IV. New Market Entries—How New is New?
A survey of new product development practices of 700 U.S. corporations conducted by the
consulting firm Booz, Allen & Hamilton identified six categories of new products based on
their degree of newness as perceived by both the company and the target customers.
oNew-to-the-world products—true innovations that are new to the firm, and create an
entirely new market.
oNew product lines—a product category that is new for the company introducing it,
but not new to customers in target market because of the existence of one or more
competitive brands.
oAdditions to existing product lines—new items that supplement a firm’s established
product line.
oImprovements in or revisions of existing products—items providing improved
performance or greater perceived value brought out to replace existing products.
oRepositioning—existing products that are targeted at new applications and new
market segments.
oCost reductions—product modifications providing similar performance at lower cost.
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.
Introducing a product that is new to both the firm and target customers requires the greatest
expenditure of effort and resources.
Products new to target customers but not new to the firm are often not very innovative in
design or operations, but they may present a great deal of marketing uncertainty.
oThe marketing challenge here is to build a primary demand, making target
customers aware of the product and convincing them to adopt it.
Products new to company but not to the market often present fewer challenges for R&D
and product engineering.
oOnce a company introduces such a product into the market, its primary marketing
objective is to build selective demand and capture market share, convincing
customers the new offering is better than the existing competitive products.
V. Objectives of New Product and Market Development
The primary objective of most new product and market development efforts is to secure
future volume and product growth.
Individual development projects also may accomplish a variety of other strategic
objectives.
Different types of new entries are appropriate for achieving different strategic objectives.
A business’s objective for its new entries influence the kind of entry strategy it should
pursue and the marketing and other functional programs needed to implement that strategy.
VI. Market Entry Strategies: Is It Better To Be a Pioneer or a Follower?
A. Pioneer Strategy
Conventional wisdom holds that although successful pioneers take the greatest risks
and probably experience more failures than their more conservative competitors,
they are greatly rewarded.
Some of the potential sources of competitive advantage available to pioneers are as
follows:
oFirst 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.
oThe pioneer defines the rules of the game: The pioneer’s actions on such
variables as product quality, price, distribution, warranties, postsale service,
and promotional appeals and budgets set standards that subsequent
competitors must meet or beat.
oDistribution advantages: 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.
oEconomies 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.
oHigh 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.
oPossibility 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.
oPossibility of preempting 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.
B. Not All Pioneers Capitalize on Their Potential Advantages
Some pioneers fail.
oThey either abandon the product category, go out of business, or get acquired
before their industry matures.
Some fail during the introductory or shakeout stages of their industries’ life cycles.
oThose that survive may lack resources to keep up with rapid growth or
competencies needed to maintain their early lead in the face of onslaughts by
strong followers.
C. Follower Strategy
Possible advantages of a follower strategy are:
oAbility to take advantage of the pioneer’s positioning mistakes
oAbility to take advantage of the pioneer’s product mistakes
oAbility to take advantage of the pioneer’s marketing mistakes
oAbility to take advantage of the latest technology
oAbility to take advantage of pioneer’s limited resources
D. Determinants of Success for Pioneers and Followers
A pioneering firm stands the best chance for long-term success in market-share
leadership and profitability when:
oThe new product-market is insulated from entry of competitors, at least for a
while, by strong patent protection, proprietary technology, substantial
investment requirements, or positive network effects
oThe 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:
oThere are few legal, technological, or financial barriers to entry
oIt has sufficient resources or competencies to overwhelm pioneer’s early
advantage
The author of a study conducted across a broad range of industry 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
one or more of the following marketing strategy elements:
oLarge entry scale
oBroad product line
oHigh product quality
oHeavy promotional expenditures
The same study found that some late entrants achieved substantial profits by
avoiding direct confrontation with more established competitors and by pursuing
peripheral target markets.
VII. Strategic Marketing Programs for Pioneers
A. Mass-Market Penetration
The ultimate objective of a mass-market penetration strategy is to capture and
maintain a commanding share of the total market for the new product.
The critical 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 tends to be 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.
Mass-market penetration is also appropriate strategy when product category is
likely to experience positive network effects.
B. Niche Penetration
Instead of pursuing the objective of capturing and sustaining a leading share of the
entire market, it may make more sense for small firms with limited resources, to
focus their efforts on a single market segment.
oThis kind of niche penetration strategy can help the smaller pioneer gain the
biggest bang for its limited and avoid direct confrontations with bigger
competitors.
