First or Second best?

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First or Second best?

Contingency influences on first mover advantages and follower advantages

in the Dutch fast moving consumer goods industry

Henk-Jan de Wild, s1541943 Thesis MSc BA Strategy and Innovation

Supervisors: T.L.J. Broekhuizen (1st) and W.A. Dolfsma (2nd) April 2012

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2 Abstract:

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1. Introduction

Firms can appropriate value from an innovation in several possible ways. According to Lieberman and Montgomery (1998), benefitting from first mover advantages is one of the possibilities for making a product successful. These first mover advantages include learning advantages and lead time advantages, but also the marketing skills of an organization and buyer switching costs (Lieberman & Montgomery, 1998).

First mover advantages or pioneer advantages are seen as the set of entry order advantages that a firm possibly obtains by being the first that brings a specific product or service to a specific market (Lieberman & Montgomery, 1988; 1998). However it is still unclear in what way these advantages are shaped by contingency factors such as the pace of technological evolution and market evolution in the market, or the degree of market pioneering. Contingency factors are factors that are situation dependent and may influence the strength of first mover advantages and follower advantages.

Teece (1986), describes that the initial innovator, on average only captures 20% of the profits that an innovation generates. He suggests that followers in the market capture a slightly larger share of these profits. This indicates that followers also have advantages over first movers. In an empirical study of 264 industrial product markets, Min, Kalwani & Robinson (2006) showed that the twelve year survival rate for first movers in really new innovations1 is 23% and for incremental innovations is 61%. Robinson and Min (2002) studied product innovations in industrial goods markets like industrial machinery and equipment, chemicals and electronics. They found that 66% of the 167 investigated pioneers and 48% of the 267 investigated early followers survived at least ten years. Burgelman, Christensen, and Wheelwright (2009) state that a starting company in a technology driven market should enter new markets as a first-mover to be successful, because the battle for market share in such a market cannot easily be won by a starting company in a sustaining

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technology-market. Contrasting, Schilling (2003) showed that the battle for market share could be won by a follower in the market when the product of the follower is significantly better than that of the pioneer. The follower then leapfrogs the pioneering product. In addition Tellis and Golder (1996) found that only 53% of the first-movers in a variety of industries can be seen as successful, where 47% fails to be successful. Moreover, 11% of the market leaders in their research were pioneers and only an average of 10% of the market share goes to successful first movers. Thus the results of numerous studies have been mixed at best.

According to Robinson and Min (2002), more research needs to be done in markets other than the industrial goods markets. Besides, more research is necessary on later entrants, the so-called second movers (Kerin, Varadarajan & Peterson, 1992) and late movers. These authors say that additional research should focus on the advantages that the second mover and late movers gain as a follower: the so called follower advantages. Also, more research is necessary to determine whether the first mover advantages and follower advantages are present in other geographical regions than the United States of America (Lieberman & Montgomery, 1998).

Finally, according to Nijssen (1999), many products that are introduced by manufacturers in the fast moving consumer goods industry are copies or extensions of existing products. These market introductions are more incremental in nature which results in a higher chance of success. This makes the fast-moving consumer goods market an interesting market to research to see if the first mover advantages strongly occur in these markets. The presence of copies and extensions of existing products could not only cause the presence first mover advantages in this type of market, but also the presence of follower advantages.

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market share data to measure success and the focus is on the influence of contingency factors on the entry order advantages.

The research question is:

“How do first mover advantages and follower advantages affect market shares of product innovations in the fast moving consumer goods industry?"

To answer this research question, the following sub-questions will be answered: 1. What are common first mover advantages and follower advantages?

2. How do contingency factors shape the relative success of first movers to that of followers?

3. What are the factors that determine the relative success of a first mover to a follower in the Dutch fast moving consumer goods industry, as measured by market share?

Outline

Chapter two starts with describing the most common entry order advantages. Further, the contingency factors that influence entry order advantages in general are described. Also the hypotheses for this research are drawn in this section.

Chapter three outlines the research methodology of this research. Both the measurement instrument and the case selection are described in this chapter. Also, in this chapter it is described how to test the influence of contingency factors on entry order effects.

In chapter four the results are described and the hypotheses will be tested with the available data and the use of a cross-case analysis.

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2. Literature review

This chapter describes the various advantages that a pioneer or a follower could benefit from when marketing its innovations. Based on Garcia and Calantone (2002) a pioneer is seen as a firm or business unit that introduces an incremental or really new product to the market as being the first. This means that the product that will be introduced “provides new features, benefits (…) to the existing technology in the existing market” or a product that “will result in a market discontinuity or a technological discontinuity” (Garcia & Calantone, 2002). This study chooses the definition of Garcia and Calantone (2002) as it refers to the discontinuities that innovations bring. Innovations that are researched can therefore also include follow-ups as products that create new markets. This is often the case in fast moving consumer goods markets. Technology in this thesis will be seen as the technical characteristics of the products.

A follower will be seen as a firm that imitates the product of a pioneer, with or without improvements to it.

2.1 First mover advantages

This paragraph describes the most commonly addressed advantages for pioneers that are distinguished from the literature. Although this study aims to provide a clear-cut list of potential advantages, the advantages that are elaborated can sometimes be overlapping.

Pioneer:

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9 Possibility to claim a price premium

Pioneers are able to benefit from a short-term monopoly position that they have until a competitor enters the market. When the pioneer introduces an innovation to a market, it takes time until the first competitor enters the market to compete for market share. In that time, the pioneer is practically a monopolist2 in the market and so it could gain the benefit of a price premium (Lieberman & Montgomery, 1988). Although the possibility of gaining from its monopoly position, it is not said that asking a high price in this temporarily monopoly is the best strategy for a pioneer (Redmond, 1989). The downside of this advantage is that when the pioneer asks a high price and gains high profits, the pioneer makes it more attractive for followers to enter the market. Solution for this downside seems to be asking a low price during its temporarily monopoly position. Then, the follower is less likely to enter the market fast and the pioneer can expand its market quickly. Redmond (1989) found that the long term market share of pioneers seems to be larger when the pioneer first sets a low price that would be raised when competitive entry follows.

