgium
France
France
Germany
Germany
Italy
Italy
Netherlands
Netherlands
Spain
Spain
Britain
Britain
Britain-DCS1800
Britain-DCS1801
Net Annual
Market Share
Order of Entry Operator Country
1
2
1
2
1
2
1
2
1
2
1
2
1
2
3
4
January 1994
August 1996
July 1992
December 1992
June 1992
June 1992
October 1992
October 1992
July 1994
September 1995
July 1995
September 1995
July 1992
January 1994
September 1993
April 1994
80%
40%
55%
45%
52%
48%
68%
32%
55%
45%
61%
39%
42%
31%
7%
20%
Date of Entry
Belgacom Mobile
Mobistar
France Telecom
SFR
Mannesmann
T Mobil
Telecom Italia Mobile
Omnitel Pronto Italia
PTT Telecom
Libertel
Telefónica Moviles
Airtel
Vodafone
Cellnet
One-2-One
Orange
European Average*
First
Entrant:
Second
Entrant:
*Minus Britain
}
}
58.5%
41.5%
EXHIBIT III
WESTERN EUROPE: ANNUAL NET ADDITION MARKET SHARE — 1996
Source: Global Mobile, May 1997; Booz-Allen & Hamilton analysis
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
I s s ue 12
and continuous new product launch is
also used as an entry barrier by sever-
al pioneers.
A recent analysis of the evolution
of wireless markets in Europe indi-
cates that ?rst entrants are also mar-
ket leaders in most countries. (See Ex-
hibit III.) Pioneers in cellular service
establish a presence in the market-
place, build brand equity and create
an excellent distribution network. Al-
so, a peculiarity of this industry is that
the quality of service is primarily de-
termined by coverage. Having evolved
over time, the ?rst entrant’s network
usually has much better coverage.
The customers become used to en-
hanced coverage over time. So new
entrants have to invest signi?cantly to
achieve this same coverage — an ef-
fort that is capital intensive and time
consuming. All new networks have ini-
tial bugs that take time to ?x. Sub-
scribers are just not willing to go
through another learning curve, when
there is already a robust supplier of
service. Another frequent constraint
is access to property to build the
towers, since the ?rst en-
trants have already seized
the ideal sites for cover-
age. This, in turn, may re-
quire the later entrant to in-
vest larger amounts in
network infrastructure to
gai n si mi l ar coverage.
Given these hurdles, it can
take two to three years be-
fore a challenger achieves
coverage competitive with
the incumbent’s.
In addition to coverage
and related quality of ser-
vice, another huge barrier
to entry for new entrants is
the issue of number porta-
bility. Customers would
have to get a new cellular number
when they switch carriers since they
cannot take the same phone number
with them as is done in land line net-
works. In general customers do not
like to change their phone number, es-
pecially in Europe, where customers
receive calls in their mobile phones.
Thus, we see the inherent advantages
to being ?rst in the market in the wire-
less industry: control of ideal sites;
freedom to evolve and ?ne-tune net-
work coverage; building of brand loy-
alty by offering superior customer
service; locking in customers by sub-
sidizing equipment for an extended
period under ?xed-service contracts,
and gaining control of key channels of
distribution.
AGILITY NEEDED
FOR LATE ENTRANTS
The picture, however, is not always so
rosy for pioneers and bleak for late en-
trants. In some industries and some
geographic areas, pioneers have lost
market-share advantage relatively
quickly. This can happen for any of
several reasons:
1) An entrenched pioneer may
not be offering a superior level of cus-
tomer service.
2) A new technology may have
changed the cost equation, so that a
new entrant can offer similar or better
service at a lower cost.
3) The new entrant may have de-
veloped a new way to access the mar-
ket, with an innovative distribution
strategy.
4) The latecomer may simply be
pricing aggressively, targeting select-
ed segments by taking advantage of
the incumbent’s tendency to average
pricing across all segments.
In what situations is the pioneer-
ing market-share advantage muted?
For a start, when consumer learning is
limited, the pioneering advantage is
likewise bound to be limited. Con-
sumer learning becomes very dif?cult
if the product becomes complex and
technical. For example, when picture
phones were introduced in the late
1970’s, the market did not respond be-
cause consumers could not ?nd occa-
sions to use the product.
