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Article Excerpt
1. Introduction
Medical device makers often first market their new products to leading research hospitals with the belief that such adoption will subsequently help them in selling their products to practicing hospitals. Firms often select which market segments to serve first based on their influence on subsequent potential customers in other markets. Although benefitting from this positive influence from the first market onto the second; firms often have to be careful about the potential reactions of the first market to entry into the second market. For instance, Porsche, known for making high-performance sports cars and serving sports car enthusiasts, had to decide in the late 1990s whether to enter the markedly different sport utility vehicle (SUV) market. Similarly, AND1, a basketball shoe company, had to decide in the early 2000s whether to expand beyond its core inner-city youth market to embrace the suburban youth market. In both instances, the company in question saw the opportunity of leveraging the appeal of its current customer base to capture a new market, but was troubled by the potential backlash in the core market from this new entry. In this paper, we investigate the optimal market entry strategy when markets are interlinked with such leverage and backlash.
Leverage and backlash are forces of social influence created because a consumer's decision to adopt a particular brand is often influenced by other consumers of that brand. Consumers adopt brands not only for functional purposes, but also to conspicuously construct and maintain social identities that help them relate to others in their surroundings (Veblen 1899). Consumers tend to adopt brands adopted by others in their aspiration groups, or those of a similar social status (Simmel 1957). At the same time, brand adoption by consumers of a lower social status can reduce its value for the higher-status consumers. Burberry in the United Kingdom stopped making its signature designer baseball caps when it became the hat of choice for football hooligans and started becoming associated with consumers outside its core market (Both well 2005). As shown in Figure 1, status concerns can create positive and negative forces of social influence between different segments of consumers (Bayus et al. 2000), and so can brand-related identity concerns (Aaker 1990, Aaker and Keller 1990, Loken and John 1993, Parker and Gatignon 1994, Keller 1998).
[FIGURE 1 OMITTED]
The positive and negative influences extend beyond merely social status aspirations. It may indeed be the case that purchases by one group serve to "legitimize" the product in the others' eyes--hence, the leverage. Consumers less knowledgeable about automobiles in general, from seeing Porsche being adopted by sports car enthusiasts, might infer that Porsche must be an outstanding manufacturer of engines and must provide superior handling. Suburban youth might similarly infer that if the "trend-setter" inner-city basketball enthusiasts wear AND1 shoes, they must be able to handle the wear and tear on the courts and might even improve their basketball performance. Similarly, the backlash could result from an assumption about the second "follower" segment requiring lower performance of the product: if it is good enough for that group, it may not be good enough for what the first group is seeking. Thus, the leverage and backlash phenomenon can happen for a variety of reasons.
In the presence of such opposing forces, a firm's market entry decision is a challenging one. In the case of Porsche in the early 1990s, the company was under the threat of bankruptcy and faced tremendous pressure to grow. A possible growth strategy for Porsche at the time was to seek a consumer base outside its core sports car market, and SUV buyers seemed an attractive option. The company's market research confirmed that Porsche's reputation in their core sports car market foreboded well for an extension into the new SUV market. However, market research also cautioned Porche's executives that backlash was a grave concern (Business Week 2004): the sports car enthusiasts may not want to be associated with soccer moms. Similarly, ANDl's decision was equally challenging. ANDl's core market was inner-city youth, a segment passionate about basketball and whose opinion mattered when it came to choosing basketball shoes. AND1 could leverage its established brand in its core market to extend to new suburban markets where its "inner-city" identity resonates. But entry into the suburban market could tarnish ANDl's image in its core market: inner-city youth could perceive the company to have "sold out" by targeting rich suburban kids, and further, based on the new customers it would have, it would lose its image of an "in your face" brand and style of basketball. Thus, in both cases, the firm's market entry decision needs to weigh the magnitude of leverage and backlash. However, this decision is further complicated by the fact that leverage and backlash evolve over time, driven by the size of the adopted consumer base (Rogers 2003). As more and more consumers adopt a product, the size of the adopted consumer base grows such that the positive or negative effect that one market has over another varies over time (Kim et al. 2000). Such temporal variation adds a new dimension to a firm's entry decision: if it decides to enter the new market, when is the right time to do so? Entering too early, might dampen the firm's ability to penetrate its original market.
Unfortunately, existing research on the effects of social influence does not offer ready guidance on the entry decision for a second market and its timing. Current research on the optimal timing of entry is conducted in two main contexts (Mahajan et al. 1993, Bayus et al. 2000, Dekimpe et al. 2000). First is the study of new or successive generations of technological innovations (Norton and Bass 1987, Wilson and Norton 1989, Mahajan and Muller 1996, Bass and Bass 2004, Krankel et al. 2006). In their analysis of entry timing for a product line extension, Wilson and Norton (1989) suggest that the optimal strategy for a firm is to enter either "now or never": a firm should launch the extension immediately if margins from the extension are equal or higher than the existing product; if margins are lower, then not entering at all may be optimal depending on the relative rates of diffusion and substitution. Subsequently, Mahajan and Muller (1996) showed that the optimal strategy for a firm should be to enter either "now or at maturity": if profits from the new generation are high (either due to greater margin or greater market size), then it is optimal to enter now, or else it is optimal to enter when the older generation has reached maturity in its lifecycle. In the diffusion of successive generations, it is commonly assumed that eventually all consumers of the old generation migrate to using products from the new generations. Also, the key focus is on selling multiple products to consumer segments that overlap (sometimes completely) rather than selling to distinct (nonoverlapping) market segments, as in our paper. The decision to enter is driven by the relative gains in target market size and margins. In this paper, we show that even with equal margin and market size, driven by social influence, entry is a more judicious, tactful decision and that entry may be optimal at any time "from now till maturity."
The second context in which the timing for market entry is studied is cross-market effects in multinational diffusion (Eliashberg and Helsen 1995, Kalish et al. 1995, Putsis et al. 1997, Dekimpe et al. 2000, Kumar and Krishnan 2002, Libai et al. 2005). In a paper closely related to this work, Kalish et al. (1995) assess the optimal entry strategies for a firm that has a presence in its home market and is considering entry into a foreign market, where adoption in the home market has a positive influence on adoption in the foreign market. The optimal entry timing is dictated by the fixed costs of entry: it is optimal to enter early if costs are low (sprinkler strategy) and late if costs are high (waterfall strategy). In this paper, we extend the prior work of Kalish et al. (1995) on unidirectional social influence between markets to include bidirectional social influences between both markets. We focus on the effects of these cross-market influences, and discuss how the optimal entry strategy may change, even in the absence of fixed costs of entry.
In summary, although past research extensively acknowledges the existence of positive and negative forces of social influence across markets, little attention has been given to analyzing entry timing in the presence of these cross-market forces (Mahajan et al. 1993, Parker and Gatignon 1994, Dekimpe et al. 2000, Kim et al. 2000, Bass 2004). These forces are significant, as evidenced in the case of Porsche, where the launch of the Cayenne generated substantial backlash from the hardcore enthusiasts. (1) Industry analysts intuitively recognized the huge backlash potential of Porsche's SUV launch and questioned the wisdom of this bold move, calling the decision "either a brilliant marketing scheme or a sure sign that the end is near" (Tanz 2002). The thinking was, shouldn't backlash always hinder entry into a new market?
Our objective in this paper is to study theoretically a firm's market entry timing when the forces of leverage and backlash are present. This normative study will allow us to isolate the factors that are important to...
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