The quandry of optimal timing of the announcement of the vice-presidential choices

When should Barack Obama and John McCain announce their vice-presidential choices? The objective would be to get maximum coverage and electoral bounce from the announcement. And here is the description of the timing quandry for each candidate.

Barack Obama is expected to return from his current Afghanistan, Iraq, and European foreign policy tour on or about July 28th. The Beijing Olympic games begin on August 8th and end on August 24th. The Democratic party convention begins on August 25th and ends on August 28th. (The Republican party convention begins on September 1st).

So Obama has to announce his vice-presidential choice at the convention (he would not obviously announce during the olympic games) or between about July 8th and about August 3rd or 4th so that the Obama campaign can enjoy 3-4 days of comprehensive news coverage -- the vice-presidential choice is likely to generate substantial free publicity. The announcement at the convention is a bit too risky. Further, Obama's birthday is on August 4th, he would be 46 years of age, and that would be a wonderful occasion to showcase the youth of Obama (and conversely, the age of McCain -- 72 years.) So an announcement is likely to be made between about July 28th and August 3rd or 4th.

What about John McCain? He will certainly wait to know Obama's choice before he makes the final decision. That means that McCain has two options given the fact that McCain also will not make the announcement during the olympic games -- August 8th to August 24th and it is a protocol to lie low during the other party's convention (in this case, the Democratic party convention which is between August 25th and August 28th).

Therefore, one alternative for McCain is that he can make the announcement immediately after the Democratic party convention i.e. on August 29th or 30th or 31st and before the Republican party convention begins on September 1st. That would limit the post-convention electoral bounce for Obama after this monstrously publicized acceptance speech on August 28th. But the problem of announcement on August 29th or 30th is that the announcement is that the announcement may also be contaminated with substantial discussion of McCain's age (72 years old) and comparison with Obama's youth and age (47 years). Actually, the interaction between the positive glow from the Democratic party nomination acceptance speech for Obama and the unfavorable coverage of McCain's age could turn out to be an even biggest boost for Obama.

The other alternative is that McCain can follow Obama immediately on or about August 3rd or 4th: let us say, Obama announces his vice-presidential choice on August 3rd, McCain can make his announcement immediately on August 4th or 5th and that would neutralize any electoral bounce that Obama may get from his vice-presidential choice. But then Obama's birthday on August 4th poses the same problem of discussion and comparison of the ages of the candidates.

So, while it is fairly obvious that the optimal time frame for the announcement of his vice-presidential choice is July 28th - August 3rd or 4th for Obama but it is not clear what is the optimal time frame for McCain (immediately after Obama in early August or immediately after the Democratic party convention in late August).

Differences in preference measurement

There is an anomaly in the public preference measurement and polls regarding the choices in the U.S. Presidential elections between Senators McCain and Obama. Here is the empirical anomaly --

The daily tracking polls/preference measures (i.e. continuous time-series data) appear to show a smaller (1-3 points) lead for Senator Obama. See Gall Up and Rasmussen Report numbers. But the more static preference measures appear to suggest a larger lead (6-9 points, see recent Quinnipiac, CBS/New York Times, ABC/Washington Post, Reuters/Zogby polls) for Senator Obama.

Why is this? Not clear. Some obvious explanations are not plausible. Polls are not taken in the same time periods. No that can be a reason because time-periods overlap. Polls are taken by different organizations. That can not explain it -- for example, the preference measurement by the USAToday/Gall Up (Gall Up organization conducted the poll) found a larger lead for Obama than Gall Up's own tracking poll in June.

So we have to fall on the general explanations i.e. differences in sampling methods, sample sizes, and modeling specifications etc. Sure but these explanations are not quite satisfying because there appears to be convergence in the preference measures both in the time-series data (1-3 points) and the more static data measurement (6-9 points).

The Power of Giving

Giving -- philanthropy -- makes human beings happy. That's why we give, donate to causes.

When someone donates millions of dollars to an institution -- a hospital, a educational outfit -- and gets his/her name placed on the institution, that can be explained by a simple human longing for immortality. The desire of human beings to perpetuate their memory is well documented.

But why do we give $100 to American Red Cross or $50 to American Heart Association or $5 to Boy Scouts or $25 to a soup kitchen. There are no named plaques or boards. We give not for personal glory, we give because the very act of giving with the knowledge that giving is helping someone makes us happy.

Professor Michael Norton and his colleagues have conducted extensive research on this topic. Norton says, "Intentional activities—practices in which people actively and effortfully choose to engage—may represent a promising route to lasting happiness. Supporting this premise, our work demonstrates that how people choose to spend their money is at least as important as how much money they make," the researchers explain.

That's why probably those that give continue to give because they have found that giving brings happiness. However, those that have not given are more worried about losing because they have not experienced that the joy of giving is substantially greater than the joy of parting with the resource.

So the first lesson is to induce human beings into giving some -- and if they do, they are likely to repeat giving. The old cliche -- the more you give, the more you get -- is quite correct.

Giving does not have to be only money, it may be time, intellect and service. Gandhis, Mandelas, Kings, and Teresas have found that service is joyful and that's why it is not only not burdensome but gratifying for them.

"Our findings suggest that very minor alterations in spending allocations—as little as $5 in our final study—may be sufficient to produce non-trivial gains in happiness on a given day."

