How newcomers can undermine incumbents' marketing strengths

Business Horizons, Sept-Oct, 1995 by Clayton G. Smith

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When Canon and Toshiba entered the business calculator market in the mid-1960s, they provided striking examples of how incumbent firms' marketing strengths can be undermined. Direct-sales and service networks had been essential for marketing electromechanical calculators successfully. The leading producers of such machines each had hundreds of sales and service personnel located in numerous company-owned branches. But Canon and Toshiba decided to sell their new product, the electronic calculator, through office equipment dealers. Because they only had to deal with a few hundred dealers, rather than with thousands of end users, a sales force of fewer than 50 people was sufficient.

Office equipment dealers did not have an extensive service staff. But as the reliability of the electronic calculator--which had few moving parts--continued to improve, the need for strong service capability waned. Moreover, by exploiting the potential for dramatic reductions in the cost of electronic components, Canon and Toshiba drove market prices for most electronic desktop models down to levels that made it difficult to cover the costs of direct-selling efforts. As a result, incumbent firms such as SCM Corporation and Singer/Friden were forced to build a network of office equipment dealers for the electronic calculators they had begun to manufacture.

As Cooper and Smith (1992) point out in their discussion of Canon and Toshiba's entry into the business calculator market, the established competitors had strong sales organizations and service networks, which had been important requirements for success. Normally, such capabilities would be expected to provide a commanding competitive advantage over new entrants. Here, however, the "marketing strengths" of the incumbents conferred little benefit in the long term. Combined with the eventual displacement of electromechanical calculators by electronic models, the incumbents' sales and service networks ultimately became irrelevant for competition in their traditional markets.

This article will show that such occurrences are not uncommon. Further, though they sometimes arise by happenstance, they can be the result of the imaginative strategies pursued by the managers of entrant firms.

Research has shown how new entrants can create "barriers to retaliation" and gain time to establish themselves before having to face strong competition from incumbent firms. (For example, an incumbent may be constrained from making a prompt, vigorous response by concerns about blurring the image of its established brand name.) In contrast, the focus of this article is not on how an entrant can deter retaliation. Nor does it focus on why incumbents may be forced to build new brand names to do so. Instead, the discussion centers on how a newcomer's strategy can undermine the competitive value of incumbent firm marketing capabilities in mainstream customer groups (see Figure 1).

The concepts explored are illustrated by reference to the strategies of a number of successful entrants, and to the strategy of Canon, Inc. (vs. Xerox) in particular. The analysis is based on information obtained from numerous secondary sources. For Canon, semi-structured interviews with five market analysts and executives from the plain-paper copier industry provided additional insights. When a newcomer is able to erode the value of capabilities that have been important for competitive success, it will improve its chances of building a strong long-term position. Overall, this article sheds new light on how entrants can counteract the advantage conferred by an incumbent firm's marketing strengths.

STRATEGIES FOR SUCCESSFUL ENTRY

A considerable amount of research has discussed how entrants develop strong competitive positions in markets that have been dominated by entrenched incumbent firms. A review of this work suggests that there are two generic approaches for doing so: flanking entry and direct competition. Both approaches typically reflect a rethinking of the industry's conventional wisdom or the exploitation of environmental change. Success often depends on barriers to retaliation, which reduce the likelihood of timely, effective retaliation by incumbent firms. Using illustrative examples from previous research, flanking entry, direct competition, and the factors that give rise to retaliation barriers are examined below. The ways in which incumbent firm marketing capabilities can be undermined will then be considered.

Flanking Entry

As discussed by Yip (1982), Willard and Savara (1988), and others, flanking entry involves an initial focus on neglected or emerging markets and their subsequent use as a platform to invade the industry's core markets. When Honda entered the United States, it initially concentrated on small "transportation" motorcycles; domestic firms such as Harley-Davidson believed that this market was very limited and continued to focus on larger sports motorcycles. In color television, Sony focused on portable models early on, a segment that Magnavox and others had neglected because it afforded lower margins than console models. Michelin entered the U.S. with its radial tire and focused on segments, such as fleet owners, that needed long-lasting tires. Because Goodyear and other producers of bias-ply tires believed radials could damage their profitable replacement market, they ignored Michelin's early efforts (to avoid giving radials a stamp of approval).