Gain from learning curve effects

Another way to benefit from the pioneer position is to make effective use of the learning curve effects. Being first to the market creates an advantage for the pioneer because it learns more quickly than later entrants. In this way the pioneer can increase its skills regarding the product in three areas before the follower enters the market. First, the pioneer can learn from production experiences (Boulding & Christen, 2008). Second, the pioneer can learn from distribution experiences (Boulding & Christen, 2008). Third, the pioneer can learn from consumer needs.

The learning curve advantage occurs because the pioneer becomes more efficient and effective than a competitor would be when entering the market by learning from experience in these areas. A pioneer, for example, can learn how to make use of technologies or it can experience scale advantages that a follower does not have when entering the market. Besides, the pioneer can build better consumer know-how by its

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experience with the market. Finally the follower will face problems to attain the necessary skills needed to act in the market, because the pioneer was the first and only in the market that used and learned the specifically needed skills for the specific product.

Capturing brand loyalty

The pioneer could also benefit from its first mover position by building a brand name and creating brand loyalty for that brand (Lieberman & Montgomery, 1988; Djellal & Gallouj, 2001). In this way the pioneer is able to create an emotional bond between the consumer and the pioneering product. When a consumer is loyal to the brand of the pioneer, the pioneer is able to gain a larger advantage from its innovation, even when new entrants enter the market place. This is the case because loyal consumers are less likely to switch to the competitors (Usero & Férnandez, 2009). According to Djellal and Gallouj (2001) the use of a brand and the creation of loyalty for that brand is the most effective way to appropriate value from a pioneering product. Besides, the pioneer is often considered the most innovative brand, just by entering the market with a new product first.

Gemser and Wijnberg (2001) found that in an industry where firms benefit from their innovative reputation, such as design furniture, first movers experience protection from the reputational damage that a follower faces when it imitates the pioneer. This protection, however, is likely to exist only in industries where reputation of the manufacturer plays a significant role in the decision process of the consumer.

Creation of monetary switching costs

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costs for the consumer. Schilling (2003) showed that switching costs can be created by ensuring that a product is only compatible with a specific device in which the consumer has to invest, like in [case 2]. When the consumer wants to use a competitive product it has to invest in another device to use the competitive product, creating switching costs for the consumer. According to Usero and Férnandez (2009), consumers are less likely to switch products or services when the perceived switching costs are high by the consumer. The consumers perceived switching costs may say little about the real costs of switching.

Installed base effect

The last first mover advantage that is discussed in this section is based on the installed base of a product or technology. According to research that Usero and Férnandez (2009) did in the European mobile telecommunication industry, consumers are more likely to choose for a larger network instead of a smaller one. This could be caused by several reasons. First, people could choose for a specific product because they are socially affected by lead users of that product. In this case, social influence causes the first mover advantage by for example word of mouth or observational learning. Second, a potential user of the product chooses a specific product because there is a large installed base for that product. In this case, the perceived utility of the product by the consumer causes the first mover advantage. The potential user assumes that the utility of the product with the large installed base yields more utility or is of better quality. Third, potential users choose for a specific product because there are more experts that could solve eventual problems within the product, when the installed base is larger. At last, the media attention for a product could be larger when there is a larger installed base for it. A first mover can benefit from its installed base for future growth.

Schilling (2003) says that a pioneer could protect and increase the advantage it encounters from its installed base by ensuring that complementary goods are only compatible with its own product. This also influences the switching costs that are discussed earlier. The bond that a firm creates with consumers by the installed base effect is of a functional nature, rather than the emotional bond that brand loyalty is based on.

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market that grows fast, followers are more likely to enter. According to Katz and Shapiro (1992) a follower can earn larger profits than the value that it contributes to the market. Besides, a follower technology may take over the market, even when the follower’s technology does not add value to the market than the pioneer’s technology.

2.2 Follower advantages

Although there are some possible advantages for pioneers, there are also advantages that a business unit could have by entering the market as a follower. These advantages are called second mover or late mover advantages (or first mover disadvantages) (Boulding & Christen, 2008; Lieberman & Montgomery, 1988). In this thesis the term follower advantage will be used for this type of advantage. In this section the various follower advantages are described.

Lower development costs

A follower can benefit from its entry timing because it does not need to invest as many resources in R&D as the first mover did. The product is already known by the consumer and the follower just needs to change the product slightly to produce the product itself. This process of gaining knowledge or learning from the product innovation of the first mover could be seen as free-riding.

Free-riding occurs when a new entrant imitates the innovation of the pioneer. By doing so, the follower gains a substantial advantage in comparison to the pioneer due to the lower developmental costs. Pioneers could protect their innovation for imitation by using patents (Lieberman & Montgomery, 1988), but often even patented innovations will be copied soon after introduction (Boulding & Christen, 2008). However, by the use of patents, the pioneer could assure its invention to get time to develop it further before the market introduction (Mazzoleni & Nelson, 1998).

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Followers in a market face lower risks than the pioneer because they face less technological uncertainty and less market uncertainty.

Technological uncertainty is a threat to pioneers that arises when there is no dominant design in the market yet. The pioneer, then does not know whether its design would become the dominant one. When the design does not become accepted as the dominant design, the pioneer runs the risk earning back its investment. When the dominant design is already emerged in a market, new entrants could benefit from this by designing a product similar to the dominant design. By doing so they face less technological uncertainty (Lieberman & Montgomery, 1988), hence lower risks.

Technological uncertainty may also arise because the first-generation technology of a pioneer may not work very well. A follower could learn from the mistakes that the pioneer has made on the first generation technology. Thereby, it could improve the technology and bring it to the market in a better form, thus leapfrogging the pioneer. Because its technology is an improved version of the pioneer, the risk of failure for the follower is reduced (Robinson & Min, 2002).