Bikinis Instigate Generalized Impatience in Intertemporal Consumer Choice

Bikini-Clad Women Make Men Impatient

Images of sexy women tend to whet men’s sexual appetite. But stimulating new research in the Journal of Consumer Research says there’s more than meets the eye. A recent study shows that men who watched sexy videos or handled lingerie sought immediate gratification—even when they were making decisions about money, soda, and candy.

Authors Bram Van den Bergh, Siegfried DeWitte, and Luk Warlop (KULeuven, Belgium) found that the desire for immediate rewards increased in men who touched bras, looked at pictures of beautiful women, or watched video clips of young women in bikinis running through a park.

“It seems that sexual appetite causes a greater urgency to consume anything rewarding,” the authors suggest. Thus, the activation of sexual desire appears to spill over into other brain systems involved in reward-seeking behaviors, even the cognitive desire for money.

“After they touched a bra, men are more likely to be content with a smaller immediate monetary reward,” writes Bram Van den Bergh, one of the study’s authors. “Prior exposure to sexy stimuli may influence the choice between chocolate cake or fruit for dessert.”

The authors believe the stimuli bring men’s minds to the present as opposed to the future. “The study demonstrates that bikinis cause a shift in time preference: Men live in the here and now when they glance at pictures featuring women in lingerie. That is, men will choose the immediately available rewards and seek immediate gratification after sex cue exposure.”

Do all straight men respond the same? Actually, no. Some men are highly responsive to rewards while others are not so sensitive, and the more reward-sensitive men are the impatient ones.

In fact, doing a task designed to inspire financial satisfaction reduced the bikini-inspired impatience, just as feeling full reduces food cravings. Men may want to be aware of bikinis’ effects on their bank accounts and waistlines.

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Bram Van den Bergh, Siegfried DeWitte, and Luk Warlop. “Bikinis Instigate Generalized Impatience in Intertemporal Choice” Journal of Consumer Research: June 2008.

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Founded in 1974, the Journal of Consumer Research publishes scholarly research that describes and explains consumer behavior. Empirical, theoretical, and methodological articles spanning fields such as psychology, marketing, sociology, economics, and anthropology are featured in this interdisciplinary journal. The primary thrust of JCR is academic, rather than managerial, with topics ranging from micro-level processes (e.g., brand choice) to more macro-level issues (e.g., the development of materialistic values).

Polls and Preference Measurements: Challenges and Opportunities

We are now in the political season in the U.S. Forecasting the preferences of voters is in huge demand. Some polls appear to be acceptable, others not. So it may be worthwhile to step back and examine the basics of predictive science.

Predictive science consists of two fundamental components. First, specification of an appropriate model. Second, estimation of this model with data. A third important component is: inferences about counterfactuals i.e., asking and answering "what if" questions, and estimating causal effects.

However, we should be careful in posing the counterfactuals. When the counterfactuals posed are too far from the data at hand, the inferences drawn from the model and the empirical analyses are not robust or reliable. Essentially, such inferences are speculative, and quite often based on indefensible model assumptions rather than empirical evidence. Unfortunately, standard statistical approaches assume the veracity of the model rather than revealing the degree of model-dependence, and so this problem can be hard to detect. Often, scholars and forecasters are inadvertently drawing conclusions based more on modeling hypotheses than on their data. For some research questions, history contains insufficient information to be our guide.

Therefore, forecasters develop methods to evaluate counterfactuals that do not require sensitivity testing over specified classes of models. If an analysis fails the tests we offer, then we know that substantive results are sensitive to at least some modeling choices that are not based on empirical evidence. Scholars have used these methods to evaluate the effects of changes in the degree of democracy in a country (on any dependent variable) and separate analyses of the effects of UN peacebuilding efforts.

So measuring preferences is complex -- it requires a good model, credible statistical estimation and thoughtful construction of counterfactuals.

Reference Frames and Evaluations of Senators Clinton and Obama

We (consumers) make choices based on their reference points/anchor points. Or put it differently, we evaluate our choices as prospects given our own reference frame based on past experience and other information. Given a particular situation (prospect) with two potential but very different choices/options, two individuals may adopt the two different choices and both would be considered rational and reasonable by the individuals because their choices are consistent with their reference framework and experiences. Colloquially, sometimes we call this as "optics."

Two behavior psychologists (Kahneman and Tverskey, 1979) discussed this at length and proposed a general theory to explain choices made by human beings. Kalyanaram and Little (1994) demonstrated the application of this theory to marketing, particularly, to pricing.

The prospect theory is applicable to the current Democratic party presidential contest too. Both Senators Obama and Clinton earnestly believe that they have a reasonable path to party's nomination. Using the formal expected utility theory, Clinton should not be so hopeful but she is because she is seeing the nomination road through a different frame than Obama is seeing. That's why this is such a dogged race. Only when one of them -- Clinton or Obama -- perceives his/her prospect dimly will the race for the nomination end.

The report filed by Marc Ambinder of The Atlantic (based on the conference call with the reporters by the two campaigns on May 1, 2008) clearly illustrates the different optics/frame employed by the two candidates.

