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.
Last-to-market
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
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.
Smart outsourcing
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.
Smart costing
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.
Smart differentiation
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.
Smart
communication
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.
Smart organisation
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.
Scaling up
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
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