The study offers a new conceptual framework for making market entry decisions and for analyzing measures that can point to unexpected advantages and lurking threats. This framework accounts for factors such as market uncertainty, firm heterogeneity, competition, hurting sales of a company's existing products, and order of entry effects in a firm's market entry decision.
"Market entry is an important yet complex marketing decision that critically affects a firm's bottom line," write Chakravarthi Narasimhan of Washington University's Olin School of Business and Z. John Zhang of Columbia University's Columbia Business School.
They note that in a typical year, over 15,000 new products are introduced in the U.S. packaged goods industry, many of which are aimed at a new market or a new market niche. According to a recent estimate, 80% of new consumer packaged goods fail and about 33% of new industrial products fail at launch.
The authors set out to develop a framework that could guide a firm's market entry decisions and reduce the failure rate.
Pioneering Advantage, Laggard's Disadvantage
The model looks at pioneering advantages – the net benefit of becoming a market pioneer – and ‘laggard's disadvantages' – the penalty for being a late entrant.
The authors' analysis shows that in making a market entry decision, a firm should not focus its attention exclusively on pioneering advantages; instead, it should also weigh the cost of ceding to its rival the opportunity to become a pioneer.
Only when a firm considers the full consequences of its decisions and weighs the rival's incentives in market entry can it hope to avoid either premature or belated entry. The optimal decision may call for a firm to be a ‘prudent laggard' when pioneering advantages to the firm are substantial, or a market pioneer when facing pioneering disadvantages.
The authors find, for instance, that the firm that is most preferred by consumers as the market pioneer or the firm that is the most resourceful in building consumer loyalty for its pioneering brand need not actually step forward and pioneer a specific product.
Their analysis further points out that a company's entry decision is affected by the degree to which its new product competes with its older products – a phenomenon called cannibalization. They suggest that the possibility of cannibalization should not always deter a firm from pioneering a market. Indeed, it should motivate a firm to become the pioneer, as doing so can give a firm the chance to minimize cannibalization. Johnson and Johnson's effort to position its new ibuprofen brand Medipren as a treatment for body aches and thus to avoid challenging its popular headache brand, Tylenol, has such an effect of reducing cannibalization.
The authors were struck by the fact that established firms are frequently slow to enter an untested market. Their research confirms that it is frequently optimal for an established firm to wait and let a new entrant assume the risk of testing the market. There is nothing inherently inglorious or irrational about being a late mover.
Their analysis suggests that a firm's investments in areas such as distribution channels, customer and brand equity, production and marketing capabilities, process innovations, and even sleeping patents assume strategic importance in product management. Such investments reduce a firm's late-mover disadvantages and provide a hedge against entering a market late.
Boeing vs. Airbus, Microsoft vs. Netscape
The study challenges the prevalent academic view that a company should do a straightforward cost-benefit analysis in deciding whether to take the first jump to market.
"This approach of using `net pioneering advantages' as a litmus test for making market entry decisions is not as plausible as it may seem," and it may have contributed to the high rate of new product failures, write the authors.
"A company like Boeing can undoubtedly use the cost-benefit analysis of being a market pioneer to decide whether to speed to the jumbo jet market if it is currently the only viable firm to enter the market. However when both Boeing and Airbus stand ready to enter the market, whether or not Boeing can become a pioneer does not depend solely on its own action, and a simple cost-benefit analysis is no longer adequate."
Thus, for example, Microsoft's early decision to delay the introduction of its Internet browser software – knowing that it could always "embrace and extend" later and that Netscape was determined to move quickly lest the large software company overwhelm it by being first to market – may indeed have been the prudent choice at that time of market uncertainties.
The study, "Market Entry Strategy Under Firm Heterogeneity and Asymmetric Payoffs," appears in the current issue of Marketing Science, an INFORMS publication.
The Institute for Operations Research and the Management Sciences (INFORMS®) is an international scientific society with over 10,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, the stock market, and telecommunications. The INFORMS website is at http://www.informs.org.