"THE OBAMA UNIVERSE is governed by the reality that every night, when the Clinton campaign turns out the lights in Arlington, Clinton is not really any close to winning the nomination that when the first intern trudged in at the crack of dawn. The math hasn't changed. Obama is 283 delegates away from declaring victory. Obama is winning two superdelegates for every one she wins; every additional superdelegate he receives equals at least 1.X more superdelegates that Clinton must pick up. Not a single pledged delegate has switched to Clinton -- indeed, when was the last time a pledged delegate ever switched sides; not a single superdelegate has switched to Clinton; a few superdelegates who've counseled patience (like freshman Bruce Braley of Iowa) say they now support Obama. The progressive media establishment -- the Olbermanns and Chris Matthews of the world -- are regularly inveighing against Clinton's decision to stay in the race. Obama has way more money to spend, the support of the party's most reliable constituencies, the ability to expand the map. His divorce with Rev. Wright takes a general election hot pot off the table. He is much more likeable and seen as much more honest than Clinton; Republicans and independents still have warmer feelings for him than they do with Clinton. Clinton's embrace of a gas tax pause shows that her campaign isn't serious about policy and voters perceive that. Oh, and voters in Indiana and North Carolina aren't watching cable news and aren't really paying attention to Rev. Wright. And besides, they're tired of all of this: tired of the noise, tired of the distractions, tired of old politics, and ready for change. This long race is hurting the party; superdelegates know this, and the tipping point has been reached.

IN THE CLINTON UNIVERSE, Clinton has all the green cards. Victory, (enough) money, momentum in the national polls, the public acknowledgment of Republicans that she'd be the tougher candidate, the fact of undecided superdelegates, and the testicular fortitude that impresses white working class voters... A month of scrutiny has noticeably eroded reduced Obama's standing with critical constituencies, and in many critical states, Clinton's brand is a winner: according to three new telephone surveys by Quinnipiac, in Florida, Clinton leads McCain by eight points; Obama and McCain are tied. In Ohio, Clinton leads by ten points; Obama and McCain are tied. Both Clinton and Obama lead McCain in Pennsylvania; Clinton's margin is twice that of Obama's. Most of the remaining superdelegates represent white working class districts (about 75% of them, in the estimation of one Clinton strategist.) They haven't come out for Obama when was winning; they surely won't support him when he's losing. They'll wait for information to see who'll beat John McCain, and right now, that evidence points to Clinton. After Indiana (and depending on the margin in North Carolina), it will point even more to Clinton. Obama has proven himself out of touch and unable to dent Clinton's standing with a critical swing constituency; even if African American turnout exceeds 100 percent, Obama would not be able to win Ohio with a double-digit deficit among white, working class voters. Clinton's victory in Pennsylvania precipitated a change in the fundamental dynamic of the race. Obama no longer appeals to independents; Clinton and Obama now have roughly the same appeal to independents. In a (near) recession, with expensive gas and good prices, with foreclosed homes and rising health care premiums, Clinton has the knowledge and leadership to turn this economy around, and that explains why she's done so well. Finally, she's an underdog, and Democrats root for the underdog. This long race is helping the party; Democrats are excited; Superdelegates perceive this, and the tipping point is coming soon."

Inertia, long-run equilibrium, and Political Preferences

Social scientists discuss concepts of "persistence," "inertia," and "long run equilibrium" in their analyses and descriptions of individual, group social and market phenomena. For example, we find that brands generally revert to their mean i.e. average (sometimes, also called equilibrium) market share levels even after the firms inject some perturbations (such as aggressive advertising and promotion of the brand.) Surely, there are variations -- ups and downs -- created by the perturbations but eventually the level appears to revert to the average measure. Only a very discrete and definitive discontinuity changes this level.

Persistence and long-run equilibrium concepts apply to political preferences and choices also. Let us examine the current Democratic party presidential contest between Senators Clinton and Obama. In a national preference match-up, Senators Clinton and Obama were supported by about (average) 45 percent and 25 percent of the voters respectively in a national preference match-up. These numbers persisted in spite of many events including surprisingly strong fund raising reports by Obama and tentative debate performances by Clinton in October and November. None of those events provided enough discontinuity for voters to change their preference structure.

And then came Senator Obama's convincing victories in Iowa and South Carolina, and close placings in New Hampshire and Nevada in the month of January. Since these results were unexpected events (of course, not to the political class) to the Democratic party voters, the preference structure changed.

Since then Senators Clinton and Obama have both earning about 45 percent of support from the Democratic party supporters in the part contest for nomination, and both have been running about even with Senator John McCain (the presumptive Republican nominee) in the general elections match-up. Obama has been doing slightly better on average but not by much. None of the events -- Bosnia error by Clinton and Wright controversy for Obama -- has yet changed the preference structure.

Look at the perceptions of the three candidates - Clinton, McCain and Obama. As Gallup organization reports that over the course of the presidential campaign (when millions of dollars have been spent) basic perceptions have not changed much. Americans viewed McCain older and likable in January and the same perception dominates now in April. Clinton was perceived as experienced and not trustworthy then and that perception has not changed either. Obama is much better known today than before the campaign got underway, but the dominant perceptions of him (as being young and inexperienced and a fresh face with new ideas) have changed little.

It does not appear that there are likely to be any foreseen event that would shift the voter preferences substantially. That's why this is such a dogged race in the Democratic party presidential nomination contest.

Market Entry Stategies for Pharmaceutical Drugs

In a study published in the International Journal of Pharmaceutical and Healthcare Marketing, G.K. Kalyanaram has found that there is a significant order of entry effect on market share in both prescription and over-the-counter pharmaceutical drugs categories. This effect is higher in magnitude in the OTC category than in the Rx category. The effects of price, and Direct-to-Physicians and Direct-to-Consumers advertising are also significant. The differential effects of DTP and DTC advertising in the prescription and over-the-counter categories are intuitive -- the effect of advertising to physicians is greater in the prescription drugs category than in the over-the-counter drugs category, and the effect of consumer advertising is greater in the over-the-counter drugs category.