C. Skimming and Early Withdrawal
Even when a firm has the resources to sustain a leading position in a new
product-market, it may choose not to. Competition is usually inevitable, and prices
and margins tend to drop dramatically after followers enter the market.
oTherefore, some pioneers opt to pursue a skimming strategy while planning
an early withdrawal from the market.
Skimming strategy involves 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.
oAt the same time, the firm may work to develop new applications for its
technology or the next generation of more advanced technology.
It is critical that the company using strategies of skimming and early withdrawal
has 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.
Since a firm pursuing this kind of strategy plans to remain in a market only short
term, it is most appropriate when there are few barriers to entry, the product is
expected to diffuse rapidly, and the pioneer lacks the capacity or other resources
necessary to defend a leading share position over the long haul.
D. Marketing Program 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 program focused on:
oAggressively building product awareness and motivation to buy among a
broad cross-section of potential customers
oMaking it as 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
Increasing Customers’ Awareness and Willingness To Buy
oWhen designing a mass-market penetration marketing program, firms should
broadly focus promotional efforts to expose and attract as many potential
customers as possible before competitors show up.
oFirms might attempt to increase customers’ willingness to buy their products
by reducing the risk associated with buying something new.
oA firm committed to mass-market penetration might also broaden its product
offerings to increase its appeal to as many market segments as possible.
Increasing Customers’ Ability to Buy
oTo capture as many customers in as short a time as possible, it usually makes
sense for a firm pursuing mass-market penetration to keep prices low
(penetration pricing) and perhaps offer liberal financing arrangements or easy
credit terms during the introductory period.
oExtensive personal selling and trade promotions aimed at gaining adequate
distribution are usually a critical part of a mass-market penetration marketing
program.
oSuch efforts should take place before the start of promotional campaigns to
ensure that the product is available as soon as customers are motivated to buy
it.
oThe pioneer might reduce switching costs by designing the product to be as
compatible as possible with related equipment.
Additional Considerations When Pioneering Global Markets
oUnless the firm already has an economic presence in a country via the
manufacture or marketing of other products or services, a potential global
pioneer faces at least one additional question: What mode of entry is most
appropriate?
oThere are three basic mechanisms for entering a foreign market:
Exporting through agents (e.g., using local manufacturers’
representatives or distributors)
Contractual agreements (e.g., licensing or franchise agreements with
local firms)
Direct investments
oExporting is the simplest way to enter a foreign market because it involves
the least commitment and risk. It can be direct or indirect.
Indirect exporting relies on the expertise of domestic international
middlemen:
Export merchants—buy the product and sell it overseas for their
own account
Export agents—sell on a commission basis
Cooperative organizations—export for several producers,
especially those selling farm products
oContractual entry modes are nonequity arrangements that involve transfer
of technology or skills to an entity in a foreign country.
In licensing a firm offers right to use its intangible assets (e.g.,
technology, know-how, patents, company name, trademarks) in
exchange for some form of payment.
Franchising grants the right to use the company’s name, trademarks,
and technology.
Contract manufacturing involves sourcing a product from a
manufacturer in a foreign country for sale there or elsewhere.
A turnkey construction contract requires the contractor to have the
project up and operating before releasing it to the owner.
Coproduction involves a company’s providing technical know-how
and components in return for a share of the output that it must sell.
Countertrade transactions include barter (direct exchange of goods),
compensation packages (cash and local goods), counterpurchase
(delayed sale of bartered goods to enable the local buyer to sell the
goods), and a buyback arrangement in which the products being sold
are used to produce other goods.
oOverseas direct investment can be implemented in two ways:
Joint ventures—involve a joint ownership arrangement to produce or
market goods in a foreign country.
Sole ownership—involves setting up a production facility in a foreign
country. It usually allows the parent organization to retain total control
of the overseas operation and avoids the problems of shared
management and loss of flexibility.
E. Marketing Program 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.
The internet provides firms with a number of promotional tools that can reach
specific segments at relatively low cost.
F. Marketing Program Components for a Skimming Strategy
A relatively high price is appropriate for a skimming strategy to increase margins
and revenues, even though some price-sensitive customers may be reluctant to
adopt the product at that price.
In many consumer goods business, 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.