Similarly, when the dominant design is known in a market, the retailer has no reason to hesitate selling that design. The pioneer then faces the disadvantage that it needs to persuade the retailer that its design will become the dominant one. The follower benefits from the fact that the retailer already is persuaded by the outcome of the battle for the dominant design. So the follower faces less market uncertainty than the pioneer.

In sum, followers success can be influenced by market and technology information that is available in the market. The risk of entry can therefore be lower for a follower than for the pioneer in the market. The lower risk of entry means lower entry barriers and less uncertainty for followers on a market.

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technology, while the followers benefit from the new technology and so build a strong market position.

The shifts in consumer needs could also be missed by the first mover, especially when the first mover is not alert on possible changes. Here, also the follower could benefit from the changes and so build a strong market position around the shift in consumer needs. This could result in the case that the first mover is still serving the main-market while it is missing an opportunity to benefit from a small shift in consumer needs. The follower could then be successful in serving these consumers as in a niche market that could grow to a new main market.

The ability to respond faster to market changes than the pioneer.

Followers often have the advantage that they did not invest in specific resources or product lines, before they know what the market is asking for. Pioneers on the contrary, did invest in certain resources and product lines. These investments can result in an inability to respond fast enough to changing consumer needs or a technology shift in the market (Lieberman & Montgomery, 1988). This phenomenon has also been described by Hannan and Freeman (1984). They named it structural inertia and found that for individual firms, it is very hard to succeed in making radical changes. Lieberman and Montgomery (1988) say that this inability to change comes from a rational response to the market. This response is based on the fixed assets that a business unit already has and the fear for cannibalizing its own product lines. A first mover generally sticks to the fixed assets it has invested in, especially when asset-specific investments have been made. For the same reason, the business unit could decide not to produce because it would cannibalize its own activities. In this situation, it is for the follower easier to respond to the market, because the follower often does not have to tackle the problems that a first mover has in these situations (Lieberman & Montgomery, 1988).

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Authors

First mover advantages Follower advantages Possibility to claim a price premium Gain form learning curve effects Capturing brand loyalty Creation of switching costs Installed base effect Lower development costs Less technological and market uncertainty Ability to benefit from shifts in the market

Boulding & Christen (2008)

X X

Djellal & Gallouj (2001) X Gemser & Wijnberg (2001) X Hannan & Freeman (1984) X Lambkin (1992) X Lieberman & Montgomery (1988) X X X X

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Table 1a. Overview of the described first mover advantages and follower advantages in literature

Authors

First mover advantages Follower advantages Possibility to claim a price premium Gain form learning curve effects Capturing brand loyalty Creation of switching costs Installed base effect Lower development costs Less technological and market uncertainty Ability to benefit from shifts in the market

Mazzoleni & Nelson (1998)

X

Redmond (1989) X

Robinson & Min (2002) X Schilling (2003) X X Usero & Férnandez (2009) X X X

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2.3 Contingency factors that influence the success of first movers and followers

The first mover advantages and follower advantages could all occur in a certain market. However, the described advantages are contingent upon diverse factors (Kerin, Varadarajan & Peterson, 1992). To investigate the factors that are contingent upon the presence of first mover advantages and follower advantages, in this section a distinction has been made between market factors and business unit specific factors. The influence of these contingency factors on the market shares of first movers and followers is described. In figure 1, an overview of the influences is made in the form of a conceptual model. The conceptual model is a simplified view of theory. The contingency factors influence the market shares of first movers and followers via several first mover advantages and follower advantages that are described in section 2.1 and 2.2. In the conceptual model, the assumption is made that when the market share of the first mover grows, the market share of followers reduces.

Market factors Business unit specific factors

for the pioneer

Figure 1. Conceptual model

Time between

pioneers market entry and follower market entry

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In this section the possible influences on the success of first movers and followers are described. Before this description, first an overall hypothesis is drawn to test whether first mover advantages or follower advantages are stronger in the Dutch fast moving consumer goods industry. The Dutch fast moving consumer goods industry is characterized by mostly incremental innovations and few technological innovations. Therefore, the chance of investing in wrong or soon to be outdated technologies is relative small in this market. Based on these market characteristics, the hypothesis is formulated as follows:

Hypothesis 1: First mover advantages outweigh follower advantages in the Dutch fast moving consumer goods industry.

2.3.1 The role of market factors on first mover success.

Previous research has shown that there are market factors that influence the firm’s chance for a first mover advantage or the sustainability of it. These influences could be positive as well as negative, depending on the influencing factor.

Pace of market evolution

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experiences (Katz & Shapiro, 1992). Kerin, Varadarajan and Peterson (1992) indicate that a fast pace of market evolution harms the endurance of certain first mover advantages.

To determine whether the expected influence of the pace of market evolution is applicable in the Dutch fast moving consumer goods industry, the following hypothesis is proposed:

Hypothesis 2: The pace of market evolution has a negative effect on the market shares of first movers and hence, a positive effect on the market shares of followers in the Dutch fast moving consumer goods industry.

Pace of technological evolution in the market

Kerin, Varadarajan and Peterson (1992) indicate that the pace of technological evolution in the market is negatively influencing the ability of a pioneer to use legal instruments to protect its innovation. When the pace of technological evolution is high, competitors more easily invent around patented technologies (von Hippel, 1988 cited in Kerin, Varadarajan & Peterson, 1992). On the other hand, a high pace of technological evolution can positively influence the competitive advantage of the first mover when the used knowledge is tacit or technology is embedded in processes rather than products (Kerin, Varadarajan & Peterson, 1992).

Suarez and Lanzolla (2007) provided a theoretical study in which these authors researched the influence that the pace of technological evolution in a market has on the effectiveness of first mover advantages. They captured the pace of technological evolution in the market by the shape of the technology adaption curve of that market. A less steep S-curve indicated a slow pace of technological evolution and an abrupt shape of the S-S-curve indicated a fast pace of technological evolution in the market.

