Download Ch15 Marketing Strategies for New Market Entries 15.1: How New is

Ch15 Marketing Strategies for New Market Entries
15.1: How New is New?
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There are six categories of new products based on their degree of newness as perceived by both the company
and the target customers:
 New- to-the-world products: True innovations that are new to the firm and create an entirely new
market (10%).
 New product lines: A product category that is new for the company introducing it, but not new to
customers in the target market because of the existence of one or more competitive brands (20%).
 Additions to existing product lines: New items that supplement a firm’s established product line.
These items may be moderately new to both the firm and the customers in its established productmarkets. They also may serve to expand the market segments appealed to by the line (26 %).
 Improvements in or revisions of existing products: items providing improved performance or
greater perceived value brought out to replace existing products. These items may present moderately
new marketing and production challenges to the firm, but unless they represent a technologically new
generation of products, customers are likely to perceive them as similar to the products they replace
(26%).
 Repositionings: Existing products that are targeted at new applications and new market segments
(7%).
 Cost reductions: product modifications providing similar performance at lower cost (11%).
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A product’s degree of newness to the company, its target customers, or both helps determine the amount of
complexity and uncertainty involved in the engineering, operations, and marketing tasks necessary to make it a
successful new entry. It also contributes to the amount of risk inherent in those tasks.
Introducing a product that is new to both the firm and target customers requires the greatest expenditure of
effort and resources. It also involves the greatest amount of uncertainty and risk of failure because of the lack of
information and experience with the technology and the target customers.
The marketing challenge is to build primary demand, making target customers aware of the product and
convincing them to adopt it.
Products new to the company but not to the market often present fewer challenges for R&D and product
engineering.
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15.2: Objectives of New Product and Market Development
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Primary objective of most new product and market development efforts is to secure future volume and profit
growth.
A business’s objectives for its new entries influence the kind of entry strategy it should pursue and the
marketing and other functional programmes needed to implement that strategy.
If a business is concerned primarily with defending an already strong market share position in its industry, it
may prefer to be a follower.
Usually entering new product markets only after an innovator, a follower relies on superior quality, better
customer service, or lower prices to offset the pioneer’s early lead. This strategy usually requires fewer
investments in R&D and product development, but marketing and sales still are critical in implementing it
effectively.
Strategic objectives attained by successful new market entries:
 Defend market share position
 Establish foothold in new market
 Preempt market segment
 Maintain position as product innovator
 Exploit technology in new way
 Capitalize on distribution strengths
 Provide a cash generator
 Use excess or off-season capacity
15.3: Market Entry Strategies: Is it Better to Be a Pioneer or a Follower?
I.
Pioneer Strategy
 Successful pioneers are handsomely rewarded.
 It is assumed competitive advantages inherent in being the first to enter a new product- market can be
sustained through the growth stage and into the maturity stage of the product life cycle, resulting in a strong
share position and substantial returns.
 Some of the potential sources of competitive advantage available to pioneers are shown below:
Exhibit 15.2 Potential advantages of pioneer and follower strategies
Pioneer
Follower
Ability to take advantage of pioneer’s
positioning mistakes.
• Economies of scales and experience.
•
• High switching costs for early adopters.
• Ability to take advantage of pioneer’s product mistakes.
• Pioneer defines the rules of the game.
•
Ability to take advantage of pioneer’s
marketing mistakes.
• Distribution advantage.
•
Ability to take advantage of the latest
technology.
•
Influence on consumer choice criteria and
attitudes.
• Ability to take advantage of pioneer’s limited resources.
• Possibility of pre-empting scarce resources.
1. First choice of market segments and positions- The pioneer has the opportunity to develop a product
offering with attributes most important to the largest segment of customers or to promote the importance of
attributes that favor its brand. The pioneer’s brand can become the standard of reference customers use to
evaluate other brands. This can make it more difficult for followers with me-too products to convince existing
customers that their new brands are superior to the older and more familiar pioneer. If the pioneer has
successfully tied its offering to the choice criteria of the largest group of customers, it also becomes more
difficult for followers to differentiate their offerings in ways that are attractive to the mass-market segment.
They may have to target a smaller peripheral segment or niche instead.
