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.
Wednesday, April 30, 2008
Monday, April 28, 2008
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.
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.
Friday, April 11, 2008
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.
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.
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