According to Suarez and Lanzolla (2007), a later entrant will be less dangerous to the first mover when the market is characterized by a slow pace of technological evolution. This is because the late mover could not easily compete with the first mover on technological improvements or differentiation.

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unpredictable market with quick product and process technology changes. They statistically found that the pace of product and process technology change in a market positively influences the relative advantage a pioneer has. The pioneer could more easily earn back its investments in development and is able to take position in an attractive product-market niche in these technology sophisticated markets. The finding of Mueller et al. (2009) is shown by H3 figure 1.

The finding of Mueller et al. (2009) is in contrast with the theory that Suarez and Lanzolla (2007) developed. This can mean different things. First, it is possible that the theory of Suarez and Lanzolla (2007) does not hold empirically. Second, it is possible that the theory of Suarez and Lanzolla (2007) could be empirically true in certain industries and the relationship that Mueller et al. (2009) found is also correct only for certain industries and circumstances. According to Mueller et al. (2009), followers may miss out on market opportunities in a market that is characterized by a fast pace of technological evolution, because the followers have less market knowledge than the first movers. Though, when a first mover invests in an expensive technology, it could lock in its resources into a technology that is quickly out to date. Then, a follower can gain from the undesirable position of the first mover. More research needs to be done on this subject to be sure about the influence of the pace of technological evolution on the relative advantage that a first mover could gain. In this thesis, the empirical findings of Mueller et al. (2009) are followed.

To determine whether the expected influence of the pace of technological evolution in the market is applicable in the Dutch fast moving consumer goods industry, the following hypothesis is proposed:

Hypothesis 3: The pace of technological evolution in the market has a positive effect on the market shares of first movers and hence, a negative effect on the market shares of followers in the Dutch fast moving consumer goods industry.

Time between pioneers market entry and follower market entry

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entering the market. This view is based on the lock-in effect that first movers could take advantage of from the moment of market introduction until the first follower enters the market. Also the monopoly position that a first mover temporarily benefits from and the chance to build brand loyalty could be relevant here. Kerin, Varadarajan and Peterson (1992) also indicated that the shorter the time that the follower needs to respond on the first mover, the smaller the first mover advantages will be.

Because the later movers need to overcome the lock-in effect of the first movers they should set lower prices than the first movers and early entrants according to Makadok (1998). However, according to Makadok (1998) the longer a follower waits with entering a market, the higher the price is that the follower can ask for its products. This could be explained by entering a niche market as a late mover, but Makadok (1998) does not explain this effect. According to Teece (1986) and Suarez and Lanzolla (2007), followers could imitate first movers by inventing around the technology – and eventually the patents – of the first and early movers. In this way, the late movers have more opportunities to challenge the leadership of the first mover. The findings of Makadok (1998) are found by empirically testing in the money market mutual fund industry, which is a good example of an industry with low barriers to entry and imitation.

To determine the expected influence of the time between pioneers market entry and follower market entry in the Dutch fast moving consumer goods industry, the following hypothesis will is proposed:

Hypothesis 4: The time between pioneers market entry and follower market entry has a positive effect on the market shares of first movers and so, a negative effect on the market shares of followers in the Dutch fast moving consumer goods industry.

2.3.2 The role of business unit specific factors on the success of first movers and followers

Degree of market pioneering

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market which was started by incremental innovation. For markets started by really new product innovations, they found that the first mover to a market often is also the first to fail (Min, Kalwani & Robinson, 2006). The degree of market pioneering therefore plays a role in the presence of a first mover advantage. In this research, the degree of market pioneering is defined as the level of newness of a product. A low degree of market pioneering indicates an incremental innovation and a high degree of market pioneering indicates a radical innovation.

Contrary, Kerin, Varadarajan and Peterson (1992) indicate that the first mover advantage is larger for first movers that introduce products with a high degree of market pioneering. They hypothesized that the first mover advantage will be larger when the first mover creates a new product category rather than a new product.

The innovativeness of a follower can significantly influence the success of a follower. Shamsie, Phelps and Kuperman (2004) found that when a late mover enters a market with a high degree of innovativeness, the late mover will perform better in terms of survival and market share. Innovativeness can be seen as the degree of market pioneering. A follower can enter a market with a pure copy or a more innovative copy. In de second case the degree of market pioneering or innovativeness of the follower is higher.

Also Shankar, Carpenter and Krishnamurthi (1998) have researched the effect of the innovativeness of a late mover on the late mover’s success in the pharmaceutical industry. They found that non-innovative late movers performed less than pioneers, but the innovative late movers performed better than the pioneers in several ways. The innovative late movers grew faster than the pioneer and also had higher repeat sales than the pioneer. Besides, the innovative late movers reduced the effectiveness of the marketing mix of the pioneer and the market potential of the innovative late movers was equal or higher than that of the pioneer (Shankar, Carpenter & Krishnamurthi, 1998).

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Mueller et al. (2009) empirically rejected these findings by showing that the relationship between market pioneering and firm growth is not linear. According to them, the relationship is inverse U-shaped with an optimum for a moderate degree of market pioneering. This finding is illustrated by H5 in figure 1.

Although the section above makes clear that the degree of pioneering can influence the success of both the follower and the pioneer in a market, the findings of the groups of researchers can be seen as contradictive.

For market pioneers Robinson and Min (2002) and Min, Kalwani and Robinson (2006) found that the degree of market pioneering is negatively related with the success of a firm. For market followers, Shamsie, Phelps and Kuperman (2004) found that the degree of market pioneering is positively related with the success of a firm. In this thesis, the findings of Mueller et al. (2009) are followed to answer the following hypothesis:

Hypothesis 5: The degree of market pioneering of a business unit has an inverted U-shaped effect on the market share of the first mover. The top of the inverted U-shape is at a moderate rate of market pioneering.