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2. The pioneer defines the rules of the game- The pioneer’s actions on such variables as product quality, price,
distribution, warranties, post sale service, and promotional appeals and budgets set standards that subsequent
competitors must meet or beat. If the pioneer sets those standards high enough, it can raise the costs of entry
and perhaps pre-empt some potential competitors.
3. Distribution advantages- The pioneer has the most options in designing a distribution channel to bring the
new product to market. This is particularly important for industrial goods where, if the pioneer exercises its
options well and with dispatch, it should end up with a network of the best distributors. This can exclude later
entrants from some markets. Distributors are often reluctant to take on second or third brands. This is
especially true when the product is technically complex and the distributor must carry large inventories of the
product and spare parts and invest in specialized training and service.
For consumer package goods, it is more difficult to slow the entry of later competitors by pre-empting
distribution alternatives. Nevertheless, the pioneer still has the advantage of attaining more shelf-facings at
the outset of the growth stage. By quickly expanding its product line following an initial success, the pioneer
can appropriate still more shelf space, thereby making the challenge faced by followers even more difficult.
And as many retailers are reducing the number of brands they carry in a given product category to speed
inventory turnover and reduce costs, it is becoming more difficult for followers with unfamiliar brands and
small market shares to gain extensive distribution.
4. Economies of scale and experience- Being first means the pioneer can gain accumulated volume and
experience and thereby lower per unit costs at a faster rate than followers. This advantage is particularly
pronounced when the product is technically sophisticated and involves high development costs or when its
life cycle is likely to be short with sales increasing rapidly during the introduction and early growth stages.
As we shall see later, the pioneer can deploy these cost advantages in a number of ways to protect its early
lead against followers. One strategy is to lower price, which can discourage followers from entering the
market because it raises the volume necessary for them to break even. Or the pioneer might invest its savings
in additional marketing efforts to expand its penetration of the market, such as heavier advertising, a larger
salesforce, or continuing product improvements or line extensions.
5. High switching costs for early adopters- Customers who are early to adopt a pioneer’s new product may be
reluctant to change suppliers when competitive products appear. This is particularly true for industrial goods
where the costs of switching suppliers can be high. Compatible equipment and spare parts, investments in
employee training, and the risks of lower product quality or customer service make it easier for the pioneer to
retain its early customers over time. In some cases, however, switching costs can work against the pioneer
and in favor of followers. A pioneer may have trouble converting customers to a new technology if they must
bear high switching costs to abandon their old way of doing things. Pioneers in the development of music
CDs, for instance, faced the formidable task of convincing potential buyers to abandon their substantial
investments in turntables and LP record libraries and to start all over again with the new technology. Once the
pioneers had begun to convince consumers that the superior convenience, sound quality, and durability of
CDs justified those high switching costs, however, demand for CDs and CD players began to grow rapidly
and it was easier for followers to attract customers.
6. Possibility of positive network effects- The value of some kinds of goods and services to an individual
customer increases as greater numbers of other people adopt the product and the network of users grows
larger. Economists say that such products exhibit network externalities or positive network effects.
Information and communications technologies, such as wireless phones, fax machines, computer software,
email, and many Internet sites, are particularly likely to benefit from network effects. [8] For instance, the
value of eBay as an auction site increases as the number of potential buyers and sellers who visit and trade on
the site increase. If the pioneer in such a product or service category can gain and maintain a substantial
customer base before competing technologies or providers appear on the market, the positive network effects
generated by that customer base will enhance the benefits of the pioneer’s offering and make it more difficult
for followers to match its perceived value. And recent research suggests that the positive impacts of such
network effects on pioneer survival and economic success are enhanced when the new products involved are
relatively radical and technologically advanced. On the other hand, for the digital new products and services
most likely to benefit from positive network effects, some of the other potential first-mover advantages may
not be as relevant. For instance, because of the relatively modest fixed costs and low marginal costs of
producing digitized information products like software and music, pioneers are unlikely to benefit from
substantial economies of scale.