Pharmaceutical firms aiming at developing pioneering brands should be encouraged by the availability of a long run market share reward for their innovation. Although the pioneer’s share does decrease as each new firm enters, the pioneer retains a substantial share differential. However, creative product innovation and position remain central to continued long-term market success.

The size of this reward depends upon the presence and strategies of later entrants. The empirical results show the innovator’s market share in the prescriptions category (OTC category) dropping from 100 percent to about 58 (61) percent after the second brand enters, to 43 (47) percent after the third entrant, to 35 (39) percent after the fourth brand enters, and to 30 (34) percent after the fifth brand enters. Consistently, the market shares for the first entrant are higher by 3-5 points in the over-the-counter drugs category than in the prescription (Rx) drugs category.

As shown in theoretical and empirical studies, a preferred strategy for a later entrant may be to develop a superior product with either unique benefit features and/or a lower price (i.e., better positioning). When such a product is backed by aggressive marketing efforts, a higher share can be achieved. However, the pioneer should consider strategies to preempt this. The pioneer can minimize the later entrant’s threat by occupying the consumers’ preferred positioning space. However, if the pioneer does not carefully design its product, and an improved product is subsequently introduced and aggressively promoted by a competitor, the market share reward for innovation may be lost. The pioneer also should consider aggressively defending its brand with advertising and thereby preventing competition from gaining an advertising dominance.

Sovereign Wealth Funds: Conventional Investing or Strategic Investing?

It is estimated that Government-run funds — the so-called sovereign wealth funds — have invested $48 billion in deals in the U.S. in 2007. And they have probably invested another $16 billion so far this year. In all, the funds hold an estimated $2 trillion capital, and are expected to grow to more than $12 trillion by 2015. In about a decade, these funds are likely to eclipse the private pools of capital. In the recent past, the sovereign funds have given succor to several financial institutions such as Citigroup, Merrill Lynch, Morgan Stanley, and UBS which have all been buffeted by the mortgage crisis.

In general, sovereign wealth funds have adopted two approaches to investment -- conventional investing and a more controversial strategic investing. Conventional investing (e.g., Norway’s and Canada’s funds) seeks profit through well known techniques like asset allocation.

However, strategic funds have evoked serious debate and have become worrisome for many countries because in strategic investing (e.g., China’s and Dubai’s funds) goals other than profit may trump. For instance, a strategic fund may be more interested in gaining access to the technological know-how — intellectual property, research, design, etc. — than in financial return. Such access allows a government to speed up the development of its own domestic industries and markets. Strategic investing may also sometimes be morally challenging. For example, such funds may invest to gain access to markets and countries that are shunned or ignored for several reasons including human rights reasons, lack of maintenance of peace etc. China’s investment in Sudan is cited as an example of this.

In sum, strategic investing is troubling because it is done to gain greater economic and political power, and that too secretively.

So is it possible that a foreign government would try to use its presence in the U.S. economy to advance political aims? Absolutely. Because there is much more to be gained from the US than any other country. However, it is also true that wealth funds bring new capital which could be very productive.

Given these facts, the U.S. should design rules and regulations to manage both the financial risks and the political risks of the sovereign funds. Such rules would include requirements for transparency and accountability -- for example, mandatory audited disclosures by the funds, reciprocity for American investors, and caps on the share of ownership that a government can make in a company or sector. The opponents of regulation argue that it would make these funds less productive or even non-productive. That missed the point because the lack of measured (not burdensome) regulatory mechanisms could lead to monumental consequences -- financial instability and loss of faith in financial markets.

Capital Requirements for India

There are varying estimates of the capital requirements for India’s sustained growth over the next five-to-ten years. By some estimates, India requires over one trillion U.S. dollars of investment in the next five years to continue the annual growth of 8%. While the estimates may vary, there is no dispute that the capital requirements are very significant.

A very important and substantial source of capital is the availability of alternative investments in the form of private equity and hedge funds resources. It is estimated that the available potential private equity capital is well over 750 billion US dollars, and the available hedge funds capital is well over one trillion US dollars.

India has not been a recipient of these alternative investments. While there is much curiosity and interest in Indian markets from the alternative investors, there is also much caution. What is it that India can do to receive a fair share of these investments?

There are three important elements that require action and attention. One, India has to open the Indian markets to ownership by the alternative investors. Without sacrificing India’s national interests and sovereignty, India can and should design appropriate mechanisms and instruments to permit majority ownership by the alternative investors in most attractive, if not all, sectors/domains.

Two, India has to create effective governance mechanism and legal protection for foreign debt investment. Currently, the debt investors are skeptical and worried about protection of their investment, and recovery of their debt.

It is a norm that for every dollar of alternative investment, there would be natural two or three dollars of foreign debt investment. Put it differently, alternative investors would invest only if their investment can be leveraged through debt investment.

If debt investment was impeded, so would alternative investment be. There is a clear synergy between the two – the alternative investment and foreign debt investment. So we need to create institutions and mechanisms to simultaneously encourage and foster alternative investment and foreign debt investment.

It is estimated that with these two reforms – majority ownership and protection of foreign debt – will attract at least 150 U.S. billion dollars of annual alternative investment. With this magnitude of alternative investment, it is expected that additional annual 300-400 billion U.S. dollars of foreign debt investment will be forthcoming. So we can expect a total annual investment of about 450 billion U.S. dollars.

