Entering (vs. Creating) New Categories — Get the Timing Right
Creating a new category or subcategory using substantial or transformational innovation is difficult, can be diverting, and involves the ultimate risk that it may not work in the marketplace. Many firms explicitly or implicitly avoid innovating new categories or subcategories because of these risks and because they want to focus on existing product markets. Their strategy is to allow small firms to innovate and prove the new category or subcategory has traction. They then enter the category or subcategory by acquisition or by creating a competitive offering.
For this strategy to work, the timing needs to be exactly right. If the timing is too early, market and offering uncertainly will still be high and the category or subcategory sales level will be inadequate to justify organizational support. The far more prevalent problem with this “enter” strategy, however, is that the timing is likely to be late.
One “enter” option with a category or subcategory that has “arrived” is to buy the leading brand or one of the leaders. The problem is that such a brand, even if it is available and not owned by a competitor, may be prohibitively expensive for two reasons. First, the category or subcategory will likely represent a visibly hot new market that has delivered healthy and maybe outstanding growth. Second, the brand is likely to have established formidable barriers in terms of customer loyalty, brand equity, operations experience, market expertise, and knowledge around the offering and its technology. A high price will mean that there will be little margin for error in managing its future growth and significant downside risk. An outlandish price led Coca-Cola to walk away from the Gatorade acquisition.
Another option, buying a third or fourth place brand or building an offering and brand internally, faces a formidable task to break into a market with such an established competitor. Coca-Cola found how tough this can be as their acquisition of Honest Tea and their Gold Peak tea entry have seen mixed results in making a dent in the growing tea arena against the big players (Arizona and Snapple) and their Full Throttle and NOS brands have not challenged the leaders in the energy drink arena (Monster or Red Bull). It is an uphill struggle.
When the timing is right, usually well before the category or subcategory has been established, an acquisition entry strategy can work well. The leading brand, which can be a potential exemplar of the new category or subcategory, will be available at a reasonable price because it will still be small and underleveraged. Often just scaling that brand by entering new markets or offering variants will provide sales enhancements that will more than make up for any price premium. Clorox has done this well with brands such as Hidden Valley Ranch Dressing and KC Masterpiece Sauce and Coca-Cola has done so as well with several brands including Odwalla.
With the timing right, an organic entry strategy can work as well because the leading brand will not have such a strong brand and customer base and may be underfunded and vulnerable.
With dynamic markets driven by substantial and transformational innovation, it is crucial for firms to have an information system that identifies and tracks market trends, an organization that will respond in a timely manner, and an ability to develop brands and bring them to the market. Being late is expensive and can be fatal.
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