7. Possibility of pre-empting scarce resources and suppliers- The pioneer may be able to negotiate favorable
deals with suppliers who are eager for new business or who do not appreciate the size of the opportunity for
their raw materials or component parts. If later entrants subsequently find those materials and components in
short supply, they may be constrained from expanding as fast as they might like or be forced to pay premium
prices
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II.
Not All Pioneers Capitalize on Their Potential Advantages
 Surviving pioneers hold a significantly larger average market share when their industries reach maturity than
firms that were either fast followers or late entrants in the product category.
 Some pioneers fail. They abandon the product strategy, go out of business, or get acquired before their
industry matures.
 While a pioneer may have some potential competitive advantages, not all pioneers are successful at
capitalizing on them. Some fail during the introductory or shakeout stages of their industries’ life cycles.
And those that survive may lack the resources to keep up with rapid growth or the competencies needed to
maintain their early lead in the face of onslaughts by strong followers.
III.
Follower Strategy
 There may be some advantages to letting other firms go first into a product market. Let the pioneer
shoulder the initial risks while the followers observe their shortcoming and mistakes. Possible
advantages of such a follower strategy are:
1- Ability to take advantage of the pioneer’s positioning mistakes. If the pioneer misjudges the
preferences and purchase criteria of the mass-market segment or attempts to satisfy two or more
segments at once, it is vulnerable to the introduction of more precisely positioned products by a
follower. By tailoring its offerings to each distinct segment, the follower(s) can successfully encircle
the pioneer.
2- Ability to take advantage of the pioneer’s product mistakes. If the pioneer’s initial product has
technical limitations or design flaws, the follower can benefit by overcoming these weaknesses. Even
when the pioneering product is technically satisfactory, a follower may gain an advantage through
product enhancements.
3- Ability to take advantage of the pioneer’s marketing mistakes. If the pioneer makes any marketing
mistakes in introducing a new entry, it opens opportunities for later entrants. This observation is
closely related to the first two points, yet goes beyond product positioning and design to the actual
execution of the pioneer’s marketing programme. For example, the pioneer may fail to attain adequate
distribution, spend too little on introductory advertising, or use ineffective promotional appeals to
communicate the product’s benefits. A follower can observe these mistakes, design a marketing
programme to overcome them, and successfully compete head-to-head with the pioneer. Marketing
mistakes can leave a pioneer vulnerable to challenges from later entrants even in product categories
with substantial positive network effects.
4- Ability to take advantage of the latest technology. In industries characterized by rapid technological
advances, followers can possibly introduce products based on a superior, second-generation
technology and thereby gain an advantage over the pioneer. And the pioneer may have difficulty
reacting quickly to such advances if it is heavily committed to an earlier technology.
5- Ability to take advantage of pioneer’s limited resources. If the pioneer has limited resources for
production facilities or marketing programmes, or fails to commit sufficient resources to its new entry,
followers willing and able to outspend the pioneer experience few enduring constraints.
IV.
Determinants of Success for Pioneers and Followers
 A pioneering firm stand the best chance for long-term success in market-share leadership and
profitability when:
 The new product market is insulated from the entry of competitors, by strong patent protection,
proprietary technology
 The firm has sufficient size, resources, and competencies to take full advantage of its
pioneering position and preserve it in the face of later competitive entries.
 A follower will most likely succeed when there are few legal, technological, or financial barriers to
inhibit entry and when it has sufficient resources or competencies to overwhelm the pioneer’s early
advantage.
 A study conducted across a broad range of industries in the PIMS database found that, regardless of the
industry involved, pioneers able to maintain their preeminent position well into the market’s growth
stage had supported their early entry with the following marketing strategy elements:
 Large entry scale – Successful pioneers had sufficient capacity, or could expand quickly enough,
to pursue a mass-market targeting strategy, usually on a national rather than a local or regional
basis. Thus, they could expand their volume quickly and achieve the benefits of experience-curve
effects before major competitors could confront them.
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Broad product line – Successful pioneers also quickly add line extensions or modifications to
their initial product to tailor their offerings to specific market segments. This helps reduce their
vulnerability to later entrants who might differentiate themselves by targeting one or more
peripheral markets.
 High product quality – Successful pioneers also offer a high-quality, well-designed product from
the beginning, thus removing one potential differential advantage for later followers. Competent
engineering, thorough product and market testing before commercialization, and good quality
control during the production process are all important to the continued success of pioneers.