India can further strengthen the confidence in Indian markets with reforms in accounting and reporting processes, procedures and requirements. The foreign capital markets are seeking more clarity and transparency, and this can be easily provided without any detriment to national interests.

Yet another opportunity to attract investment is creation of user- and investor-friendly real estate investment for small and individual investors. There is a huge intent to invest in India’s booming real estate market. But this market is not evidently transparent and friendly for the individual investors – there is too much friction.

Therefore, India should consider creation of Real Estate Investment Trusts (REITs) to encourage and receive the potential monumental individual investment.

PIONEERING ADVANTAGE: FICTION OR REALITY? by Gurumurthy Kalyanaram and Ragu Gurumurthy

Comment: This article is abstracted from another article published in Business and Strategy, and this article was written a few years back. But the facts and inferences remain valid.

Put simply, it costs the most to be the first, for two reasons:

1) the product innovation requires a higher investment in research and development than does product imitation, and

2) the necessary marketplace education and testing forces the pioneer to spend heavily on advertising and promotion. A second entrant enjoys the fruits of the pioneer's labor.

Are there higher returns on market share and investments to offset the pioneer's increased costs and relatively higher risks? Companies such as the Hewlett-Packard Company and the 3M Company, which generate growth through innovation, garner more than 60 percent of their revenues from products introduced over the most recent three-year period. Obviously, these companies have succeeded in pioneering at a very high level.

Does this occur in other industries and in countries other than the United States? In fact, numerous studies have found that later entrants in a market achieve a lower market share than earlier entrants -- and that this holds true in a variety of product categories and industries, such as consumer packaged goods, industrial goods and pharmaceuticals. Even when a company's tangible (e.g., financial) and intangible (e.g., brand equity) resources and business skills are considered, early entrants continue to hold market-share advantage.

What is the magnitude of market-share penalty for later entrants? A 1995 study by Gurumurthy Kalyanaram and others in Marketing Science suggests that the new entrant's forecasted market share divided by the first entrant's market share equals, very roughly, one divided by the square root of order of entry of the new entrant. Therefore, if there are two players in the market, the first entrant will have a market share of 59 percent and the second entrant will have a market share of 41 percent (which is 70 percent of 59 percent). This is validated in the cellular industry in several countries in Europe in which the average market share of the first entrant in Belgium, France, Germany, Italy, the Netherlands and Spain is 58.5 percent and the second entrant is 41.5 percent. The figures are consistent with the empirical results – the second entrant has about 70 percent of the pioneer's market share.

Why do early entrants so frequently enjoy a higher market share? First, consumers in general are risk averse. If a product or service provides enough satisfaction, consumers do not want to risk switching to a new product. Second, the pioneer becomes the prototype for the product category. Later entrants are compared to the pioneer, and always somewhat unfavorably. Whenever consumers think of photocopying for example, Xerox is the name that jumps to mind. Third, consumers learn best the attributes of early entrants. More knowledge translates into more strongly held beliefs and great confidence in choice. And lastly, early entrants are able to secure the best positioning in the marketplace.

Does the pioneering advantage manifest itself in return-on-investment metrics apart from market share? Yes, after substantial research and development investments, being early in the market is rewarding. Research shows that the pioneers enjoy a higher return on investment in both consumer and industrial goods. This research and development investment and continuous new product launch is also used as an entry barrier by several pioneers.

A recent analysis of the evolution of wireless markets in Europe indicates that first entrants are also market leaders in most countries. Pioneers in cellular service establish a presence in the marketplace, build brand equity and create an excellent distribution network. Also, a peculiarity of this industry is that the quality of service is primarily determined by coverage. Having evolved over time, the first entrant's network usually has much better coverage. The customers become used to enhanced coverage over time. So new entrants have to invest significantly to achieve this same coverage -- an effort that is capital intensive and time consuming. All new networks have initial bugs that take time to fix. Subscribers are just not willing to go through another learning curve, when there is already a robust supplier of service. Another frequent constraint is access to property to build the towers, since the first entrants have already seized the ideal sites for coverage. This, in turn, may require the later entrant to invest larger amounts in network infrastructure to gain similar coverage. Given these hurdles, it can take two to three years before a challenger achieves coverage competitive with the incumbent's.

In addition to coverage and related quality of service, another huge barrier to entry for new entrants is the issue of number portability. Customers would have to get a new cellular number when they switch carriers since they cannot take the same phone number with them as is done in land line networks. In general customers do not like to change their phone number, especially in Europe, where customers receive calls in their mobile phones. Thus, we see the inherent advantages to being first in the market in the wireless industry: control of ideal sites; freedom to evolve and fine-tune network coverage; building of brand loyalty by offering superior customer service; locking in customers by subsidizing equipment for an extended period under fixed-service contracts, and gaining control of key channels of distribution.

AGILITY NEEDED FOR LATE ENTRANTS

The picture, however, is not always so rosy for pioneers and bleak for late entrants. In some industries and some geographic areas, pioneers have lost market-share advantage relatively quickly. This can happen for any of several reasons:

1) An entrenched pioneer may not be offering a superior level of customer service.

2) A new technology may have changed the cost equation, so that a new entrant can offer similar or better service at a lower cost.

3) The new entrant may have developed a new way to access the market, with an innovative distribution strategy.