The pioneering advantage is also
limited in a cluttered market: If there
are many available brands, consumers
react by becoming confused.
Moving beyond such issues, what
can later entrants do to overcome any
5
Thi r d Quar t e r ’ 98
B E S T P R A C T I C E
When consumer learning
is limited, the pioneering
advantage is likewise
bound to be limited.
Consumer learning
becomes very difficult if
the product becomes
complex and technical.
For example, when picture
phones were introduced
in the late 1970’s, the
market did not respond
because consumers could
not find occasions to use
the product.
7
I s s ue 12
inherent market-share disadvantage?
First, the later entrant should differen-
tiate itself substantially in the minds of
the consumers. Such positioning can
be accomplished through substantial
changes in either the product or pro-
motion strategies. For example, the
Chrysler Corporation rede?ned per-
ceptions of its minivans by introducing
Caravan, a two-door van. The Ford Cor-
poration’s Windstar, expected to be a
marquee van, substantially lost its
glamour to the Caravan. When the Gen-
eral Motors Corporation decided to
reposition its Oldsmobile, it changed
not only its product but also its adver-
tising copy. The new copy appealed to
consumers over 30 years old, project-
ing the image of a younger profession-
al woman via this voice-over: “This car
is not only for your father’s generation,
but it’s for you too.”
A second route for later entrants
is to discover creative ways to increase
product trial. At best, one study has
found that the market-share advantage
for the early entrants comes from high-
er trial penetration. If the later entrant
can generate greater trial market share,
then its disadvantage can be over-
come. Sample-product trial is an ap-
propriate mechanism. For exam-
ple, in consumer goods,
consumers can be supplied with
a sample product for trial. In non-
consumer goods, other creative
mechanisms must be designed.
Limited demonstration of usage
or prototypes is possible in soft-
ware products, and test usage is
possible in automobiles. Also,
distributing the product through
new channels such as direct mar-
keting (think of the Lands’ End
catalogue or the Mary Kay cos-
metics parties) or a home-shop-
ping-network channel would
place the product in the hands of
more consumers.
The later entrant can also seg-
ment the market, focusing on a partic-
ular target. By providing appropriate
value, the later entrant can extract ad-
ditional rents. A good example of this
is the competition among the Interna-
tional Business Machines Corporation,
Compaq Computer and Dell Computer
in the personal-computer market. Fi-
nally, later entrants can position them-
selves as variety enhancers, rather
than as replacements or substitutes for
the pioneers.
An example is Orange, the late-en-
try cellular service provider in Britain,
which successfully nudged aside the
pioneers. Orange entered the market
almost 30 months after the ?rst en-
trant, Vodafone, and nine months after
One-2-One, and with technology simi-
lar 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 ?rst two
years of introduction, but also devel-
oped aggressive pricing strategies. Or-
ange seized a third of Britain’s total
market’s ?rst 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 pro?ts 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 signi?-
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.
7
Thi r d Quar t e r ’ 98
B E S T P R A C T I C E
Later entrants can
position themselves as
variety enhancers,
rather than as
replacements or
substitutes for the
pioneers. An example is
Orange, the late-entry
cellular service
provider in Britain,
which successfully
nudged aside the
pioneers.
8
Thi r d Quar t e r ’ 98
Later entrants can also succeed
by attacking high-growth markets par-
ticularly when there is a signi?cant
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-
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-
ni?cantly 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
to the personal computer market, cap-
tured the lead in the 1980’s by develop-
ing the technology and using its pow-
erful marketing engine. Later, Compaq
and Dell fundamentally rede?ned the
business. Compaq reduced
the cost by changing the
manufacturing process and
having superior logistics.
Dell, in addition to using an
efficient manufacturing
process and superb logistics,
invented the mail-order or di-
rect channel to access end
users, who by now were com-
fortable with personal com-
puter technology. I.B.M. was
not able to react to these
changes fast enough and lost
its lead in the 1990’s.