 Heavy promotional expenditures – Successful pioneers had marketing programmes
characterized by relatively high advertising and promotional expenditures as a percentage of sales.
Initially the promotion helps to stimulate awareness and primary demand for the new product
category, build volume, and reduce unit costs. Later, this promotion focuses on building selective
demand for the pioneer’s brand and reinforcing loyalty as new competitors enter.
The same study found that the most successful fast followers had the resources to enter the new market on a
larger scale than the pioneer. Consequently, they could quickly reduce their unit costs, offer lower prices
than incumbent competitors, and enjoy and positive network effects.
Some fast followers achieved success by leapfrogging earlier effects. These followers won customers away
from the pioneer by offering a product with more sophisticated technology, better quality, or superior
service.
The author found that some late entrants also achieved substantial provides by avoiding direct
confrontations with more established competitors and by pursuing peripheral target markets. They often
offer tailor-made products to smaller market niches and support them with high levels of service.
Followers typically enter a market after it is in the growth phase of its life cycle, and they start with low
market shares relatives to the established pioneer.
Exhibit 15.4: Marketing strategy elements pursued by successful pioneers, fast
followers and late entrants
These marketers …
are characterized by one or more of these strategy
elements:
Successful pioneers
• Large entry scale.
• Broad product line.
• High product quality.
• Heavy promotional expenditures.
Successful fast followers
• Larger entry scale than the pioneer.
• Leapfrogging the pioneer with superior:
– product technology.
– product quality.
– customer service.
Successful late entrants
• Focus on peripheral target markets or niches.
15.4: Strategic Marketing Programs for Pioneers
 A pioneer chooses from one of three different types of marketing strategies and they are: mass-market
penetration, niche penetration, or skimming and early withdrawal.
1- Mass-Market Penetration
 Objective of a mass- market penetration strategy is to capture and maintain a commanding share of the
total market for the new product.
 The marketing task is to convince as many potential customers as possible to adopt the pioneer’s
product quickly to drive down unit costs and build a large contingent of loyal customers before
competitors enter the market.
 Mass-market penetration is most successful when entry barriers inhibit or delay the appearance of
competitors, thus allowing the pioneer more time to build volume, lower costs, and create loyal
customers, or when the pioneer has competencies or resources that most potential competitors cannot
match.
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 A smaller firm with limited resources can successfully employ a mass-market penetration strategy if
the market has a protracted adoption process and slow initial growth.
 Slow growth can delay competitive entry because fewer competitors are attracted to a market
with questionable future growth. This allows the pioneer more time to expand capacity.
 Mass-market penetration is an appropriate strategy when the product category is likely to experience
positive network effects.
2- Niche Penetration
 Niche penetration: focusing on a single market segment. It can help the smaller pioneer gain the
biggest bang for its limited bucks and avoid direct confrontations with bigger competitors.
 It is most appropriate when the new market is expected to grow quickly and there are a number of
different benefit or applications segments to appeal to. It is attractive when there are few barriers to the
entry of major competitors and when the pioneer has only limited resources and competencies to
defend any advantage it gains through early entry.
3- Skimming and Early Withdrawal
 Skimming strategy: setting a high price and engaging in only limited advertising and promotion to
maximize per-unit profits and recover the product’s development costs as quickly as possible.
 The firm may work to develop new applications for its technology or the next generation of more
advanced technology.
 Either small or large firms can use strategies of skimming and early withdrawal.
 It is critical that the company have good R&D and product development skills so it can produce a
constant stream of new products or new applications to replace older ones as they attract heavy
competition.
Exhibit 15.5 Marketing objectives and strategies for new product pioneers
Alternative marketing strategies
Situational
variables
Mass-market penetration
Primary objective
•
Maximize number of triers and
adopters in total market.
•
Maximize number of triers and
adopters in target segment.
Recoup development and
• commercialization costs as soon as
possible.
•
Maintain leading share position in
total market.
•
Maintain leading share position in
target segment.
Withdraw from market when
• increasing competition puts
pressure on margins.