Strategic learning capabilities of the first mover

Strategic learning capabilities of a firm has been defined by Mueller et al. (2009) as "the ability of firms to interpret the outcomes of past decisions and adjust future tactics based on what was learned from prior actions". These capabilities tend to have a negative influence on the relationship between market pioneering and firm growth (Mueller et al., 2009). This paper extends this finding and transforms the moderating effect into a direct negative effect.

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characteristics have been dramatically changed. A third possibility could be that a firm performs well in a market and sticks to the used methods because these methods have proven to work out good for the firm. These possibilities are based on structural inertia, which is described in section 2.2 earlier and also by Hannan and Freeman (1984).

To determine the expected influence of strategic learning capabilities of the first mover in the Dutch fast moving consumer goods industry, the following hypothesis is proposed:

H6: The strength of strategic learning capabilities of a pioneer has a negative effect on its market share in the Dutch fast moving consumer goods industry.

Pace of decision making of the business unit

Covin, Green and Slevin (2006) defined decision-making participativeness as "the extent to which the firm’s major operating and strategic decisions are made through consensus-seeking processes versus individualistic or autocratic processes by the formally responsible executive". Mueller et al. (2009) found that strategic decision-making participativeness in a firm negatively moderates the relation between market pioneering and firm growth. The reason for this is twofold. First, the decision making process takes more time when it is participative than when decisions are made in an autocratic way. The extra time necessary for the participativeness could result in a missed opportunity. Second, the nature of the decisions made is different between participative and autocratic decision making. The participative decisions normally are more conservative and gain lower returns from the alternatives chosen than decisions that are made autocratic. The autocratic made decisions take higher return alternatives. It can be said that decision making participativeness delays decision making and so the factor of influence is the time of decision-making.

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are made in a more autocratic way. Third, the decision needs to be implemented. The time that is needed for implementation depends among others on the time that a business unit needs to act when a decision is made.

To determine the expected influence of the pace of decision making of the business unit in the Dutch fast moving consumer goods industry, the following hypothesis is proposed:

Hypothesis 7: The pace of decision making in a business unit has a positive effect on its market share in the Dutch fast moving consumer goods industry.

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3. Research methodology

The objective of this research is to explore how the existing theory about first mover advantages and follower advantages apply to organizations in the Dutch fast-moving consumer goods market. The aim of this research therefore, was to explore this research field with an initial test of contingency effects.

Based on the literature study, the conceptual model for the situation in the Dutch fast-moving consumer goods market, which is shown in figure 1 on page 17, has been made. This conceptual model will be explored in practice with the use of a qualitative research. The qualitative data which was necessary is collected through semi-structured interviews with relevant stakeholders in four cases in the Dutch fast moving consumer goods industry. These relevant stakeholders are employees of large producers in the Dutch fast moving consumer goods industry. The choice for a case analysis has been made because of the explorative character of this thesis and the difficulty of obtaining sales data in the Dutch fast moving consumer goods industry. Besides, in a case study factors that are hard to measure statistically, like the degree of market pioneering, can be measured.

Prior to each interview, the questions of the interview were conducted based on the described literature and survey questions from previously empirical studies on this subject in other markets. Factors were measured with the use of multi-item scales because multi-item scales make it possible to measure rich and hard to define constructs. Questions that were asked were about the presence and effects of the first mover advantages and follower advantages and about the market factors and company or business-unit factors for the pioneer that could influence the advantages. The interviews were mostly performed face-to face and in some cases a telephone interview was performed. After each interview, an interview transcription was made. The transcriptions of the interviews can be found in appendix A-G. The most important results can be found in the results section of this thesis.

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different market characteristics. The classification of the cases has been performed on the basis of the empirical study and can be seen in paragraph 3.1 and figure 2 on page 31.

3.1. Cases selection

The cases in which the model is tested differ in the pace of market evolution and the pace of technological evolution in the market. Based on the empirical study, the cases are categorized along these two dimensions. The classification can be seen in figure 2. The cases that were researched are: [case 1]; [case 2]; the [case 3] and [case 4]. The cases are described in this section. In table 2 an overview of the interviewees per case is given.

Case Interviewees

[case 1] Trade marketer. ([brand 1.1])

[case 2] Commercial manager

Innovation, Global commerce ([brand 2.1])

Innovation manager, Marketing ([brand 2.1]

[case 3] Category shopper manager

personal care. ([brand 3.1] Wildrose)

Product manager [brand 3.2] Deodorant & [brand 3.3].

[case 4] Product manager [brand 4.2].

Table 2. Interviewees per case.

[case 1]

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the market into maturity is not “fast”. Besides, the interviewee says that “On the long term [brand 1.1] established a solid position in the market” and that the pace of market evolution is “very fast, but that would be the description of the whole cosmetics industry as well.“ which indicates that [case 1] is not characterized by a higher than moderate pace of market evolution for the industry.

The technological evolution of the product is perceived to be fast because the interviewee said that “Large R&D investments are definitely characteristic for this industry as well as for the product group of hair care.” And that it is “a precondition to have products of high quality. Also the continuous improvement of these products is a precondition to be able to act in this industry.” Also the process technologies are important to be in order and are continuously optimized.

[case 2]

This submarket started in March 2004 by [brand 2.1]. At the time of market introduction the market was characterized by a moderate pace of market evolution and a fast pace of technological evolution in the market. The interviewees said about the pace of market evolution that “In the Netherlands the segment quickly grew and reached its peak within three years. The grow rate then dropped down because [brand 2.1] did not promote the product as much as it did before. [brand 2.1.1] should improve the segment and the grow of [brand 2.1] in the segment.“ And that “The growth of the [case 2] market declined a bit, but the introduction of [brand 2.1.1] added more growth and potential to the market.“

The market grows to maturity at a moderate pace and the technology in the market changes fast. The changes in the product technology are moderate but the processes are continuously optimized. According to the interviewees: “New products within the [case 2] segment are very high tech, because the systems are very expensive to develop and the systems hardly change after the introduction. (…) These product technology changes are done on the product level, but also at the process level we try to benefit from improvements. (…) At the process level we do this by optimizing the supply chain. “

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This submarket started in 2008 by [brand 3.2] and is characterized by a slow market evolution and a moderate technological evolution in the market. The market is not growing fast to maturity because according to the interviewee “The behavior of people must be changed to let the market develop into maturity (…) A producer need to convince the consumer of the utility and need for the product. In deodorant for example, the producer needs to convince the consumer that it is important to have a fresh smell.”

