Strategy Formulation, Research Paper Example

Introduction

In a capitalistic economic environment, any business industry bases their operating principles on the rules of free enterprise. A free enterprise environment encourages the aspect of competition and freedom in terms of production levels and consumption levels. Entrance of many companies into the same industry brings intense competition in any given market segment. In this context, the aspiration to secure a substantial market share is the contributing factor for competition. Every company strives to achieve its business objectives by increasing profitability in its undertakings (Hirshleifer  & Glazer, 2010). The main challenge to businesses is that the number of consumers in any given market segment may not grow fast compared to the number of competing firms operating within that same segment. Therefore, the market share enjoyed by any given company may change as the entire process of competition creates a dynamic commercial environment. As competition intensifies, some firms decide to differentiate their products or services so that they can gain a competitive advantage over other firms in the same market. The process of differentiation may include development of new products, among other practices (Hill & Jones, 2010).

New Market Entry

Upon thorough appraisal of different market situations, expansion into new markets is inherent for business growth because, the number of consumers may not grow correspondingly to the increasing production by the competing firms. Entrance into new markets may provide an opportunity for diversify portfolios, satisfy a company’s entrepreneurial spirit and preempting competition. In this regard, company executives are constantly looking for growth opportunities that may place their company in a better business position than their competitors. Entrance into new markets may include expanding into new geographical regions, availing products and services to new customers or launching new or improved products and services (Hirshleifer & Glazer, 2010).
Entry into a new market warrants substantial deliberative processes than any other marketing undertaking. This process comes with a myriad of risks and opportunities which has to be acknowledged and evaluated before commencing any expansion project. Within any given industry, many new market entry situations results in dismal performance or even failure of the subject company. However, some organizations today can attribute their superior business positions to the aspect of new market entry. Many giant organizations took advantage of new market entry strategies and made them the cornerstone of their growth. Just like any other business process, entrance into a new market segment requires professional and informed analysis of the underlying business situation. In addition, the analytical process works well when coupled with high standards execution strategies. In this regard, every new market entry strategy should work towards maximizing the available opportunities in the target market segment (Hill & Jones, 2010).

Theories

New product or service development tops the list of actions undertaken by business firms during the entry of a new market. During the deliberative process, managers should adopt appropriate tools that will facilitate the development of an objective decision. Some of the relevant tools include theoretical perceptions based on the business matter under consideration. In the context of new product development, two theories prove helpful and appropriate in making decisions. These are the First-mover and the Late-mover theories. These two theories provide a judgment platform on the most feasible course of action to adopt during new product development (Hill & Jones, 2010). Throughout the analytical process, managers base their thoughts and opinions on the advantages and disadvantages offered by each theory. Apart from a theoretical evaluation of new product development, research exercises may supplement new and practical approaches on the matter. Results obtained from a research serves best at indicating on whether a given firm will succeed or fail on entering a new market. In this context, we will start with appraising both theories. On completion, the best option materialises upon weighing the pros and cons of each theory.

Advantages of First Mover Theory Large Market Share

First movers enjoy a considerable competitive advantage over late movers due to customer trust and brand recognition. First movers may create competitive advantages like barriers to new entrants, among others. By the time late movers enter the market, the pioneer will have recognition and brand loyalty from customers. In this case, first movers will ensure enjoyment of a large market share than their competitors.

Acquisition of Economic Resources

In a situation whereby resources for production are scarce, a pioneer will have an advantage of acquiring them before their competitors. Some of these resources include raw materials, brand recognition and geographical positioning of marketing infrastructure. Acquisition of these resources may place a company in a permanent competitive advantage.

Technological Leadership

A pioneer may enjoy a long time of leading a certain industry in terms of production and marketing techniques if they stay abreast of technological advances. In this context, a first mover will be the first firm to employ a certain technology for production. This means that the knowledge and experience gained through their business practices offers them a chance to advance as per the shortcomings seen in the technology line. In addition, a firm will remain a technological leader in an industry if the production knowledge remains exclusive to the pioneering firm (Hill & Jones, 2010).

