marketing mix reaction to entry

7/27/2019 marketing mix reaction to entry

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Marketing Mix Reactions to Entry

Author(s): William T. RobinsonSource: Marketing Science, Vol. 7, No. 4, Special Issue on Competitive Marketing Strategy(Autumn, 1988), pp. 368-385Published by: INFORMSStable URL: http://www.jstor.org/stable/184084 .

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MARKETING SCIENCEVol. 7, No. 4, Fall 1988

Printed in U.S.A.

MARKETING MIX REACTIONS TO ENTRYWILLIAMT. ROBINSON

University fRochesterInitial product, distribution, marketing expenditure, and price reactions by incumbents areexamined for 115 entrants into oligopolistic markets. The most common reaction pattern iseither no reaction or only a single reaction. It is very unusual for entrants to face reactions acrossthe entire marketing mix. Reactions in the first two years after entry are explained as a functionof the entrant's strategy, incumbent characteristics, and industry characteristics. The explana-

tion provides insights into why marketing mix reactions to entry are often limited.(Market Entry;Competition; Marketing Mix Reactions)

1. IntroductionAre initial marketing mix reactions to entry usually aggressive,passive, or accommo-dating? How are these reactions influenced by the entrant's strategy, incumbent char-acteristics, and industry characteristics?These issues are important because aggressivereactions can catch an entrant in a vulnerable position and damage an otherwisesuccessful strategy. A frequently cited example is Tylenol's reaction to Datril. Tylenolslashed prices, dramatically increased the advertising budget, formed a sales force, andlegally chargedDatril with unfair and misleading advertising(AdvertisingAge 1975 andWall Street Journal 1982). These reactions seriously damaged Datril's entry strategy

and helped Tylenol maintain market leadership.Reaction insights are also important because expected reactions can alter the en-trant's strategy. Scherer (1980) points out that, "potential entrants . . . devote a gooddeal of thought to finding an entry strategy that strikes the best compromise betweensecuring scale economies and minimizing the risk of price warfare"(p. 248). Thus, ifaggressiveand damaging reactions are expected, the entrant can be frightenedoff or canchoose to enter on a less ambitious scale. For example, American Express has intro-duced a new credit card, Optima (AdvertisingAge 1987b), but is downplaying it be-cause of fear that banks offering Visa and MasterCardwill react. Finally, incumbentsbenefit when typical reactions provide a starting point for developing their defensivestrategies.In economics, theoretical researchon reactions to entry has spanned literally decadesand Caves and Porter (1977, p. 244) have termed the subject a "classicalproblem". Theresearchhas progressed from the ad hoc assumption by Bain (1956) and Sylos-Labini(1962) of a defending brand maintaining unit sales, to more sophisticated argumentsaddressingissues such as developing a reputation for toughness (Milgrom and Roberts

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Copyright ? 1988, The Institute of Management Sciences/Operations Research Society of America

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MARKETING MIX REACTIONS TO ENTRY

1982)and the fearof pricewarfareBrockand Scheinkman1985).Clearly, hemarket-ing literature'smost importantcontribution s Hauserand Shugan's 1983) Defendermodel. While exceptionsarise,this research ypicallypredictsaggressive ather hanpassiveor accommodating eactions o entry.(SeeNti and Shubik1979,p. 285.)If industry-specificxamplesareexcluded,only two descriptive tudies haveexam-ined initialmarketingmixreactions o entry.Inthe first woyearsafterentry,Biggadike(1979)concludes hat forindividualmarketingmix elements,"No reaction s the mostcommon reactionby an overwhelmingmargin"(p. 179). In addition,roughlyhalf(46%)of the entrantsfaced no reactionson any marketingmix element.Yip (1982)providessimilardescriptive esults.Thoughthesefindingsareimportant, amplesizesof 37 and 36 limit their generalizability.Also, becauseof the restricted amples,amultivariateanalysiscould not be used to explainthe variation n competitivereac-tions.Clearly,however, he findingsconflictwiththe theoreticalpredictionsof aggres-sive reactions or individualmarketingmix elementsbecausethe typicalreactionwasno reaction.The main factorlimitingempiricalcontributionson reactions o entryhas been alack of data. With the assistanceof the StrategicPlanningInstitute(SPI),Biggadikedevelopeda questionnaireand gainedthe cooperationof a cross section of start-upbusinesses.The PIMS(ProfitImpactof MarketStrategies) ataat SPIarewellknownand have beenanalyzedby manyacademicresearchers,utSPI'sstart-upbusinessdatahave been largelyoverlooked.The oversight s especially mportantnow becauseSPIhas expandedthe sample and it is five times largerthan it was in Biggadike'sni-tial study.