About the technological evolution the interviewee said that “Winning [in the market] can be accomplished by both radical and incremental innovation (…) At all products that are used by applying the product on the skin, technological changes are very important (…) All large producers in personal care have a very large R&D department (…) These departments [and] Innovation will become a standard and a precondition in certain parts of the market”

[case 4]

This submarket started in 2011 by [brand 4.1] and is characterized by a slow pace of market evolution and a slow pace of technological evolution in the market.

The interviewee said about the pace of market evolution that “the market has a large growth potential (…) In a number: When 1 is no evolution and 10 is full evolution (…) a 5 characterizes this market.” And “Last year there was an enormous growth in the market and this year [2011] there was a decline in sales. This, however, could be because the seasonal character of the market.”

The pace of technological evolution in the market is perceived to be slow because the interviewee said that “Annually there are new product introductions and incremental changes to existing products and formulas.” Also the interviewee noticed that the industry is characterized by a lot of new products and that innovation is important. However, for the market of [case 4] there are no frequent market introductions. Besides, [brand 4.2] is the second mover at 104 weeks after the pioneer introduced its product. The product did not change more than incrementally in those 104 weeks.

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organize this matrix has been retrieved from the case interviews and tested to the thoughts of the author of this thesis.

1. The interviewees notified that the market of [case 1] has a slow pace of market evolution and a fast pace of technological evolution in the market.

2. The interviewees notified that the [case 2] market is characterized by a moderate pace of market evolution and a fast pace of technological evolution in the market. 3. The interviewees notified that the [case 3] market is characterized by a slow pace of

market evolution and a moderate pace of technological evolution in the market. 4. The interviewees notified that the [case 4] market is characterized by a slow pace of

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Very slow ` Pace of market Very fast

evolution Number : Case: 1. [case 1] 2. [case 2] 3. [case 3] 4. [case 4]

Figure 2: Cases of interest organized by pace of market evolution and pace of technological evolution in the market. Data is used from the empirical case study.

3.2 Measurement instrument

For this thesis research, some practical choices have been made to ensure that the outcomes of the research are appropriate. These choices are described in this section.

Entry order

The entry order is objectively defined by checking the market share data of the product cases and asking the interviewee in the concerning case. In the market share data the entry order of products is shown by the entrance of new products. Until the market introduction of a product, its market share is 0. After the introduction of a product, its

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market share can increase. The information about entry orders is cross-checked with the help of interviewees.

This research only distinguished the pioneer and followers. No difference has been made between different followers including fast followers, slow followers, second movers, third movers or later movers. The speed of following is researched by the contingency factor ‘time between pioneers market entry and follower market entry’.

A first mover, which also can be called innovator or pioneer, is seen as:

“A firm [or business unit] that introduces a product that provides new features or benefits to the technology in the market or a product that results in a market discontinuity or a technological discontinuity.” (Garcia & Calantone, 2002)

Followers are seen as all business units that enter the same market as the pioneer did, with a product that is comparable with the product of the pioneer.

The business units in the cases have been labeled as pioneers or followers by testing the business units to the definition of a first mover used in this thesis. To ensure that the business units can be seen as pioneers or as followers, the entry order of products in the created submarket has been tested with market share data that was retrieved by A.C. Nielsen, a well-known market research firm. The product introductions are all creating a new submarket within an existing market. The market share data shows a market share of 0% until the business unit introduces the product. After the introduction, the market share in the existing market increases and thereby creating a submarket. Finally, the case interviewees confirmed the entry order position (first mover or follower) their business units were in. [case 2] is an exception of this method because the market share data in this case was not available to check the pioneering position of [brand 2.1].

Success

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The other variables are shown by noting the symbols --, -, +/-, + and ++ for it. For every variable, there follows a table in this section that shows what each of the symbols means.

Pace of market evolution

To measure the pace of market evolution in the interview cases, the following items of Suarez and Lanzolla (2007) and Agarwal and Bayus (2002) were used.

1. On scale 1-10, how fast do you think that this market is getting into maturity?

2. Has there been a sales takeoff in your market in the past? (If yes: How fast was it after the market introduction of the product?)

3. Was this sales takeoff followed up by a stabilization phase? (If yes, how long did the stabilization take?)

4. How would you describe the pace of market evolution in your market? 5. How do consumer needs change over time in your market?

6. How fast does consumer needs change over time in your market?

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of points

Symbol Meaning

1 - -

Very slow pace of market evolution. Answers indicate that the market hardly changes. The market does hardly grow and consumer needs do hardly change over time.

2 -

Slow pace of market evolution. Answers indicate that the market shows a little evolution. The market grows a little or consumer needs are changing incrementally.

3 +/-

Moderate pace of market evolution. Answers indicate that the market shows an evolution that is not fast, nor slow. The market grows or consumer needs are changing.

4 +

Fast pace of market evolution. Answers indicate that the market shows a fast evolution. The market grows at a fast pace or consumer needs are changing at a fast pace.

5 + +

Very fast pace of market evolution. Answers indicate that the market shows a fast evolution. The market grows at a fast pace and consumer needs are changing at a fast pace.

Table 3 Transformation of the symbols for the pace of market evolution.

Pace of technological evolution in the market.