DEFENSE STRATEGIES
FOR PIONEERS
Even as new entrants attempt to re-
de?ne the business or formulate niche
strategies to attack pro?table indus-
tries and market segments, pioneers
can ?ght 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
?exible 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
is a low-cost industry and it will be dif-
?cult for them to survive. Pricing below
variable cost, however, is illegal in most
countries. On the other hand, new en-
trants traditionally focus on a few key
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 dif?cult 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
8
I s s ue 12
B E S T P R A C T I C E
Usually, however,
technological innovation
gives a company an edge
for only a time, since
incumbents catchon fairly
quickly. Given that this
is the case, new entrants
should support their
innovations with effective
positioning, appropriate
pricing and aggressive
advertising.
9
I s s ue 12
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 ?exible
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
?lm 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 ?exible 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
9
Thi r d Quar t e r ’ 98
B E S T P R A C T I C E
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.
10
Thi r d Quar t e r ’ 98
10
I s s ue 12
B E S T P R A C T I C E
in the recent past only by ?ghting back
ef?ciently 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 ?rst 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 signi?-
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 pro?le.
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
• Economics of scale
and scope
• Technology drivers
trends
• Effect of external
factors such as
regulation and
public policy
UNDERSTAND MARKET DYNAMICS CAPABILITY ASSESSMENT AND OFFERING
STRATEGY FORMULATION
Understand
Industry
Characteristic
Understand
Market Size
and Growth
Needs
Competitor’s
Positioning;
Strengths
and Weaknesses
Market Access:
Channel
Options
For Existing
Markets
Product/Service
Offering
Non-Product
Related
Sources of
Differentiation
Economic
Assessment
Develop
Core Benefit
Proposition
Assess Options
and Select
Optimal Option
Develop
Product Market
Strategic Options
• Current target
market
• Key segment
characteristics
• Domestic versus
global market
• Market’s implicit
and explicit needs
• Products and
services offered
(including
substitutes)
• Key segments
targeted
• Pricing and
positioning
• Availability of
channels
• Access to key
segments
• Features of new
products
• Service-evolution
plans
• Customer service
• Necessary to
access to key
market segments
• Cost of
manufacturing
• Cost of bringing
to market
• Develop strategic
segmentation based
on needs and new
service offering
• Positioning and
targeting strategy
• Pricing and
promotion
• Channel/market
access
• Value proposition of
the offering to key
segments
• Branding strategy
• Implementability risk
• Economic
assessment
–cost
–potential revenue
EXHIBIT IV
MARKETING-STRATEGY FRAMEWORK
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Source: Booz-Allen & Hamilton
11
I s s ue 12
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
de?ned 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 ?yer
programs, and so on.
At the completion of external and
internal assessment, a company is
ready for the ?nal 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 ?rst
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.
Reprint No. 98307
B E S T P R A C T I C E
doc_380886583.pdf
W
ANT TO BE King of the
Mountain in a new marketplace?
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 lagging
technology.
Aggressive
competitors
have a vast array of weapons to
knock
you down.
Today’s strategic planners, having
created
as much value as they
could
by cutting costs, are
looking now
BEST PRACTICE
Market Entry
Strategies:
Pioneers Versus
Late Arrivals
By Gurumurthy Kalyanaram and 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.
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 product
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 youare 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 significant
and sustained market-share
advantage
over later entrants. Still, later
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.
1
I s s ue 12
1
Thi r d Quar t e r ’ 98
W
ANT TO BE King of the
Mountain in a new mar-
ketplace? Here is some
advice: be ?rst, 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 ?rst, 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 ?rst 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 ?rst
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 ?rst to the market provides a sig-
ni?cant 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.
B E S T P R A C T I C E
Market Entry
Strategies:
Pioneers Versus
Late Arrivals
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.
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 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.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
By Gurumurt hy Kal yanaram and Ragu Gurumurt hy
2
Thi r d Quar t e r ’ 98
New entrants can take advantage of
gaps in the offerings of these aging pio-
neers, or ?nd 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
2
I s s ue 12
B E S T P R A C T I C E
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.
3
I s s ue 12
3
Thi r d Quar t e r ’ 98
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 dif?cult 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
?rst, 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., ?nancial) and intangible
(e.g., brand equity) resources and
business skills are considered, early
entrants continue to hold market-
B E S T P R A C T I C E
First
Second
Third
Fourth
Fifth
Sixth
Berndt et al.
