Market strategies for new ventures
by David Molian, Lecturer in Enterprise
‘Is launching new products harder or easier today than it was 10 years ago?’ Ask a
brand manager in a large consumer goods company and the response will almost
certainly be ‘harder’. Intensified competition, consumers who are more value
conscious and less brand loyal, dwindling product life cycles and increasingly
powerful retailers mean that many new products fall by the wayside. In some
industries the failure rate can be as high as 90%.
How much more difficult must it be for the new venture, especially the start up. With
fewer resources, fragile or embryonic networks and the need to build trust and
credibility among both customers and suppliers, the typical new venture carries more
inherent risks. Yet it also possesses certain intangible assets: the ability to act rapidly,
a capacity for flexibility, a management that is hungry for success and above all
freedom from the burden of corporate history.
Change of pace
The pace of commerce makes launching products a risky business. Markets that are
growing are frequently turbulent and hard to forecast. Those markets that are static -such as mature commodity sectors like soap powder -- may contain a few pockets of
niche activity but are generally a battleground in which a few dominant competitors
wrestle each other for an extra quarter per cent of market share.
The upshot is that big business has had to rethink radically its traditional approach to
innovation and new product launches. The way they used to manage the risks
associated with entry into new markets no longer suffices. Extended periods of
commercialisation are just too long in today’s business world- in too many markets
the window of opportunity can be lost. Yet trying to compress the time to market can
create its own risks as Unilever’s experience with Omo Power (Persil in the UK)
shows. Nor are large advertising, salesforce and marketing budgets a guarantee of
© Management Focus Issue 12 Summer 1999 (Cranfield School of Management)
success: IBM’s PC Jr. and Kodak’s Disk Camera are just two examples of failed new
product launches supported by hundreds of millions of dollars.
Value chain
To succeed, the new venture must create value for which a customer is prepared to
pay. The market entry decision is closely related to the position within the value chain
that the new venture adopts. A choice has to be made as to how much of the
marketing risk to assume and how much it is should be shared by other players in the
chain.
There is a spectrum of risk sharing. At one end are businesses such as biotechnology
laboratories whose discoveries are normally licensed to large pharmaceutical houses
for downstream exploitation in new drugs. This kind of company lives on royalty
income generated by its intellectual property, while the risk of taking the discovery to
market is largely borne by the counter party. At the other end of the spectrum are
organisations that sell direct to the market, who position themselves in the final
section of the value chain, such as catalogue retailers. Between the two extremes lies a
huge variety of risk-sharing arrangements, covering agencies, wholesaling,
franchising, subcontracting and so on.
There is, however, a second dimension -- access to the market. This also runs along a
spectrum, from the immediate relationship with the end customer enjoyed by the
direct sales company to the remote connection of the biotechnologist.
As figure 1 shows there is typically an inverse relationship between a high degree of
risk-sharing and access to the market. We are not talking here of absolute risk: if the
essence of an opportunity is a company’s capacity to react swiftly to customer demand
© Management Focus Issue 12 Summer 1999 (Cranfield School of Management)
- as in the fashion business - assuming the entire marketing risk may well be less
“risky” than laying off that risk through a counter-party through whom contact with
the customer is filtered. Conversely, if a direct line to the ultimate buyer is of no
importance in the business concept, selling direct is unlikely to make much sense.
Insert figure 1 Risk sharing and market access
Selecting the appropriate risk sharing arrangement is a strategic decision. Marketing
risk can also be managed operationally by consideration of the process by which a
new venture can be brought to market.
Prototyping
A typical new venture does not have the resources to manage the innovation process
in the same way large organisations traditionally do and in any case this can be too
protracted and cumbersome a way of responding to market changes. There is,
however, an element of good innovation practice that a new venture could and should
emulate, namely prototyping. The term comes from large engineering projects but can
be applied to all sorts of new ventures. A restaurant business can be prototyped - that
is launched in a format that is acknowledged (by the management at least) as
provisional, to be modified in response to market reaction. So, too, can a service. The
concept is valuable for the following reasons:
 prototyping is a means of containing risk through limiting the commitment of
resources;
 it allows the new venture to test the robustness of the product or service concept,
often through giving target customers access in advance of the launch. This is
common practice in the software industry where software is routinely tested by
selected customers prior to full release;
 it fosters a mentality of flexibility and responsiveness to customers;
 in many new venture environments demand is latent, but conventional market
research methods may not apply or may be prohibitively expensive. The only way
to prove demand exists therefore is to test the market by offering an early version
© Management Focus Issue 12 Summer 1999 (Cranfield School of Management)
of the concept in the full knowledge that it may change as a result of customer
exposure.
One of the UK’s premier health and fitness clubs adapted the prototyping approach.
While the club was still under construction, local residents were mailed invitations to
tour the site. Those who accepted were shown the plans for the final design and
invited to comment, with the result that a number of suggestions were incorporated
while it was still possible to do so. The club also, it need hardly be said, acquired a
useful database of prospective members.
Incremental commercialisation
Traditional modes of innovation were based on a clear separation between
development and launch -- at a certain point development was frozen and the finished
product entered the market. However, even this approach includes an element of
incremental commercialisation, in the form of test markets, which allow a company to
modify the product whether in its physical form or in the way in which it is marketed
before a full launch.
For many new ventures, attempting to keep development and launch as distinct
processes is inappropriate. For one thing, most new ventures today will be service
based. The beauty of a service-based business is the speed and flexibility with which
the service can be modified in response to the market. The new venture needs to
exploit that inherent advantage and avoid undue rigidity in advance of feedback from
customers.
Conclusion
The market entry decision requires the same skills that characterise the successful
entrepreneur: the capacity to determine where in the market place the opportunity lies;
the ability to shape that opportunity in response to customers’ needs; the feel for
managing risk to acceptable levels through the use of partners; and above all the
ability to smooth the path through the limited exposure offered through techniques
such as prototyping and incremental commercialisation.
© Management Focus Issue 12 Summer 1999 (Cranfield School of Management)
© Management Focus Issue 12 Summer 1999 (Cranfield School of Management)