Consumer Switching Cost

Switching cost proves helpful to a firm if it develops loyalty and a positive perception of its products on the consumers’ minds. Consumers may develop loyalty to a firm’s products if the firm’s products proves reliable to the consumer population. In this regard, it makes it hard for consumers to switch their attention to a late mover, which has not developed loyalty and trust to the customers (Shankar & Carpenter, 2012).

Disadvantages of First-mover theory

Freerider effects

A company that pioneers in entering a new market sets rules and practices for that given market segment. This means that consumers will embrace and play by the rules and business practices employed by that company. In this regards, being a first mover means stipulating techniques and strategies for the new market (Tielmann, 2009). Due to intense competition characterising free market environments, late movers will have an advantage of studying the pioneer’s strategies and capitalize on differentiating products against the pioneer’s weaknesses. In this case, late movers may ride on the marketing infrustructure already created by the first company. This means first mover strategy creates a business advantage to a firm’s competitors

Market Uncertainty

In any given market segment, being the first mover means assuming the entire risks associated with entering that new market. There will be no other firm in the market that will share the uncertain market situation prevailing during the inception stages of a new product. In addition to uncertain markets, first movers face the risk of dynamic technological advances in the industry. Late movers will have an advantage because they will adjust their practices as per the standards set by the first mover. In this case, first movers face the risk of being commercially obsolete if they do not meet the standards set by the industry on the new products. Therefore, first mover faces numerous risks associated with the market and technological uncertainty (Shankar & Carpenter, 2012).

Change in Consumers’ Needs

At inception, the first mover employs most of the economic resources within its disposal in creating the new product or service in the market. As time moves, technological changes may cause a corresponding change of consumers needs concerning the products. In this case, late movers take advantage of this situation be responding accordingly to the new customers’ needs. This situation usually happens when a late mover adopts a less expensive mode of production, hence developing a more friendly perception on the consumers by lowering the price of its products. Therefore, first movers may lose the market share and the value of their assets in the form of technological infrastructure they had invested in production (Shankar & Carpenter, 2012).

Profit Disadvantage

When a new product starts to enter into the new markets, first movers enjoy the market share and gains a substantial sales advantage. Apart from the large sales advantage, these companies also enjoy huge cost disadvantages. As late movers enter the new market, the pioneer’s sales disadvantage diminishes while the cost disadvantage persists. In the long run, the pioneer’s brand recognition and marketing advantages declines. This means that their long term business objectives may be aborted due to diminishing profit margins (Tielmann, 2009).

Advantages of Late-mover Theory Free Ride

Late movers have the advantage of free ride on the Infrustructure development made by pioneers. They can learn the strategies stipulated by the first movers, and use them to their advantage by improving on the weaknesses identified in those strategies.

Market Certainity

Late movers enter the market at a time when the technological and market uncertainties have been resolved by the first movers. The first movers establish a strong base of market certainty by incorporating intense consumer education programs about their products. In this case, late movers will enjoy the market certainty whereby consumers are familiar with the products and services offered in an industry (Shankar & Carpenter, 2012).

Low Risks

First movers take all the risks involved in predicting and adapting to changes in the market. However, late movers will have to study the methods that works when developing responses to market dynamics. They will not be forced to invest blindly in projects aimed at testing the market trends (Hill & Jones, 2010).

First Mover Inertia

As the product cycle develops, customers’ needs and preferences changes. This means that the pioneering firm has to respond to the customers’ change in test and preferences. In an event that the first mover cannot accomodate the change demands, late movers would have the advantage of adopting the operational inertia developed by the first movers in responding to the new consumers needs (Hill & Jones, 2010).

Disadvantages of Late-mover Theory

Access to Key Resources

First movers acquires all the major resources and uses them to their advantage. First movers may acquire the best human resources and take up the best geographical locations for their production and marketing activities. This leaves late movers with few options concerning resource base in the industry (Hill & Jones, 2010).

