The Pioneering Advantage/Disadvantage

1
The Pioneering Advantage/Disadvantage

• Empirical Evidence
• Theory of Pioneering Advantage
• Economic
• Consumer Behavior
• Principles of Entry Deterrence
• Late Entrant Strategies for Combating Pioneering
  Advantage.

2
Some Empirical Evidence

• 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.
• 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

• 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.
• Urban et. al study of 129 CPG brands in well
  defined categories find strong evidence of a
  pioneering advantage.
• 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 TheorySources of Pioneering Advantage

• Supply Side Sources
• Experience curve advantages and economies of
  scale.
• Learning by doing (Texas Instruments)
• Decision Fixed costs of investment vs. lower
  variable costs (Wal-Martinvestments in
  information systems, satellites, electronic
  warehousing)
• 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

• 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.
• Which of these strategies will you use?

6
Question

• Pioneers bear higher risk, greater RD, higher
  launch costs.
• 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.
• Moreover such a late-mover can position close to
  the pioneer and sell at a lower price.
• Why does the pioneering advantage persist?

7
Economic TheoryConsumer Side Sources

• 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.
• Brand specific user skills.
• Implications
• 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 TheoryConsumer Side Sources

• Consumer behavior researchers criticize the
  economic approach because it assumes that product
  preferences are fixed.
• Memory for product information and past
  experience has a profound impact on consumer
  decision behavior.
• Knowledgeable customers depend heavily on brands
  as foci for organizing product information.
• 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 TheoryConsumer Side Sources

• Two behavioral advantages
• 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).
• But, why does this advantage persist?
• Original coke consumers die and are replaced by
  a new generation?
• Why do me-too products that are similar not
  succeed?

10
Why Does Pioneering Persist

• The first experience in a category among new
  consumers is more likely to be with the biggest
  brands.
• Prior to first trial, a customers knowledge
  about the importance of attributes or their ideal
  combination is vague it may be approximately
  uniform.
• Post-trial, the brand tried updates the
  customers preferences, and the updated
  preferences favor the brand tried.
• 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.
• Frequently effect 2 dominates. What is the
  implication for the late entrant.
• Should the late entrant move towards the pioneer
  or another late entrant.

12
Late-Entry Strategy

• 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.
• Position close to a differentiated entrant rather
  than the pioneer
• Deliberate adoption of follower status
• Need a unique non-transferable follower attribute
  (Avis).
• Deliberate adoption of a Niche. Rationale behind
  Kiwi airlines