4) The latecomer may simply be pricing aggressively, targeting selected segments by taking advantage of the incumbent's tendency to average pricing across all segments.

In what situations is the pioneering market-share advantage muted? For a start, when consumer learning is limited, the pioneering advantage is likewise bound to be limited. Consumer learning becomes very difficult if the product becomes complex and technical. For example, when picture phones were introduced in the late 1970's, the market did not respond because consumers could not find occasions to use the product.

The pioneering advantage is also limited in a cluttered market: If there are many available brands, consumers react by becoming confused.

Moving beyond such issues, what can later entrants do to overcome any inherent market-share disadvantage? First, the later entrant should differentiate itself substantially in the minds of the consumers. Such positioning can be accomplished through substantial changes in either the product or promotion strategies. For example, the Chrysler Corporation redefined perceptions of its minivans by introducing Caravan, a two-door van. The Ford Corporation's Windstar, expected to be a marquee van, substantially lost its glamour to the Caravan. When the General Motors Corporation decided to reposition its Oldsmobile, it changed not only its product but also its advertising copy. The new copy appealed to consumers over 30 years old, projecting the image of a younger professional woman via this voice-over: "This car is not only for your father's generation, but it's for you too."

A second route for later entrants is to discover creative ways to increase product trial. At best, one study has found that the market-share advantage for the early entrants comes from higher trial penetration. If the later entrant can generate greater trial market share, then its disadvantage can be overcome. Sample-product trial is an appropriate mechanism. For example, in consumer goods, consumers can be supplied with a sample product for trial. In non-consumer goods, other creative mechanisms must be designed. Limited demonstration of usage or prototypes is possible in software products, and test usage is possible in automobiles. Also, distributing the product through new channels such as direct marketing (think of the Lands' End catalogue or the Mary Kay cosmetics parties) or a home-shopping-network channel would place the product in the hands of more consumers.

The later entrant can also segment the market, focusing on a particular target. By providing appropriate value, the later entrant can extract additional rents. A good example of this is the competition among the International Business Machines Corporation, Compaq Computer and Dell Computer in the personal-computer market. Finally, later entrants can position themselves as variety enhancers, rather than as replacements or substitutes for the pioneers.

An example is Orange, the late-entry cellular service provider in Britain, which successfully nudged aside the pioneers. Orange entered the market almost 30 months after the first entrant, Vodafone, and nine months after One-2-One, and with technology similar to One-2-One's. Orange, however, has followed a very aggressive entry strategy. It has not only invested heavily in the network over the first two years of introduction, but also developed aggressive pricing strategies. Orange seized a third of Britain's total market's first quarter 1996 growth by offering about a 30 percent savings to end users, compared with Vodafone and Cellnet. The pricing strategy was effective enough to compensate for Orange's relatively poor network coverage. (This rapid increase in penetration of new subscribers decreased in the second quarter, after Vodafone and Cellnet lowered the price differentials in key segments.) Thus, aggressive pricing tactics, investment in network infrastructure and innovative marketing tactics such as aggressive advertising and creative service bundling have made Orange a credible player.

Different markets require different strategies. What worked for Orange in Britain, for example, will not work for new entrants in Scandinavia. There, the incumbent's monopolies are not driven by profits from the wireless industries, and thus they price their wireless services below the average price for the rest of Europe. This is a significant barrier to entry for new players, especially since entering the industry requires a high capital investment. So the key source of differentiation for new entrants in such situations is going to be creative marketing, innovative advertising, new service packages and superior customer service. This is especially true since the incumbents offer a relatively poor level of customer service, a concern to end users.

Later entrants can also succeed by attacking high-growth markets particularly when there is a significant shift in the industry. Such shifts can be due to changes in regulation, or technological breakthroughs that improve the product, or breakthroughs that improve the process of manufacturing and delivering the product. The classic example is MCI's success in penetrating the long-distance market and winning a regulatory battle with the AT&T Corporation.

Another strategic option for the later entrant is micro-segmenting the customer base -- that is, targeting high-value customers who are able and willing to pay a higher price for the product or service relative to the cost incurred in catering to that segment. For example, the competitive-access providers (now Competitive Local Exchange Carriers, or CLECS), in order to provide local telecommunications services, basically skimmed the best customers of the regional Bell operating companies by offering a lower price. This was possible because the regional companies had adopted an average price scheme partly dictated by the Federal Communications Commission.

Innovators have also been successful in entering markets with a significantly better technology. Usually, however, technological innovation gives a company an edge for only a time, since incumbents catch on fairly quickly. Given that this is the case, new entrants should support their innovations with effective positioning, appropriate pricing and aggressive advertising. For example, I.B.M., a later entrant to the personal computer market, captured the lead in the 1980's by developing the technology and using its powerful marketing engine. Later, Compaq and Dell fundamentally redefined the business. Compaq reduced the cost by changing the manufacturing process and having superior logistics. Dell, in addition to using an efficient manufacturing process and superb logistics, invented the mail-order or direct channel to access end users, who by now were comfortable with personal computer technology. I.B.M. was not able to react to these changes fast enough and lost its lead in the 1990's.

DEFENSE STRATEGIES FOR PIONEERS

Even as new entrants attempt to redefine the business or formulate niche strategies to attack profitable industries and market segments, pioneers can fight back to retain their competitive advantage. The major strategies for the pioneers:

1) increase the barriers to entry for later entrants,

2) innovate faster than the latecomers, and

3) build a market-responsive and flexible organization.

