As the mid-year approaches, rumours of Samsung trying to be a month ahead of Apple with the respective new smartphones have started doing the rounds. Samsung is reportedly bracing to launch its latest generation Note 6 phablet ahead of Apple launching Apple 7 Plus phablet. First-to-market is a time tested strategy; it helps a firm capture market as it gets formed and take market share when no competitor is around. If the product is indeed a pioneering product and captures user imagination, it could become a monopoly and create formidable entry barriers to other manufacturers. On the other hand, if the product is poorly engineered it could help the follow-on players to improve upon their products and excel even more.
Being the first-to-market is not an easy task; it requires advanced engineering, smart manufacturing and agile marketing. The DNA of such firms tends to be unique. Over time, however, as technology becomes relatively more accessible, the market starts becoming more populated with several follow-on players. As market expands and firms are able to segment their markets based on unique features and combinations, the first-to-market concept could morph into first-to-market-segment concept. Not surprisingly, in a free market economy there would be firms wanting to enter an industry at all times. While it is easy to appreciate that the first-to-market company, and early followers will have the bulk of market share, what motivates firms to enter an industry despite being the last or near-last to enter is inexplicable.
Being the first-to-market is measurable and understandable as a well merited aspiration. Being the last-to-market, however, is less measurable as it is difficult to forecast who else will join the late party. Being the last-to-market is also less understandable and tends to be arbitrary. For example, any share less than 1 percent could be one measure in one industry but even 5 percent may not be the right one for being the last company in the race. Any production level less than the minimum economical production quantity could be another measure. As costs keep coming down, the sustainable minimal production quantity and minimal viable market share could be coming down. Still, it could beat one’s imagination as to why a firm should, in a manner of speaking, be the 100th firm to enter a market when the same effort could be expended to be in the first group of entrants in another field. There are, of course, valid reasons for the last-to-enter firms.
For example, the industry itself could be so fragmented that there may not be much difference between the first-to-market and the last-to-market. Secondly, the entry barriers could be so low that there is enough scope for even marginal players to make an entry. Thirdly, there could so much outsourcing and contract manufacturing occurring in the industry that being the 100th manufacturer could be infinitely easy. Fourthly, certain firms have resources that can be marginally deployed in easy-to-enter industries without big expectations. Fifthly, managerial mind-sets of operating in highly established market segments prompt such late stage entries. There are many examples with varied technological and marketing characteristics that confirm to the above criteria. Examples are Indian formulations market, global smartphone market, Indian processed food market, and so on.
Turning the tables
Admittedly, a pioneering company has many strategic advantages which can be further sharpened to snuff out completion from late entrants. These include lowering of prices, cross-subsidization, differentiation, geographical expansion, locking up distribution channels, buying up retail spaces, aggressive advertising, product extensions, product innovations, market segmenting, sales discounts, service offerings, aggressive advertising and so on. As a result, the later one enters a market the smaller one’s market share could be, empirically. A 1995 study by Gurumurthy Kalyanaram and others in Marketing Science suggested 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. It is evident as a market gets crowded, the last entrant would have miniscule market share. Yet, empiricism may not always be the only guidepost.
In normal social life, we have countless stories of backbenchers in schools and colleges becoming top rankers as well as the poor and underprivileged reaching top careers. A combination of aspiration and optimism, diligence and commitment, grit and energy, knowledge and application, positioning and a bit of luck helps in such amazing accomplishments. Late entrants to industries and markets similarly have opportunities to prove their mettle and turn the tables on the incumbents. Admittedly, whatever ‘magic’ late entrants can spin the incumbents can also carry out with their superior resources and manage to maintain or expand their lead. However, performance is not always only a function of increasing size and scale. Incumbency also leads to complacency of invincibility while late entry is backed by the passion of the underdog to upstage the favourite!
