One of the crucial questions for strategic purposes in an emerg-ing industry is often the assessment of which markets for the new in-dustry’s product will open up early and which will come later. This assessment not only helps focus product development and marketing efforts but also is essential to forecasting structural evolution, since the early markets often exert a major influence on the manner in which an industry develops.
Markets, market segments, and even particular buyers within market segments may have greatly different receptivity to a new product. A number of criteria seem to be crucial in determining this receptivity, some of which can be influenced or overcome by firms in the emerging industry.7
Nature of the Benefit. Perhaps the single most important de–terminant of the receptivity of the buyer to a new product or service is the nature of the expected benefit. We can imagine a continuum of benefits ranging from a new product that offers a performance ad-vantage unachievable through other means to one that offers solely a cost advantage. Intermediate cases are those offering an advantage in performance but one that could be replicated through other means at higher cost.
The earliest markets purchasing a new product, other things be-ing equal, are usually those in which the advantage is one of per-formance. This situation occurs because the achievement of a cost advantage in practice is often viewed with suspicion when buyers confront the newness, uncertainty, and often erratic performance of the emerging industry, among other factors to be discussed later. Whether the benefit from the new product is one of cost or perform-ance, however, the receptivity of the buyer depends on a number of other aspects of the nature of the benefit it offers:
PERFORMANCE ADVANTAGE
- How large is the performance advantage for the particular buyers? Buyers will differ in this regard because of differ-ences in their situations.
- How obvious is the advantage?
- How pressing is the need for the buyer to improve along the dimension offered by the new product?
- Does the performance advantage improve the competitive po-sition of the buyer?
- How strong is competitive pressure to compel changeover? Performance advantages that help counter a threat to the buyer’s business or are defensive in nature usually stimulate adoption before those that offer a chance to improve compet–itively on an offensive basis.
- How price and/or cost sensitive is the buyer, if the added per-formance entails higher cost?
COST ADVANTAGE
- How large is the cost advantage for the particular buyer?
- How obvious is the advantage?
- Can a lasting competitive advantage be gained from lowering costs?
- How much competitive pressure compels changeover?
- How cost-oriented is the prospective buyer’s business strategy?
In some cases, buyers are compelled by regulatory fiat (or by fiat from other entitites, like insurance companies in order to qualify for insurance) to purchase a new product that serves a particular function. In such cases buyers usually will purchase the lowest cost alternative that meets the technical requirements.
State of the Art Required to Yield Significant Benefits. A sec-ond key factor in determining whether buyers will adopt the new product early is the technological performance their application de-mands of the product. Some buyers may be able to achieve valuable benefits even with rudimentary versions of the new product, whereas others will require more sophisticated varieties. For example, scien-tists in the laboratory were satisfied with relatively high-cost and low-speed minicomputers to solve data processing problems for which no real alternatives existed. Conversely, accounting and con-trol applications required lower-cost and more sophisticated ver-sions, and these applications developed later.
Cost of Product Failure. Buyers who face a relatively high cost of product failure will usually be slower in adopting a new prod-uct than ones whose risk is lower. Buyers whose use for the new product involves plugging it into an integrated system often face very high failure costs, as do buyers who pay particularly high penal-ties for interrupted service of the product for some reason. The cost of failure also depends on the resources of the buyers. For example, wealthy individuals are probably less concerned that their newly pur-chased snowmobile does not work or does not provide the claimed benefits than are individuals for whom the purchase will effectively negate possibilities for acquiring other leisure-time products.
Introduction or Switching Costs. The costs of introducing a new product or of substituting the new product for an existing one will differ for different buyers. These costs are analogous to switch-ing costs, which are discussed in Chapters 1 and 6, and include the following:
- costs of retraining employees;
- costs of acquiring new ancillary equipment;
- write-offs due to undepreciated investment (net of salvage value) in old technology;
- capital requirements for changeover;
- engineering or R&D costs of changeover;
- costs in modifying interrelated stages of production or related aspects of the business.
Changeover costs can be subtle. For example, when adopting the new coal gasification technology instead of purchasing gas from a utility, a prospective buyer often must cope with changes in the chemical properties of the gas. For some buyers this affects the per-formance of the gas in their downstream manufacturing operations and requires investments in modification there.
Changeover costs are often influenced by the pace of change-over, when the pace is discretionary, and also by such factors as
- whether the new product is serving a new function or replac-ing an existing product; replacement often involves the added cost of retraining, undepreciated investment, and so on;
- length of redesign cycles; it is usually easier to substitute a new product during a period of normal redesign than if the substitution requires an unscheduled redesign.
Support Services. Closely related to changeover costs in influ-encing timing of adoption are the requirements the buyer faces for support services (e.g., engineering, repair) to cope with the new product, relative to the capability of the buyer. For example, if the new product requires skilled operators or service technicians, it is likely to be adopted first by buyers who either have such resources already or have experience in dealing with them.
Cost of Obsolescence. For particular buyers, the degree to which successive generations of technology in the emerging industry will make early versions of the product obsolete varies. Some buyers can obtain all the benefits they really need from the first generation, whereas others will be forced to acquire successive generations of the new product to remain competitive. Depending on their changeover costs (discussed above), the latter buyers may be more or less willing to buy early.
Asymmetric Government, Regulatory, or Labor Barriers. The degree to which regulatory barriers to adopting the new product are present may differ for various buyers. Food and pharmaceutical producers are closely monitored concerning any change in their man-ufacturing operations, for example, whereas firms in many other in-dustries can change their processes freely. The same asymmetry can apply to inertia created by labor agreements.
Resources to Change. Buyers will differ with respect to the re-sources they have available for changeover to the new product, in-cluding capital, engineering, and R&D personnel.
Perception of Technological Change. Buyers may differ in their comfort with and experience in technological change. In busi-nesses characterized by rapid technological progress and possessing a high degree of technological sophistication, a new product can seem a great deal less threatening than in a very stable, low-technol-ogy industry. Related to this factor, technological change in some in-dustries is viewed as an opportunity to improve strategic position, whereas in others it has always been a threat. The former are more likely to be the early buyers of a new product than the latter, other things being equal.
Personal Risk to the Decision Maker. Buyers will be slowest to adopt a new product when the responsible decision maker faces the greatest perceived risk if the decision to adopt proves incorrect in the near to medium term. This perceived personal risk may vary a great deal, depending on the ownership or power structure of the buyer.
Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.