The relativelyargesample s used to describemarketingmix reactions o entry ntooligopolisticmarkets.The reactionscover the firsttwo yearsof commercialization.ConsistentwithBiggadikeandYip'sresults, he typicalfinding orindividualmarket-ing mix elements is no reaction.In a regression nalysis, he reactionsarefoundto beinfluencedby certainaspectsof the entrant's trategy,ncumbentcharacteristics,ndindustrycharacteristics.2. Data

The Strategic Planning Institute's (SPI) start-up business data provide detailed infor-mation on reactions o entry.Briefly,a start-upbusiness s a newbusinessventureandis typically7 yearsold or less (Start-UpData Manual 1978).A start-upbusinessisconsidereda new source of supplyby its customersand a new entrantby its com-petitors.The Start-UpData Manual (1978) recommends that a data-gathering eam beformedof managersn marketing, inance,manufacturing,nd R &D. As mostof thedatausedhereare ikelyto havebeengatheredbyone ormoremarketingmanagers,hestudyis based on self-reported,ingle-informant atasuppliedby the entrant.In Start-Up Data Form 3, competitive reactions assess, "any changes . . . of thethree leading competitors which were a direct response to the entry of this businessduring its first two years of commercialization, not resulting from fluctuating marketconditions."Asdiscussedbelow,the marketingmix reactions overperceivedproduct,distribution,marketing xpenditure, ndpricechanges.In designing the questionnaire, Biggadike (p. 169) assumed any reactions more thantwoyearsoutwould be influencedby manyforcesandcouldnot be tiedaccuratelyo aspecific entrant. Thus, the data miss reactions that arise 3 or more years after entry.Other potentially important reactions not examined include reactions prior to entry,reactionsoutside the marketingmix such as lawsuits,reactionsaimed at a groupofentrantssuch as IBM'swidespreadresponseto personalcomputerclones (Business

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WILLIAM T. ROBINSONWeek 1986b), reactions in other markets in which the entrant competes, and reactionsby competitors who are not among the top 3 market leaders. Still, initial marketing mixreactions by the leading competitors measure very important reactions to entry.

The reaction measures undoubtedly are influenced by perceptual, entrant strategy,and SPI self-selection problems. First, entrants may not perceive reactions becausedetection can be difficult, especially in growing markets where strategic change isrelatively frequent, the environment is "noisy", and the entrant may not have a well-developed competitive intelligence system. Also, when multiple factors motivate stra-tegic change, it is difficult to know whether or not the change would have been made inthe absence of entry. Second, as discussed in the introduction, expected reactions canalter the entrant's strategy.These first two factors bias the results toward finding infre-quent reactions to entry.The SPI self-selection problem should help offset this bias. The entrants are clients ofthe Strategic Planning Institute and typically representdiversification efforts of Fortune500 firms. Because Fortune 500 firms have relatively strong skills and resources, theypose a greater threat to incumbents than typical entrants and therefore should incitegreaterreactions.Finally, the data only include survivors. When strong reactions push entrants out ofthe market, important reactions are missed and averagereactions are biased downward.Entrants that leave the market because they are not serving the customer effectivelywould not threaten incumbents and consequently probably faced infrequent reactions.Excluding these observations biases average reactions upward. Hence, it is not clearhow the survivor issue influences average reactions.Descriptive Statistics