To measure the pace of technological evolution in the markets of the interview cases, the following items of Mueller et al. (2009) were used.

1. Are heavy investments in R&D characteristic of your industry?

2. Are frequent product technology changes characteristic of your industry? 3. Are frequent process technology changes characteristic of your industry?

4. Is having superior technical personnel a key basis for competitive advantage in your industry?

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For each question the author gave a point in if the question was answered positively by the interviewee. No point was given if the question was answered negatively by the interviewee. The total of points over the five questions determined the transformation to the symbols that are given in table 4.

Points given

Symbol Meaning

0 - - Very slow pace of technological evolution in the market. All five questions are answered by negatively.

1 - Slow pace of technological evolution in the market. One of the five questions is answered positively and four of the questions are answered negatively.

2-3 +/- Moderate pace of technological evolution in the market. Two or three of

the questions are answered positively and two or three of the questions are answered negatively.

4 + Fast pace of technological evolution in the market. Four of the questions

are answered positively and one of the questions is answered negatively. 5 + + Very fast pace of technological evolution in the market. All five questions

are answered positively.

Table 4 Transformation of the symbols for the pace of technological evolution in the market.

Degree of market pioneering

To measure the degree of market pioneering of the pioneer in the interview cases, items were based on qualitative research of Mueller et al. (2009).

The questions include:

1. Do you offer products in this submarket that are very similar to those of your major competitors (reverse coded)?

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3. Do or did you compete heavily on the basis of being first-to-market with new products in this submarket?

4. Do you typically precede your major competitors in bringing new products to this submarket?

For each question the author gave points in a range of 1 to 5. 1 point was given if the answer of the interviewee indicated no market pioneering at all: The answer of the interviewee indicates that the specific product in the case is not different from other products in the market and is not introduced in another submarket. 5 points were given when the answer of the interviewee indicated a high degree of market pioneering: The specific product is totally new and is introduced to a new market. The average of points over the four questions determined the transformation to the symbols that are given in table 5.

Average of points

Symbol Meaning

1 - - There is no market pioneering at all. The specific product is not different from other products in the market and is not introduced to another submarket.

2 - There is a low degree of market pioneering. The specific product is just slightly different from other products in the market and is not introduced to another submarket.

3 +/- There is a moderate rate of market pioneering. The specific product is

new to the market or has been introduced to another submarket. 4 + There is a high degree of market pioneering. The specific product is

new to the market and introduced to another submarket.

5 + + There is a very high degree of market pioneering. The specific product

is new and is introduced to a new market.

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Time between pioneers market entry and follower market entry

To measure the time between the market entry of the pioneer and the market entry of the follower(s) in the market in the interview cases, the following question was asked based on research of Makadok (1998). Besides asking the question to the interviewee, if possible the answers of the interviewee were also checked with market share data of AC Nielsen, a market research company.

“How long did it take from the market introduction of the pioneer until the follower entered the market?”

In the results section the answers on this open question are formulated in years, months and days. The results are formulated in this way because it is hard to say in which product case the time between pioneers market entry and follower market entry is long or short. This also depends on the case and the pace of market evolution and technological evolution in the market. This item therefore has been measured in absolute terms because it cannot be said whether a certain time is slow or fast in the market.

Strategic learning capabilities

To measure the strategic learning capabilities in the interview cases, the following items of Mueller et al. (2009) are used.

1. Is your business unit good at identifying strategies that haven’t worked? 2. Is your business unit good at pinpointing why failed strategies haven’t worked? 3. Is your business unit good at learning from its strategic/competitive mistakes?

4. Does your business unit regularly modifies its choice of business practices and competitive tactics to see what works and what does not?

5. Is your business unit good at changing its business strategy midstream as you get a sense of the likely effectiveness of our actions?

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For each question the author gave a point if the question was answered positively based on the comments of the interviewee. No point was given if the question was answered negatively. The total of points over the six questions determined the transformation to the symbols that are given in table 6.

Points given

Symbol Meaning

0-1 - - Very weak strategic learning capabilities. One question at most was answered positively

2 - Weak strategic learning capabilities. Two questions were answered

positively

3 +/- Moderate strategic learning capabilities. Three questions were

answered positively

4 + Strong strategic learning capabilities. Four questions were answered

positively

5-6 + + Very strong strategic learning capabilities. Five or more questions were

answered positively.

Table 6 Transformation of the symbols for the degree of strategic learning capabilities.

Pace of decision making

To measure the pace of decision making in a business unit in the interview cases, the following items of Mueller et al. (2009) and Covin, Green and Slevin (2006) were used.

1. How long does it take to identify problems in the R&D process?

2. How long does it take between problem identification and decision making?

3. Are strategic relevant decisions in your business unit made through consensus-seeking processes versus autocratic process by the formally responsible executive

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40 Average

of points

Symbol Meaning

1 - -

Very slow pace of decision making in the business unit. Answers indicate that problem identification and decision making take relatively much time compared to competitors. Decisions are made by seeking consensus.

2 -

Slow pace of decision making in the business unit. Answers indicate that problem identification and decision making take relatively much time compared to competitors. Decisions are made by seeking consensus, but also autocratic when necessary.

3 +/-

Moderate pace of decision making in the business unit. Answers indicate that problem identification and decision making take similar time compared to competitors. Decisions are made by seeking consensus as often as autocratic.

4 +

Fast pace of decision making in the business unit. Answers indicate that problem identification and decision making take less time than competitors. Decisions are made autocratic, but also by seeking consensus when necessary.

5 + +

Very fast pace of decision making in the business unit. Answers indicate that problem identification and decision making take less time compared to competitors. Decisions are made autocratic.

Table 7 Transformation of the symbols for the pace of decision making of the business unit.

3.3 Cross-case analysis and hypothesis testing

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Hypothesis 1: First mover advantages outweigh follower advantages in the Dutch fast moving consumer goods industry.