Market
• Large potential demand.
characteristics
•
Relatively homogeneous
customer needs.
Customers likely to adopt product
• relatively quickly; short diffusion
process.
Product
characteristics
•
Product technology patentable or
difficult to copy.
Niche penetration
Skimming; early withdrawal
• Large potential demand.
• Limited potential demand.
Fragmented market; many
• different applications and benefit
segments.
Customers likely to adopt product
• relatively quickly; short adoption
process.
Customers likely to adopt product
• relatively quickly; short adoption
process.
•
Product technology offers little
• patent protection; easily
copied or adapted.
Product technology offers little
• patent protection; easily
copied or adapted.
Early adopters willing to pay high
price; demand is price inelastic.
Components or materials
• difficult to obtain; limited sources
of supply.
•
Complex production process;
• substantial development and/or
investment required.
Relatively simple production
• process; little development or
additional investment required.
Relatively simple production
• process; little development or
additional investment required.
Substantial network effects; value
• increases with growth in installed
customer base.
• Limited or no network effects.
• Limited or no network effects.
Competitor
• Few potential competitors.
• Many potential competitors.
• Many potential competitors.
characteristics
Most potential competitors have
limited resources and
•
competencies; few sources of
differential advantage.
Some potential competitors have
substantial resources and
•
competencies; possible sources of
differential advantage.
Some potential competitors have
substantial resources and
•
competencies; possible sources of
differential advantage.
Firm
characteristics
•
Strong product-engineering skills;
able to quickly develop product
•
Components or materials easy to
obtain; many sources of supply.
Limited product-engineering skills
and resources.
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•
•
Components or materials easy to
obtain; many sources of supply.
Strong basic R&D and newproduct development skills; a
modifications and line extensions
for multiple market segments.
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prospector with good
capability for continued new
product innovation.
Strong marketing skills and
resources; ability to identify and
develop marketing
programmes for multiple
•
segments; ability to shift from
stimulation of primary demand to
stimulation of selective
demand as competitors enter.
•
Limited marketing skills and
resources.
Good sales and promotional skills;
able to quickly build primary
demand in target
•
market; perhaps has limited
marketing resources for long-term
market maintenance.
Sufficient financial and
organizational resources to build
•
capacity in advance of growth in
demand.
Insufficient financial or
organizational resources to build
•
capacity in advance of growing
demand.
Limited financial or organizational
resources to commit to building
•
capacity in advance of growth in
demand.
Marketing Programme Components for a Mass-Market Penetration Strategy
 The crucial marketing task in a mass-market penetration strategy is to maximize the number of customers
adopting the firm’s new product as quickly as possible. This requires a marketing programme focused on:
 Aggressively building product awareness and motivation to buy among a broad cross-section
of potential customers
 Making it easy as possible for those customers to try the new product, on the assumption that
they will try it, like it, develop loyalty and make repeat purchases.
 A number of marketing activities that might help increase customers’ awareness and willingness to buy or
improve their ability to try the product are shown below:
Exhibit 15.7 Components of strategic marketing programmes for pioneers
Alternative strategic marketing programmes
Strategic
objectives and tasks
Increase customers’
awareness and
willingness to buy
Mass-market penetration
•
Heavy advertising to generate
awareness among customers in
mass market; broad use of mass
media.
Heavy advertising directed at target
Limited advertising to generate
• segment to generate awareness; use • awareness, particularly among least
selective media relevant to target.
price sensitive early adopters.
Extensive salesforce efforts to win
new adopters; possible use of
•
incentives, to encourage new
product sales.
Extensive salesforce efforts
focused on potential customers in
• target segment; possible use of
incentives to encourage new
product sales to target accounts.
Extensive salesforce efforts
particularly focused on largest
• potential adopters; possible use of
volume-based incentives to
encourage new product sales.
Advertising and sales appeals
• stress generic benefits of new
product types.
Advertising and sales appeals
• stress generic benefits of new
product type.
Advertising and sales appeals
• stress generic benefits of new
product type.
Extensive introductory sales
• promotions to induce trial, but
focused on target segment.
•
Additional product development
limited to improvements or
•
modifications to increase appeal to
target segment.
Little, if any, additional
• development within the
product category.