The STR2 data cover 199 entrants. Because the sample is 5 times largerthan that inBiggadike's initial study, 80% represent new observations. The sample used here isrestrictedto manufacturing businesses that faced one or more established competitorswhen they entered their market. Thus, observations are excluded for market pioneerswho entered their market first and for markets without any competitors in the yearprior to entry. Observations are also excluded for fragmented or perfectly competitivemarkets. In fragmented markets, each competitor is too small for competitive interde-pendencies to be recognized. Consequently, reactions to entry should be negligible.'The 115observations retained meet the preceding criteria and also have a full set ofindependent variables for the regression analysis. Roughly 75% of the entrants competein industrial markets and 25%compete in consumer markets.The markets aretypicallygrowing because 20% of the businesses entered during the introductory stage of theproduct life cycle, 56% during growth, 21% during maturity, and only 3% duringdecline. Also, the averageannual percentage market growth rate in dollars for the threeyears prior to entry is 35%,which is not surprisingbecause researcherssuch as Hauseand Du Rietz (1984) have found more entry in growing markets.Incumbent reactions are classified by the author in three categories. Aggressive reac-tions make entry more difficult, passive reactions reflect no competitive change, andaccommodating reactions make entry easier. The classification follows theoretical re-search that examines the direction and not the magnitude of response (e.g., see Hauserand Shugan 1983).

' Markets are defined as fragmented when the year 1 sum of the market share levels for the three largestcompetitors plus the entering firm is less than 40 share points. The cut point at 40 share points is based on avisual inspection of the data and excludes 25 entrants that faced almost no reactions to entry. Three additionalobservations are also excluded, two reported a firstyear market share of 0.00 and a third reported 99.99.

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MARKETING MIX REACTIONS TO ENTRYIn the data, an aggressiveproductreactioncoversany productchangethat eithermatches or placesthe entrant'sproductat a disadvantage.Check-Up,the pump-dis-pensedtoothpasteintroducedby Minnetonka,faced an aggressiveproductreaction

because it was quicklyimitatedby Procter& Gamble,Colgate-Palmolive, nd LeverBros. Advertising ge 1987a).The dentifrice eadersalsospentmorethan$100 millionin advertising ndpromotionson theirentries.Thisactioneasilyqualifiesas an aggres-sive marketingexpenditureresponsebecause it representsa significantexpenditureincrease.One major factor inciting these reactions was that the dentifrice leaders ". . werenotgoingto let a newcomer akeawaytheir valuableretailshelfspacewithouta fight."(p. 33). Hence, it is reasonable o assume thatdistribution eactionsdamagedCheck-Up's distribution ffectiveness. f so, this wouldbe recordedas an aggressive istribu-tion reaction.Pricingreactionswerepassiveas there s no evidencethataveragedenti-frice prices were cut by at least 1%.Because of these reactions,MinnetonkasoldCheck-Upand hasleft the dentifricemarket.Accommodatingreactionscover any productchangesthat strengthen he entrant,significantdecreases n marketingexpenditures,and price increases. No category sprovided oraccommodatingdistribution eactions.)Theauthor ocatedtwo examplesof accommodating eactions. n an attempt o reduce heirmarketdevelopmentcosts,RCA used licensingto encourageentry into the color televisionmarket(Biggadike1979,pp. 174-175).When du Pont facedan antitrust uitcharginghemwithattempt-ing to monopolizethe cellophaneindustry,they startedan advertising ampaigntolocatecompetitors Waldham1980).Eventhoughthesetwoexamplesbotharosepriorto entry,they signalan accommodatingntention.For the 115 entrants n thestudy,Table 1showsthe frequencyof aggressive, assive,andaccommodating eactions. n the firstyear,aggressive eactionsoccurredonly 4%of the time for the product,3% ordistribution,10% ormarketing xpenditures, nd15% orprice.Passivereactionsdominatefirstyearreactionsbecause heyarose95%ofthe time for the product,97%for distribution,89%for marketingexpenditures,and83% orprice.Almost no accommodatingmovesarosefortheproduct 1%),marketingexpenditures 1%),and price (2%).Thus, when firstyear reactionsarose,they weredominatedby price cuts and increasedmarketingexpenditures.This findingis notsurprising ecause hosechangesgenerally an bemademuchfaster hanchangesn theproductanddistributionKotler 1984,p. 69).In year2, aggressive eactionsuniformly ncreasedacrossthe marketingmix, witheachincreasebeingstatistically ignificantat the 10%evel orhigher.The largestpoint