(1994)
1.00
0.71
0.58
0.51
0.45
0.41
Kalyanaram and
Urban (1992)
Urban et al.
(1986)
Entry
Order
1.00
0.76
0.64
0.57
0.53
0.49
1.00
0.70
0.57
0.49
0.44
0.40
% % %
Return on Investment
(%)
25
Return on Investment
(%)
Consumer Goods
Business
Industrial Goods
Business
Market Pioneers
24 Market Pioneers
Early followers
Late entrants
19
16
Early followers
Late entrants
19
15
EXHIBIT I
FORECASTED MARKET SHARE RELATIVE
TO THE PIONEERING BRAND
EXHIBIT II
ORDER OF MARKET ENTRY AND
ACCOUNTING PROFIT
Source: Adapted from Kalyanaram et al., “Order of
Market Entry: Established Empirical Generalizations,
Emerging Empirical Generalizations, and Future Research”
Source: Adapted from Lambbkin, M.B. (1988),
“Order of Entry and Performance in New Markets”
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Thi r d Quar t e r ’ 98
share advantage.
What is the magnitude of market-
share penalty for later entrants? A
1995 study by Gurumurthy Kalya-
naram and others in Marketing Sci-
ence suggests that the new entrant’s
forecasted market share divided by
the ?rst 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 ?rst 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 con?dence 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
B E S T P R A C T I C E
Belgium
Belgium
France
France
Germany
Germany
Italy
Italy
Netherlands
Netherlands
Spain
Spain
Britain
Britain
Britain-DCS1800
Britain-DCS1801
Net Annual
Market Share
Order of Entry Operator Country
1
2
1
2
1
2
1
2
1
2
1
2
1
2
3
4
January 1994
August 1996
July 1992
December 1992
June 1992
June 1992
October 1992
October 1992
July 1994
September 1995
July 1995
September 1995
July 1992
January 1994
September 1993
April 1994
80%
40%
55%
45%
52%
48%
68%
32%
55%
45%
61%
39%
42%
31%
7%
20%
Date of Entry
Belgacom Mobile
Mobistar
France Telecom
SFR
Mannesmann
T Mobil
Telecom Italia Mobile
Omnitel Pronto Italia
PTT Telecom
Libertel
Telefónica Moviles
Airtel
Vodafone
Cellnet
One-2-One
Orange
European Average*
First
Entrant:
Second
Entrant:
*Minus Britain
}
}
58.5%
41.5%
EXHIBIT III
WESTERN EUROPE: ANNUAL NET ADDITION MARKET SHARE — 1996
Source: Global Mobile, May 1997; Booz-Allen & Hamilton analysis
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
I s s ue 12
and continuous new product launch is
also used as an entry barrier by sever-
al pioneers.
A recent analysis of the evolution
of wireless markets in Europe indi-
cates that ?rst entrants are also mar-
ket leaders in most countries. (See Ex-
hibit III.) Pioneers in cellular service
establish a presence in the market-
place, build brand equity and create
an excellent distribution network. Al-
so, a peculiarity of this industry is that
the quality of service is primarily de-
termined by coverage. Having evolved
over time, the ?rst entrant’s network
usually has much better coverage.
The customers become used to en-
hanced coverage over time. So new
entrants have to invest signi?cantly to
achieve this same coverage — an ef-
fort that is capital intensive and time
consuming. All new networks have ini-
tial bugs that take time to ?x. Sub-
scribers are just not willing to go
through another learning curve, when
there is already a robust supplier of
service. Another frequent constraint
is access to property to build the
towers, since the ?rst en-
trants have already seized
the ideal sites for cover-
age. This, in turn, may re-
quire the later entrant to in-
vest larger amounts in
network infrastructure to
gai n si mi l ar coverage.
Given these hurdles, it can
take two to three years be-
fore a challenger achieves
coverage competitive with
the incumbent’s.
In addition to coverage
and related quality of ser-
vice, another huge barrier
to entry for new entrants is
the issue of number porta-
bility. Customers would
have to get a new cellular number
when they switch carriers since they
cannot take the same phone number
with them as is done in land line net-
works. In general customers do not
like to change their phone number, es-
pecially in Europe, where customers
receive calls in their mobile phones.
