Consumer Behaviors, MIT College
Because it takes time to roll out a new market offering, work out the technical problems, fill
dealer
channels and gain consumer acceptance, sales growth tends to be slow in the introduction
stage.
Profits are negative or low, while promotional marketing communications expenditures are at
their highest ratio to sales because of the need to: (1) inform potential consumers; (2) induce
customers to trial the market offering; and (3) secure distribution in retail outlets. 3 Firms focus
on
those buyers who are ready to purchase. Prices tend to be high because costs are high.
Companies that plan to introduce a new market offering must learn from previous experiences
and exercise sound judgement when to enter the market. To be first can be rewarding,
but risky and expensive. To come in later makes sense if the firm can bring superior technology,
quality or brand strength. Speeding up innovation time is essential in an age of shortening
product
life cycles. Being early has been shown to pay. Nokia was a good illustration of a fast-track
innovator (acquired by Microsoft in 2014). In many cases the market pioneer gains the greatest
advantage. Companies such as Amazon, Nintendo, Sony and Swatch developed sustained
market
dominance.
What are the sources of the pioneer’s advantage? Early users will recall the pioneer’s brand
name (as in the case of Hoover, whose brand name became the generic term for vacuum
cleaners
for several years in the United Kingdom) if the product satisfies them. The pioneer’s brand also
establishes the attributes the product class should possess. The pioneer’s brand normally aims
at the middle of the market and so captures more users. Customer inertia also plays a role; and
there are producer advantages: economies of scale, technological leadership, patents,
ownership
of scarce assets, and other barriers to entry. Furthermore, pioneers can benefit from effective
marketing communications and enjoy higher rates of consumer repeat purchases.
However, pioneer advantage is not inevitable. Consider the fate of Amstrad (low-cost personal
computers), Apple’s Newton (personal digital assistant) and Netscape (web browser), were all
market pioneers overtaken by later entrants. First movers also have to watch out for what some
have called the ‘second mover advantage’.
If a company wants to win, it needs to be the first, surely? The first mover advantage theory
states that the first company entering a certain market will gain massive market share due to
the
competitive advantages developed and will also be able to defend its leadership position from
new entrants. Andrew Grove, Intel’s ex-CEO, defended that ‘the first mover and only the first
mover, the company that acts while others dither, has a true opportunity to gain time over its
competitors; and time advantage, in this business, is the surest way to gain market share’. 4
There is a lot of theoretical evidence supporting the model, but does this evidence emerge
empirically as well? Not quite. Consider the markets for safety razors, disposable nappies,
photographic
film, laser printers, games consoles, VCRs, energy drinks, personal computers, internet
browsers, operating systems, search engines, online bookstores, online auctions, VoIP (a
protocol
optimised for the transmission of the voice through the internet) services – and the list goes on.
In each and every one of these markets, the leader position is held by a company that was a late
entrant to the market.
The question then becomes: why, despite the lack of empirical evidence, do people still
embrace the idea that being the first to enter a market is extremely important? There are three
main reasons: the industrial age environment, natural monopolies and the bias towards
winners.