1 The Pioneering Advantage/Disadvantage l Empirical Evidence l Theory of Pioneering Advantage »Economic »Consumer Behavior l Principles of Entry Deterrence l Late Entrant Strategies for Combating Pioneering Advantage.

2 Some Empirical Evidence l A study of 40 industrial product entries represented by large firms showed that »after four years, the average share of entrants was 15%. » while shares of largest existing incumbents declined from 47% to 28%. »shares decline but do not equalize. l A study of 371 consumer goods business units in mature categories. »Firms designated themselves "Pioneers", Early Followers" and "Later Entrants". »Shares averaged 29%, 16% and 11% respectively.

3 Empirical Evidence l For pharmaceutical products (diuretics and anti-anginals): "first firm to offer and promote a new type of product received a substantial and enduring sales advantage”. l Urban et. al study of 129 CPG brands in well defined categories find strong evidence of a pioneering advantage. l However all these studies may suffer from a common defect - the survivor bias. »All the pioneering products considered survived. In many categories, the original pioneer is long since gone, a victim of poor quality, unacceptable price or poor marketing. Why does pioneering advantage exist? What are its theoretical underpinnings?

4 Economic Theory Sources of Pioneering Advantage Supply Side Sources l Experience curve advantages and economies of scale. »Learning by doing (Texas Instruments) »Decision: Fixed costs of investment vs. lower variable costs (Wal-Mart…investments in information systems, satellites, electronic warehousing) l Entry barriers »Preemptive positioning. Adopting the best “market position.” »Patented product differentiation advantages. »Ability to invest in or take entry-deterrence actions.

5 Economic Theory l Should a manager of a pioneering firm try to deter entry through »threatening to seriously cut price if the entrant indeed enters. »Investing in excess plant capacity. l Which of these strategies will you use?

6 Question l Pioneers bear higher risk, greater R&D, higher launch costs. l A late entrant can learn about the technology and thereby attain cost and product design advantages which might be greater than the economies of scale and other advantages of the pioneer. l Moreover such a late-mover can position close to the pioneer and sell at a lower price. l Why does the pioneering advantage persist?

7 Economic Theory Consumer Side Sources l Consumers are uncertain about the quality in a category »Risk based explanation »The first brand that performs satisfactorily reduces this uncertainty. »Compared trying other brands involves the cost of risk. l Brand specific user skills. Implications l Pioneering advantage higher when »Low Frequency of Purchase »Low cost of product to consumer. Because consumers are more likely to search for information the more expensive the product. For low cost product they rely on the brand itself.

8 Behavioral Theory Consumer Side Sources l Consumer behavior researchers criticize the economic approach because it assumes that product preferences are fixed. l Memory for product information and past experience has a profound impact on consumer decision behavior. l Knowledgeable customers depend heavily on brands as foci for organizing product information. l Choice experience results in selective retention of brand information favoring the chosen brand. »Choice affects memory and memory in turn, affects choice processes.

9 Behavioral Theory Consumer Side Sources Two behavioral advantages l In the early stages of the market consumers may know little about the relative importance of their relative attributes »A pioneer influences how different product attributes are valued (Coca-Cola). »The pioneer becomes proto-typical of the category or the standard against which later brands are judged (Coke, Roller-Blade, Kleenex). l But, why does this advantage persist? »Original coke consumers die and are replaced by a new generation? l Why do me-too products that are similar not succeed?

10 Why Does Pioneering Persist l The first experience in a category among new consumers is more likely to be with the biggest brands. »Prior to first trial, a customer’s knowledge about the importance of attributes or their ideal combination is vague; it may be approximately uniform. »Post-trial, the brand tried updates the customer’s preferences, and the updated preferences favor the brand tried. l A me-too product, despite its similarity to the dominant brand, will suffer in comparison, because it is not proto- typical. It only derives its identity from the brand it has copied.

11 Late Entry Strategies: Behavioral Basis Three Effects »1. The closer a brand is to the buyer's ideal, the greater the relative preference, all else equal. »2. Closer a late entrant is to a pioneer, the greater the valuation of the pioneer brand, relative to the new comer. »3. More dominant the pioneer less price sensitive is the category. l Frequently effect 2 dominates. What is the implication for the late entrant. l Should the late entrant move towards the pioneer or another late entrant.

12 Late-Entry Strategy l Product differentiation rather than lower price. »High Differentiation with high price and high advertising (Honda vs. Harley Davidson motorcycles). »High differentiation with low price and low advertising i.e., a fringe product - Rent a Wreck in car rentals. l Position close to a differentiated entrant rather than the pioneer l Deliberate adoption of follower status »Need a unique non-transferable follower attribute (Avis). l Deliberate adoption of a Niche. Rationale behind Kiwi airlines