Thus, we see the inherent advantages
to being ?rst in the market in the wire-
less industry: control of ideal sites;
freedom to evolve and ?ne-tune net-
work coverage; building of brand loy-
alty by offering superior customer
service; locking in customers by sub-
sidizing equipment for an extended
period under ?xed-service contracts,
and gaining control of key channels of
distribution.
AGILITY NEEDED
FOR LATE ENTRANTS
The picture, however, is not always so
rosy for pioneers and bleak for late en-
trants. In some industries and some
geographic areas, pioneers have lost
market-share advantage relatively
quickly. This can happen for any of
several reasons:
1) An entrenched pioneer may
not be offering a superior level of cus-
tomer service.
2) A new technology may have
changed the cost equation, so that a
new entrant can offer similar or better
service at a lower cost.
3) The new entrant may have de-
veloped a new way to access the mar-
ket, with an innovative distribution
strategy.
4) The latecomer may simply be
pricing aggressively, targeting select-
ed segments by taking advantage of
the incumbent’s tendency to average
pricing across all segments.
In what situations is the pioneer-
ing market-share advantage muted?
For a start, when consumer learning is
limited, the pioneering advantage is
likewise bound to be limited. Con-
sumer learning becomes very dif?cult
if the product becomes complex and
technical. For example, when picture
phones were introduced in the late
1970’s, the market did not respond be-
cause consumers could not ?nd occa-
sions to use the product.
The pioneering advantage is also
limited in a cluttered market: If there
are many available brands, consumers
react by becoming confused.
Moving beyond such issues, what
can later entrants do to overcome any
5
Thi r d Quar t e r ’ 98
B E S T P R A C T I C E
When consumer learning
is limited, the pioneering
advantage is likewise
bound to be limited.
Consumer learning
becomes very difficult if
the product becomes
complex and technical.
For example, when picture
phones were introduced
in the late 1970’s, the
market did not respond
because consumers could
not find occasions to use
the product.
7
I s s ue 12
inherent market-share disadvantage?
First, the later entrant should differen-
tiate itself substantially in the minds of
the consumers. Such positioning can
be accomplished through substantial
changes in either the product or pro-
motion strategies. For example, the
Chrysler Corporation rede?ned per-
ceptions of its minivans by introducing
Caravan, a two-door van. The Ford Cor-
poration’s Windstar, expected to be a
marquee van, substantially lost its
glamour to the Caravan. When the Gen-
eral Motors Corporation decided to
reposition its Oldsmobile, it changed
not only its product but also its adver-
tising copy. The new copy appealed to
consumers over 30 years old, project-
ing the image of a younger profession-
al woman via this voice-over: “This car
is not only for your father’s generation,
but it’s for you too.”
A second route for later entrants
is to discover creative ways to increase
product trial. At best, one study has
found that the market-share advantage
for the early entrants comes from high-
er trial penetration. If the later entrant
can generate greater trial market share,
then its disadvantage can be over-
come. Sample-product trial is an ap-
propriate mechanism. For exam-
ple, in consumer goods,
consumers can be supplied with
a sample product for trial. In non-
consumer goods, other creative
mechanisms must be designed.
Limited demonstration of usage
or prototypes is possible in soft-
ware products, and test usage is
possible in automobiles. Also,
distributing the product through
new channels such as direct mar-
keting (think of the Lands’ End
catalogue or the Mary Kay cos-
metics parties) or a home-shop-
ping-network channel would
place the product in the hands of
more consumers.
The later entrant can also seg-
ment the market, focusing on a partic-
ular target. By providing appropriate
value, the later entrant can extract ad-
ditional rents. A good example of this
is the competition among the Interna-
tional Business Machines Corporation,
Compaq Computer and Dell Computer
in the personal-computer market. Fi-
nally, later entrants can position them-
selves as variety enhancers, rather
than as replacements or substitutes for
the pioneers.