In most markets both pioneers and later entrants operate with incomplete information. Pioneers can take advantage of this by using effective signaling mechanisms as a deterrent. For example, pioneers can cut price, signaling to potential new entrants that it is a low-cost industry and it will be difficult for them to survive. Pricing below variable cost, however, is illegal in most countries. On the other hand, new entrants traditionally focus on a few key segments of the market ¬¬ typically those that are subsidizing the cost to serve other segments of the incumbents. So, it is important for pioneers to understand their end-user segments and to adopt a differential pricing scheme to extract optimal rent from each of the segments.

Pioneers can also attempt to lock up the key channels of distribution, making it difficult for new entrants to get access to the market. In several industries and countries, however, it is not possible to get exclusive distribution rights. Pioneers can also offer special types of enhanced customer service packages or reward programs to make it harder for key customers to switch.

Another route, especially in the high-tech industries, is for a pioneer to remain innovative and launch the next generation of products ¬¬ or at least announce the next generation of products, thus deterring the entry of competition. The Intel Corporation's strategy in this regard is an example.

Finally, a responsive and flexible organization may be the most productive route, especially when the structure of an industry changes drastically or there is a seismic shift in the regulatory environment. In the telecommunications industry, for instance, the 1996 Telecommunications Act has fundamentally changed the rules of the game, leaving almost all the markets open for competition. This has forced both the regional Bell operating companies and the long-distance carriers such as AT&T and MCI to revise their strategies. Aging pioneers in other industries have also followed the strategy of attack as best defense, targeting potential new entrants' home bases -- be it geographic or product markets. As Fuji penetrated the photographic film market in the United States, for example, the Eastman Kodak Company's strategy was to attack Fuji in its home market. This strategy met with mixed results, due to the tight controls in the Japanese market.

The underlying parameters for all these strategies are that companies should be aware of the market dynamics and have an organization that is flexible with the right culture to adapt, not only reacting to potential competition but also proactively developing their strategies. It is easier to lose a market-share point than it is to gain one.

An example of a good blocking strategy is Vodafone's decision to lower its prices in key market segments to match those of its new competitor, Orange, thereby reducing the price differential between the two companies. While doing this, Vodafone kept its average price in the market constant and extracted more rent from customers who were not targeted by the competition.

Managers should have a feel for the marketplace, to correctly estimate the switching barriers for customers and set the price differential accordingly.

Another example in the wireless industry is the case of cellular companies in the United States. These companies have undertaken a suite of counterattacks, including innovative service packages and special deals on the equipment for one-year contracts, thereby increasing the switching barriers for the customers. This has also slowed the penetration of personal -communications-services (P.C.S.) players among the cellular customer base. But as these companies, which offer a service similar to cellular but based on a different technology, build their networks and offer enhanced services, they will inevitably begin to attract cellular customers unless cellular companies can offer similar features in the long run. Meanwhile, both the P.C.S. companies and the cellular companies have launched aggressive advertising campaigns.

KEY SOURCES OF DIFFERENTIATION

It is important to note that in the case of the telecommunications industry, pioneering advantage can be sustained only through continuous investment in building network infrastructure and the offering of superior customer service -- the two key sources of differentiation. In the wireless industry, customers are repeat purchasers, since their contract terms typically last for only one year and the cost of handsets is dropping rapidly. This situation could enable a late entrant to compete effectively by developing a good network infrastructure and by gaining access to good distribution networks. This is evident from the fact that the incumbents in several countries have not been able to sustain their lead and the differences between early entrants and second entrants are decreasing rapidly. For example, in Britain, Vodafone had an 18-month advantage over its prime competitor, Cellnet, with similar technology. Three years after the launch of Cellnet, however, the difference in market share in annual net additions between Vodafone and Cellnet is only 11 percent. Vodafone has been able to retain its lead in the recent past only by fighting back efficiently on the customer-service dimension and by developing creative service-bundling strategies.

MARKETING-STRATEGY FRAMEWORK

Having thoroughly analyzed the various strategies adopted by successful pioneers and later entrants, we have developed a framework both can employ to formulate strategies for growth, penetration or share retention, as the case may be.

The first component in our framework involves developing an understanding of the dynamics of the market. The critical areas to be analyzed are:

1) those fundamental drivers of technology that may cause a significant shift in the market;

2) changes in governance, such as any shifts in regulatory policies that might have a marked impact on the industry structure;

3) the size and growth of the potential market, and

4) the competitive profile.

Several qualitative and quantitative tools are available to assist in evaluating these critical issues. For instance, the model developed by F.M. Bass, the Bass model (1969, 1987), and the Booz-Allen & Hamilton model (1997) are highly useful for forecasting market size and growth. Competitive assessment on the other hand, is primarily done by conducting extensive secondary research on the key players. Our experience indicates that more than 60 percent of relevant information can be found in public sources and that the challenge lies in the gathering and synthesis of this information.

The second component of the framework involves conducting an internal assessment of your company's capabilities and product offerings. Product or service development is an iterative process between developers and researchers, one involving marketplace feedback. Once a product is defined and the positioning determined, it is important to understand the economics of manufacturing. In a competitive environment in which a technology edge is short-lived, try to think beyond simply making a good product in an economical way. Companies need to evaluate and develop non-product-related sources of differentiation, such as customer service, innovative ways to access end-users, creative marketing partnerships with other services such as frequent flyer programs, and so on.