•
Extensive introductory sales
promotions to induce trial
(sampling, couponing, quantity
discounts).
Move relatively quickly to expand
offerings (line extensions, multiple
•
package sizes) to
appeal to multiple segments.
Offer free trial, liberal return or
Offer free trial, liberal return or
extended warranty policies to
extended warranty policies to
•
•
reduce customers’ perceived risk of
reduce target customers’ perceived
adopting the new product.
risk of adopting the new product.
Increase customers’
ability to buy
Skimming; early
withdrawal
Niche penetration
Offer free trial, liberal return or
extended warranty policies to
•
reduce target customers’ perceived
risk of adopting the new product.
•
Penetration pricing; or start with
high price but bring out lowerpriced versions in
anticipation of competitive entries.
•
Extended credit terms to encourage
Extended credit terms to encourage
Extended credit terms to
•
•
initial purchases.
initial purchases.
encourage initial purchases.
•
Penetration pricing; or start with
high price but bring out lowerpriced versions in
anticipation of competitive entries.
Limited use, if any, of introductory
sales promotions; if used, they
should be volume-based quantity
discounts.
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•
Skimming pricing; attempt to
maintain margins at level
consistent with value of product to
early adopters.
Heavy use of trade promotions
• aimed at gaining
extensive distribution.
Trade promotions aimed at gaining
solid distribution along retailers or
Limited use of trade promotions;
• distributors
• only as necessary to gain adequate
pertinent for reaching target
distribution.
segment.
Offer engineering, installation and
training services to
increase new product’s
•
compatibility with customers’
current operations to reduce
switching costs.
Offer engineering, installation and
training services to
increase new product’s
•
compatibility with customers’
current operations to reduce
switching costs.
Offer limited engineering,
installation and services as
•
necessary to overcome
customers’ objections.
 Increasing Customers’ Awareness and Willingness to Buy
 Heavy expenditures on advertising, introductory promotions such as sampling and couponing, and personal
selling efforts all can increase awareness of a new product or service among potential customers.
 Media advertising and sales promotion are more useful for building awareness and primary demand for a
new consumer good among customers in mass market.
 Firms might attempt to increase customers’ willingness to buy their products by reducing the risk
associated with buying something new.
 A firm committed to mass-market penetration might broaden its product offerings to increase its appeal to
as many market segment as possible.
 Increasing Customers’ Ability to Buy
 Customers must be aware of the item and be motivated to buy.
 A firm must keep prices low (penetration pricing) and perhaps offer liberal financing arrangements or easy
credit terms during the introductory period
 Pioneers introducing new information or communications technologies tend to be particularly aggressive
in pricing their offerings for two reasons:
 First: such products often can benefit from positive network effects if enough customers can be
induced to adopt them quickly.
 Second: the variable costs of producing and distributing additional units of such products are
usually very low.
 A factor that can inhibit customers’ ability to buy is a lack of product availability.
 Additional Considerations When Pioneering Global Markets
 Three basic mechanisms for entering a foreign market: exporting through agents, contractual agreements,
and direct investment.
 Exporting has the advantage of lowering the financial risk for a pioneer entering an unfamiliar foreign
market. Such arrangements also afford a pioneer relatively little control over the marketing and distribution
of its product or service.
 Investing in a wholly owned subsidiary typically makes little sense until it becomes clear that the
pioneering product will win customer acceptance.
 Intermediate modes of entry, such as licensing or forming a joint venture with a local firm in the host
country, tend to be the preferred means of developing global markets for new products.
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Marketing Programme Components for a Niche Penetration Strategy
 The niche penetrator should keep its marketing efforts clearly focused on the target segment to gain as
much impact as possible from its limited resources.
Marketing Programme Components for a Skimming Strategy
 Introductory promotional programmes might best focus on customer groups who are least sensitive to price
and most likely to be early adopters of the new product. This can help hold down promotion costs and
avoid wasting marketing efforts on less profitable market segments.
 Skimming strategies focus on relatively upscale customers, since they are often more likely to be early
adopters and less sensitive to price.
 A critical element of a skimming strategy is the nature of the firm’s continuing product-development
efforts. A p
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