An example is Orange, the late-en-
try cellular service provider in Britain,
which successfully nudged aside the
pioneers. Orange entered the market
almost 30 months after the ?rst en-
trant, Vodafone, and nine months after
One-2-One, and with technology simi-
lar 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 ?rst two
years of introduction, but also devel-
oped aggressive pricing strategies. Or-
ange seized a third of Britain’s total
market’s ?rst 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 pro?ts 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 signi?-
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.
7
Thi r d Quar t e r ’ 98
B E S T P R A C T I C E
Later entrants can
position themselves as
variety enhancers,
rather than as
replacements or
substitutes for the
pioneers. An example is
Orange, the late-entry
cellular service
provider in Britain,
which successfully
nudged aside the
pioneers.
8
Thi r d Quar t e r ’ 98
Later entrants can also succeed
by attacking high-growth markets par-
ticularly when there is a signi?cant
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-
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-
ni?cantly 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
to the personal computer market, cap-
tured the lead in the 1980’s by develop-
ing the technology and using its pow-
erful marketing engine. Later, Compaq
and Dell fundamentally rede?ned the
business. Compaq reduced
the cost by changing the
manufacturing process and
having superior logistics.
Dell, in addition to using an
efficient manufacturing
process and superb logistics,
invented the mail-order or di-
rect channel to access end
users, who by now were com-
fortable with personal com-
puter technology. I.B.M. was
not able to react to these
changes fast enough and lost
its lead in the 1990’s.
DEFENSE STRATEGIES
FOR PIONEERS
Even as new entrants attempt to re-
de?ne the business or formulate niche
strategies to attack pro?table indus-
tries and market segments, pioneers
can ?ght 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
?exible 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
is a low-cost industry and it will be dif-
?cult for them to survive. Pricing below
variable cost, however, is illegal in most
countries. On the other hand, new en-
trants traditionally focus on a few key
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 dif?cult 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
8
I s s ue 12
B E S T P R A C T I C E
Usually, however,
technological innovation
gives a company an edge
for only a time, since
incumbents catchon fairly
quickly. Given that this
is the case, new entrants
should support their
innovations with effective
positioning, appropriate
pricing and aggressive
advertising.
9
I s s ue 12
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 ?exible
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
?lm 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 ?exible 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
9
Thi r d Quar t e r ’ 98
B E S T P R A C T I C E
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.
10
Thi r d Quar t e r ’ 98
10
I s s ue 12
B E S T P R A C T I C E
in the recent past only by ?ghting back
ef?ciently 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 ?rst 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 signi?-
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 pro?le.
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
• Economics of scale
and scope
• Technology drivers
trends
• Effect of external
factors such as
regulation and
public policy
UNDERSTAND MARKET DYNAMICS CAPABILITY ASSESSMENT AND OFFERING
STRATEGY FORMULATION
Understand
Industry
Characteristic
Understand
Market Size
and Growth
Needs
Competitor’s
Positioning;
Strengths
and Weaknesses
Market Access:
Channel
Options
For Existing
Markets
Product/Service
Offering
Non-Product
Related
Sources of
Differentiation
Economic
Assessment
Develop
Core Benefit
Proposition
Assess Options
and Select
Optimal Option
Develop
Product Market
Strategic Options
• Current target
market
• Key segment
characteristics
• Domestic versus
global market
• Market’s implicit
and explicit needs
• Products and
services offered
(including
substitutes)
• Key segments
targeted
• Pricing and
positioning
• Availability of
channels
• Access to key
segments
• Features of new
products
• Service-evolution
plans
• Customer service
• Necessary to
access to key
market segments
• Cost of
manufacturing
• Cost of bringing
to market
• Develop strategic
segmentation based
on needs and new
service offering
• Positioning and
targeting strategy
• Pricing and
promotion
• Channel/market
access
• Value proposition of
the offering to key
segments
• Branding strategy
• Implementability risk
• Economic
assessment
–cost
–potential revenue
EXHIBIT IV
MARKETING-STRATEGY FRAMEWORK
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Source: Booz-Allen & Hamilton
11
I s s ue 12
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
de?ned 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 ?yer
programs, and so on.
At the completion of external and
internal assessment, a company is
ready for the ?nal 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 ?rst
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.
Reprint No. 98307
B E S T P R A C T I C E
doc_380886583.pdf