TABLE 1Frequency of Marketing Mix Reactions to Entry

Year 1 Year 2IncumbentReactionsa Aggressive Passive Accommodating Aggressive Passive Accommodating(%) (%) (%) (%) (%) (%)1) Product 4 95 1 20 78 22) Distribution 3 97 n.a.b 7 93 n.a.3) Marketing Exp. 10 89 1 18 82 04) Price 15 83 2 24 73 3

Average 8 91 1 17 82 1a Reactions by any of the three leading incumbents are classified as aggressive if the reaction makes entrymore difficult, passive if no reaction occurs, and accommodating if the reaction makes entry easier.b This calculation is not applicable because the category is excluded from the data forms.

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WILLIAM T. ROBINSONTABLE 2

Distribution f the Reaction ndexREACTION INDEXa

DistributionValue Year 1 Year 2

(%) (%)4.0 (Most Aggressive) 1 23.0 1 32.0 2 111.0 21 270.0 (Passive) 72 54-1.0 3 3-2.0 0 0

-3.0 0 0-4.0 (Most Accommodating) 0 0100 100

aFor each element of the marketing mix, aggressive reactionsequal 1.0, passive 0.0, and accommodating -1.0. The reactionindex is the sum of these four values.

increase is for product reactions, from 4%to 20%, and the smallest is for distributionreactions, from 3%to 7%.Aggressive product, marketing expenditure, and price reac-tions all occurred at roughly the same frequency. Even with the increase in aggressivereactions, a passive response occurred 78% of the time for the product, 93% for distri-bution, 82% for marketing expenditures, and 73% for price. Again, accommodatingreactions were very infrequent.Though data are not available for year 3, year 2 reactions are substantially morefrequent than year I reactions. At least one reaction was faced in year 1 by 28% of theentrants and in year 2 by 46% of the entrants. If reactions continued to increase by 64%(46%/28%),then 76%of the entrants faced at least one reaction in year 3. While thesecan be important reactions, they are beyond this study's domain, which is to examineinitial reactions to entry.

A reaction index is formed to describe reactions on an entrant-by-entrant basis. Forthe four individual marketing mix elements, aggressivereactions are set equal to 1.0,passive 0.0, and accommodating -1.0. Thus, the index can reach a maximum value of4.0 if aggressivereactions occur across the entire marketing mix and a minimum valueof -4.0 if every reaction is accommodating.2Table 2 provides the reaction index's frequency distribution. For both years, theactual rangeis from 4.0 to - 1.0. In year 1, only 4% of the entrants have a value of 2.0 orhigher. Because 21% have a reaction index value of 1.0, when firstyear reactions arose,they tended to arise along a single dimension. In year 2, 16%of the entrants faced netreactions of 2.0 or higher. If these reactions are considered aggressive and damaging,such reactions arose for roughly 1 in 6 entrants.Table 3 is a cross-tabulation of year 1 versus year 2 reactions. The large percentagesdown the diagonal, which range from 34%to 100%,show that year 1 reactions typicallycarried over to year 2. When reactions changed in year 2, they tended to be moreaggressive.For example, for the 83 entrants that faced no reactions in the firstyear, by2 As discussed subsequently, some information is available for the magnitude of aggressive reactions.Though information is lost by examining only frequencies, an effective method of incorporating thesemagnitudes into a single index was not found. Still, measuring only frequencies has an advantagebecause theindex is easy to interpret. It is very useful in evaluating economic significance in the regression analysis.

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MARKETING MIX REACTIONS TO ENTRYTABLE 3

Reaction Index for Year 1 versus Year 2Distribution of Year 2 Reaction Index Given Year 1 ReactionsYear 1 ReactionIndex Value n 4.0 3.0 2.0 1.0 0.0 -1.0