At the completion of external and internal assessment, a company is ready for the final component of the framework: the actual development of the product strategy. Strategic elements here include segmentation, positioning and decisions on marketing instruments.

One of the most important strategic elements is the timing of product entry. Should the company be the first to enter the market or a later entrant? Just what are the risks and rewards? Again, there are some important tools available to facilitate scenario planning and decision making. These include the formulation suggested by Dr. Kalyanaram in the journal Marketing Science (1995) and market share models by Dr. Kalyanaram and Glen L. Urban (1992) and by Dr. Urban and others (1986), again in Marketing Science. Other useful approaches for product strategy are the lead-user technology proposed by Eric Von Hippel, and the "wargaming" simulation analysis methodology developed by Booz-Allen. Thus, based on the market, internal and product strategic assessments, an optimal strategy can be formulated.

Market Entry Strategies: Pioneers Versus Late Arrivals by Gurumurthy Kalyanaram and Ragu Gurumurthy

Comment: This article has been abstracted from an article published in Strategy and Business by the authors.

What is the best way to move into a new market? If you do not have a first-in advantage, attack the one who does.

Want to be King of the Mountain in a new marketplace? Here is some advice: be first, or a close second, and do not pause for breath. Others want to be King of the Mountain too. Even though you have a huge advantage in being first, you can lose it in the blink of an eye over pricing or service or lagging technology. Aggressive competitors have a vast array of weapons to knock you down.

Today's strategic planners, having created as much value as they could by cutting costs, are looking now to grow domestic markets, as well as build new markets and revenues in such countries as Brazil, China, India, Malaysia and Mexico. Before striking out, though, they need the answers to some crucial questions:

Does it pay to be first with a product or service? Is being an innovator worth the risk? Is it better to wait and learn from the experiences of the first entrant to the market? What is the proper balance between the risks and rewards? If you are a pioneer, what can you do to prevent share erosion when a new player enters the market? If you are a late entrant, what strategies should you adopt to make your entry successful?

Studies show that in most cases, being first to the market provides a significant and sustained market-share advantage over later entrants. Still, later entrants can succeed by adopting distinctive positioning and marketing strategies. Pioneers in most industries, once they have reached the status of incumbent, are powerful. Sometimes, however, they get complacent or are not in a position to cater to the growing or shifting demands of the marketplace. New entrants can take advantage of gaps in the offerings of these aging pioneers, or find innovative ways to market their product or service.

Pioneers with a distinctive presence in the marketplace need to be in a position to react, or even better, anticipate potential entrants and increase the barriers to their entry. For example, a pioneer may be in a position to reduce its price and decrease the value of the business for a new entrant, or it can block entrance entirely by controlling key distribution channels.

Whether a late entrant or a pioneer seeking to foil newcomers, it helps to have a thorough understanding of the entry and defensive strategies available, a good sense of timing and a game plan for decision-making.

BASIC STRATEGIC PLANNING

Competitive strategies typically depend on the market environment and the positioning and product portfolio of the existing players. These are the basics:

Reduce price to penetrate an existing market: By introducing a product at a lower price than the pioneer's, a latecomer can attract new customers who would not have otherwise purchased such a product ¬¬ in effect expanding the total market. Reduced price can also induce the pioneer's current customers to switch. Still, this strategy is likely to result in reduced margins for the new entrant compared with other players in the market, unless the new entrant's cost of production is relatively cheaper. This can be adopted by both the incumbents and pioneers.

Improve a product or service, with focus on a niche market: Companies can compete by being innovative in the marketplace. The innovation may be radical or incremental. One example of incremental innovation is an enhanced version of an existing product. The enhanced product can compete directly with existing products, or it can be positioned to attract a smaller segment of the existing market. In addition, the improved product or service can sometimes attract new customers that are not the current target for the existing product or service. For example: potential satellite-based wireless service providers are currently offering a new feature called global coverage. This service could both complement and replace options available to current customers -- but most of the potential players in the marketplace are targeting either traveling professionals who need to be in constant touch or the rural market, in which the cost-to-provision telecommunications infrastructure is very high and satellite-based options help governments offer ubiquitous telecommunications services. In both cases the telecommunications market is expanded, generating additional revenue.

Target new geographic markets for existing products: As markets mature in the home base, companies traditionally look outside to more lucrative markets. Most consumer goods companies, for instance, are setting their sights on China. Many heavy equipment manufacturers are targeting newly emerging markets that will need tractors and cranes for building. Faced with intense competition and maturation in the local markets in the United States, regional Bell operating companies such as BellSouth are expanding into emerging markets such as Brazil.

Develop new channels of distribution to access new markets or better penetrate existing ones: Going global is not the only solution. Sometimes the risk and the investment required to penetrate international markets may not be worth the return. Focusing on existing markets, where your company has a good understanding of the environment, can prove less risky and bring quicker successes. This can be accomplished by repositioning the product or service through marketing, advertising, packaging and so on. For instance, Dell Computer went after the mass market by having customers place their orders directly with Dell by phone, fax or computer. This direct channel revolutionized the method of selling computers to the end users, including corporate clients.

In addition to choosing the appropriate marketing strategy, it is crucial to determine the timing of the introduction of any new product. This is especially true in high-tech industries, in which product life cycles are short and it is difficult for late entrants to catch up and extract reasonable returns. In most cases, if you are entering second or later in such a market, you should do so immediately after the pioneer.