Consumer Acceptance

The first mover establishes a strong base for product loyalty and trust for their firm. This means that consumers grows with a strong trust and loyalty to the pioneer company. Late movers face a hard time trying to convince the limited consumer population into changing their perceptions.

Head Start Disadvantage

First movers set rules for playing the business game in the new market segment. Being alone in the industry means the pioneer develop skills and experience in the industry. In this context, late movers will have to work extra hard in order to catch up with the pioneers in learning business rules of the industry.

Profit Disadvantage

The operating cost of making the new products may prove challenging to the late movers, especially because of the limited market share they enjoy. In this case, the late movers may end up operate with a small profit margin. Therefore, their business goals of that entry may not materialize within the stipulated time (Tielmann, 2009).

Examples of Real Companies 

Successful Real Firms

In the US sanitary towel industry, Procter & Gamble was a first mover who successfully used technological leadership to their advantage. The company adopted the use of synthetic fiber in their production process, which resulted in production of cheaper diapers. Apart from Procter & Gamble, American Tobacco have always adopted state-of-the-art management systems and softwares, which makes them manage their diverse human resources in all their regional industries.

Some firms in the US took advantage of the first mover theory by acquiring the key resources and using them to their advantage. Acquisition of these resources includes taking up a certain geographical location containing the materials (Tielmann, 2009). Example of companies which used this strategy includes the Anglo-American Pl c and the BHP Billiton Ltd, which are both nickel mining and manufacturing industries. Both the companies, which used a first mover strategy, secured geographical regions rich in mineral. Other companies also proved very successful when the adopted the first mover advantage of switching cost. Some of these companies include Gitman Brothers Vintage, James Perse and Gucci, all in the clothing industry. In addition, some telecommunication firms like Frontier Communications and CenturyLink developed a strong customer loyalty as the first movers into their current markets.

On the other hand, some companies gained their current superior positions by entering the market as late movers. Examples of these firms are Hindustan Computers Limited, which enjoyed development of innovative service offering after entering the hardware market late. Another example is Facebook. Facebook entered the market which had been created by MySpace and derived its pronounced success by riding on the infrastructure and customer base created by MySpace. In addition, Google rode on the market base created by Atavista and emerged as the top search engine today.

Unsuccessful Firms

Despite the advantages associated with both the theories, some incidences of company failure have been witnessed upon adoption of both methods of market entry. Some of the late movers like Tucker Automobiles and The Edsel are some of the automobile projects which failed after entering the market late. These automobile projects wanted to ride on market bases created by other companies. Flooz.com and Polaroid are some of the information technology companies which also failed after entering late. Some first movers, which failed to pick up due to the aspect of risk and market uncertainty include DeLorean Motor Company and Atkins Nutrition. Both these companies failed because they could not secure a substantial market share (Hill & Jones, 2010).

Conclusion

In an event where company executives faces a situation which requires them to decide the right strategy to use, the best option lies on the resource base of the company. The two theories present both positive and negative effects upon adoption. This means than no option provides the safes and perfect method to decide the most appropriate course of action. A company’s strenghts and weaknesses depend on the company’s resource base at any given moment (Hirshleifer & Glazer, 2010). Entry into the market as a first mover works best for those companies which has the potential of securing a large portion of the available resources. On the other hand, firms with considerable strengths in the aspects of production and marketing can enter the market later, after the market and technological uncertainties have been resolved. With respect to this company, which is good in manufacturing and marketing processes, it is more appropriate to create another version of the competitor’s product, which is already in the market.

Reference List

Hirshleifer, J. & Glazer, Amihai. (2010). Theory and Applications: Decisions, Markets, and Information. Cambridge: Cambridge University Press.

Tielmann, V. (2009). Market Entry Strategies: International Marketing Management. London: GRIN Verlag Publishing.

Hill, L. W. & Jones, R. G. (2010). Strategic Management Theory: An Integrated Approach. California: Cengage Learning.

Shankar, V. & Carpenter, G. S. (2012). Handbook of Marketing Strategy. New York: Edward Elgar Publishing.