To test this hypothesis all the cases are compared with each other. The first movers of the cases are compared with the followers and the analysis will focus on the relative success in market share of first movers. The first movers and followers for each case are listed in table 8. The entry order all of the cases is defined by asking the interviewee in the concerning case. The interview statements have been compared with market share data that was retrieved by AC Nielsen. Only in the case of [case 2], the data could not be compared with market share data because this data was not available. The entry order in [case 2] has been compared with information from the website coolness.nl, a website with information about [case 2] (Coolness.nl, 2011; 2012).

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Case First mover Follower(s)

1. [case 1] [brand 1.1] [brand 1.2]

2. [case 2] [brand 2.1] [brand 2.2] and others

3. [case 3] [brand 3.2] [brand 3.1]

[brand 3.3]

4. [case 4] [brand 4.1] [brand 4.2]

Table 8: First mover and follower(s) per case. In bold: The business units that participated in the interviews

Hypothesis 2: Pace of market evolution

H2: The pace of market evolution has a negative effect on the market shares of first movers and so, a positive effect on the market shares of followers in the Dutch fast moving consumer goods industry.

To test this hypothesis, [case 1], 3 and 4 are compared with case 2. In [case 1], 3 and 4 the pace of market evolution has been found to be slow and in case 2 the pace of market evolution has been found to be moderate. Therefore the best comparison of cases is to compare [case 1], 3 and 4 with case 2

Hypothesis 3: Pace of technological evolution

H3: The pace of technological evolution in the market has a positive effect on the market shares of first movers and so, a negative effect on the market shares of followers in the Dutch fast moving consumer goods industry.

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H4: The degree of market pioneering of a business unit has an inverted U-shaped relationship with the market share of the first mover. The top of the inverted U-shape is at a moderate rate of market pioneering.

To test this hypothesis, [case 1] and 3 are compared with case 2 and 4. In [case 1] and 3 the degree of market pioneering of first movers has been found to be moderate and in case 2 and 4 the degree of market pioneering of first movers has been found to be high. In all of the cases the degree of market pioneering of the followers has been found to be low (or no market pioneering at all in [case 1]). Therefore the best comparison of cases is to compare [case 1] and 3 with case 2 and 4.

Hypothesis 5: Time between pioneers market entry and follower market entry

H5: The Time between pioneers market entry and follower market entry has a positive effect on the market shares of first movers and so, a negative effect on the market shares of followers in the Dutch fast moving consumer goods industry.

To test this hypothesis, [case 1] and 4 are compared with case 2 and 3. In [case 1] and 4 the time between pioneers market entry and follower market entry has been found to be relatively long (80 and 104 weeks). In case 2 and 4 the time between pioneers market entry and follower market entry has been found to be relatively short (35 and 40 weeks). Therefore the best comparison of cases is to compare [case 1] and 4 with case 2 and 3.

Hypothesis 6: Strength of strategic learning capabilities

H6: The strength of strategic learning capabilities of a business unit has a positive effect on its market share in the Dutch fast moving consumer goods industry.

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and 2 the fist mover has been interviewed and in case 3 and 4 a follower in the market has been interviewed.

Hypothesis 7: Pace of decision making

H7: The pace of decision making in a business unit has a positive relationship with its market share in the Dutch fast moving consumer goods industry.

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4. Results

In this chapter the results of this research will be described per case. First, the results of [case 1] will be described in section 4.1. Section 4.2 describes the results of [case 2]. Section 4.3 and 4.4 respectively describe [case 3] and [case 4]. In section 4.5 an additional finding is described. At the end of the sections 4.1-4.4 there will be a table with an overview of the results of the concerning case. At the end of this chapter in section 4.6 an overview of all results is given and hypotheses are tested based on the results of all case studies.

4.1 [case 1].

[brand 1.1] is a brand of shampoo that has been introduced by [brand 1.1] in week 25 of 2009. [brand 1.1] could be seen as an innovation because it is the first brand of shampoo that claims to offer [case 1] shampoo. In week 52 of 2010, [brand 1.2]introduced [brand 1.2] and by that, became second mover in the segment of [case 1]. At the end of May 2011, [brand 1.1] still is the larger one of the two with a total market share of 4.2% of the total shampoo market against 2.3% for [brand 1.2]. The relative market shares of the two business units are respectively 64.4% and 35.4% in the shampoo niche market. It can be concluded that in this case [brand 1.1] is the first mover and the winner so far.

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The strategic learning capabilities of [brand 1.1] hair care appear very strong (++). This is illustrated by the following quotes from the interview: “Much lessons are learned from past cases”; “[brand 1.1] has the capability to analyze past cases and learn from them”; “We evaluate on what is good and what can be better”; “Learning from competitors is difficult, but happens” and “When an introduction or strategy is not working well, there will be immediate adjustment. Action will be made fast.”

The pace of decision making at [brand 1.1] hair care is moderate (+/-) compared to the competitors. Problem identification and the search for solutions and alternatives are fast. Despite of the consensus finding decision making that sometimes appear, decisions are not delayed. However, the interviewee indicated that [brand 1.1] hair care has no slower or faster decision making than its competitors.

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[brand 1.1] Shampoo [brand 1.2] Shampoo

Entry order First mover Second mover

Market share at May 2011 4.2 % of the total shampoo

market

2.3 % of the total shampoo market

Relative market share of the two business units at May 2011

64.6 % of the submarket 35.4 % of the submarket

Pace of market evolution in the product group of [case 1]

-

(slow pace of market evolution) Pace of technological evolution

in the product group of [case 1]

+

(fast pace of technological evolution)

Time of entry Week 25 of 2009 Week 52 of 2010

(80 weeks later than the first mover)

Degree of market pioneering +/-

(new submarket)

--

(no market pioneering) Strategic learning capabilities

of the business unit

++

(very strong strategic learning capabilities)

Not known

Pace of decision making of the business unit

+/-

(similar to competitor)

+/-

(similar to competitor)

First or Second best?