Late entrants are of two types. The first type is a well-endowed corporation which has decided to make a belated entry into an industry which is already catered to by the existing players. Entry of Reliance Jio into telecommunication services is an example. They have all the resources to use any of the pioneering advantages despite the late entry, and secure a market space. Such firms are not a subject of this blog post. The second type is a more humble entity or individual with just the necessary resources to make a modest entry. They may not have the resources to claim any of the advantages that large late entrants have but are skillful in securing a market hold. They typically would adopt the following five principles.
Every company needs design, manufacturing and marketing capabilities to put a product into the market place. Typically, each of these takes 25 to 30 percent of total investment, aggregating to 75 to 90 percent, leaving 10 to 25 percent of the investment for other activities. A late entrant deploys smart outsourcing in as many areas as possible to reduce the typical investment to just a small proportion of what an integrated corporation would need. The smartest outsourcer would outsource all operations, close to 90 percent, and focus only on strategy and oversight. The typical outsourcer, however, may choose to invest in one of the three key areas, be it development, manufacturing or marketing, and strategy. Smart outsourcing requires smart selection of the outsourcing partner, and providing a compelling value creation to the partner to break into the market together.
It is not so well recognised that costing, and consequently pricing, can make or mar a product. Purist accountants who fully burden a product with all the functional, site and corporate overheads and management inefficiencies literally kill the new product. In a pioneering or first batch entry, there could be scope for recovery prior to market growth but for late entrants to mature markets, fully burdened costing is a sure way to defeat the very objective of entry. Strategists must realize that market toehold and market expansion are the fundamental requirements for a product to survive. It is necessary to secure an entry and expansion, even at a loss, to be able to recover later. Smart late entrants focus on smart costing and smart pricing, and in most cases carry their outsourcing partners along in this strategy.
Differentiation is more common today than envisaged. Differentiation is confused with having variety. Having just a few products does not lessen differentiation (eg., as in the case of Apple) nor would a profusion of products provide differentiation (as in the case of Xiaomi, Huawei and Meizu). Oppo’s selfie phone with industry leading 16 MP front camera is an example of focused differentiation. Leveraging the scientific validation of Indian herbs and spices, a late entrant to the Indian masala product market could create new formulae for differentiation. An ice cream maker may capitalize on seasonality of fruits to develop seasonal special entries. Late entrants would need to focus on micro differentiation to make a smart entry.
While incumbents, pioneers or fast followers, may focus on aggressive advertisement, late entrants must focus on smart communication to be seen as providers of products which are qualitatively feature-rich, affordable and differentiated. Outsourcing helps the late entrants to assimilate the best of breed product features, from ingredients to packaging, and deliver them through multiple channels. Brand recall can be maximized with smart communication rather than just aggressive advertising. Out of several advertising campaigns, one normally recalls only those which convey a central message in a creative fashion. Airtel 4G advertisement, for example, says a lot without saying anything explicitly about the widest cellular coverage.
In all cases, organization is important to secure and sustain market superiority. Late entrants, however, can bridge a lot of gap with an organization that is agile, flexible and adaptive with the right culture. Managers of a smart organization will have a first-hand feel for marketplace as well as manufacturing base. They should have a keen understanding of what makes customers switch brands and select outsourcing partnerships that provide such advantages. Smart organisation tends to be lean and non-corporate in structure and systems. Their relationships with product partners and retailing channels help the late entrants secure competitive advantage for the firm as a whole.
Late entrants certainly have a chance to enter a crowded market, and grow up with the smart formula discussed above. However, such firms have to contend with the fact that the incumbents are bound to hit back after experiencing the initial disequilibrium while even later entrants would try to replicate the success of the (earlier) late entrants. The challenge for reasonably successful late entrants is how they can move up to the next trajectory; solutions could emerge from external support systems rather than persist with the same success formula.
Simple successes lead to industry and private equity community taking notice. They are brought into a higher trajectory through mergers and acquisitions and/or external financing. The typical late entrant may thus gain huge power based on the late entry success but could become a typical incumbent through the step-up process. That would be a bit unfortunate for the firm but for the ecosystem it would be a benefit; as late entrants turn incumbents, new late entrants join the industry, keeping the ecosystem rich and bright.
Posted by Dr CB Rao on March 15, 2016