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.