Download Pioneering Lecture - Olin Business School

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.
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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?
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Economic Theory
Sources 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-Mart…investments
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.
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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?
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Question

Pioneers bear higher risk, greater
R&D, 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?
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Economic Theory
Consumer 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.
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Behavioral Theory
Consumer 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.
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Behavioral Theory
Consumer 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?
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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 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.

A me-too product, despite its similarity
to the dominant brand, will suffer in
comparison, because it is not prototypical. It only derives its identity from
the brand it has copied.
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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.
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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
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