4.0 1 100% - - -3.0 1 -100% - -2.0 2 - - 100%1.0 25 - 8% 20% 64% 8%0.0 83 1% 1% 6% 17% 72% 3%-1.0 3 - - 33% 33% 34%115

the secondyear25% acedone or moreaggressive eactionsandonly 3% acedaccom-modatingreactions.Some informationon magnitudes s provided n the STR2 data for aggressive,butnot for accommodatingreactions.Aggressiveproduct,marketingexpenditure,anddistributionreactionstendedto match rather han place the entrant at a significantdisadvantage.For the 17 entrants acingpricecuts in the firstyear, 12 cuts arein the1%-10%ange, our arein the 11%-15%ange,andonlyone is in the 16%-25%ange.For the 28 entrants acing pricecuts in the secondyear,20 are in the 1%-10%ange,sevenare n the 11%-15% ange,andonlyoneis in the 16%-25%ange.To summarize,the nonpricereactionswere typicallydefensivebecausethey imitatedthe entrant'sstrategy nd the pricecuts wereusually ess than 10%.Overall, hedescriptive esultsareverysimilar o thereactions eportedby Biggadike(1979) and Yip (1982). They are also consistentwith reactions o entryin the winecoolermarket.3By 1984therewereroughly110wine coolers.Certainly ome impor-tantreactions o entryhaveoccurred, uchasCaliforniaCooler mitating hesuccessfulorange lavor ntroducedby the SanFrancisco-basedWineGroup.However,only 8 to10brandswith majorspendingpotentialweretreatedseriouslyby incumbents.Thus,the vast majorityof entrantsfaced no incumbentreactions.Since entrycan triggeraggressive eactions, he followinganalysisexaminesfactors hat can limit and inciteaggressive eactions o entry.3. HypothesesInitialmarketingmix reactionsshouldbe influencedby the entrant'sstrategy, n-cumbentcharacteristics,ndindustrycharacteristics. he reaction ndex is the depen-dent variablebecause,with thelimitedsamplesizeandinfrequent eactions,ndividualmarketingmix reactionscannotbe explained uccessfully.Thevariables redefined nTable 4.

Entry StrategyTheentrystrategys evaluated n termsof the scale of entry, nnovativeness, ndthemode of entry.Thescale of entry s definedas theaveragevalue of theentrant'smarketshare and shareof manufacturing apacity.4Marketshareis one key aspect of the

3 The wine cooler example is based on Advertising Age (1985) and a telephone conversation with Mr.Howard Jacobson, Director of Marketing, Canandaigua Wine Co.4 Market share is provided in the STR2 data, but share of manufacturing capacity must be estimated. Theestimate is based on combining the entrant's market share and capacity utilization along with the competitor'smarket share and capacity utilization. The latter value must be estimated and is set equal to 74%,the averagecapacity utilization for established businesses in the PIMS data in the introductory and growth stages of theproduct life cycle.

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VariableDefinitionsaVariable Definition

Reaction Index

Scale of EntryScale of Entry SquaredMajor Product AdvantageProduct Patent or Trade Secret

Market PioneerAcquisition EntryRelative Size of LargestCompetitor

High Dependence on ServedMarket by LargestCompetitor

Seller Concentration

Seller Concentration SquaredLog Industry Dollar

Sales Growth

Change in Numberof End Users

Standardized Product

Marketing mix reactions by the three leading competitors which werea direct response to entry during each of the first two years ofcommercialization, not resulting from fluctuating marketconditions. Reactions are summed for the product, distribution,marketing expenditures, and price. These reactions receive a valueof 1 if aggressive,0 if passive, and - 1 if accommodating.The average value of market share and share of production capacity,which is expressed as a proportion, and not as a percentage.The squared value of scale of entry.1 if the entrant's product had a very strong relative advantage overcompetitive or substitute products, 0 otherwise.1 if the entrant benefited to a significant degree from patents, tradesecrets, or other proprietarymethods of production or operationduring its first two years of commercialization, 0 otherwise.1 if the entrant was one of the pioneers in developing products andservices in the market, but was not first to enter, 0 otherwise.1 if the start-up business originated by acquisition, 0 otherwise.In the year prior to entry, the largestcompetitor in this market was afirm whose total sales, relative to this firm's total sales were1 = Smaller2 = About the same, and3 = Larger.In the year prior to entry, the percentage of the largestcompetitor's

total sales represented by its sales in this served market. If thiscompetitor was a division of a firm, the percentage of thedivision's total sales.I = If 50% or more of their total salesare from this served market.0 = Otherwise.The sum of the market share levels for the three largestcompetitors,where this ranking is assessed in the last year in which data weresubmitted. The entrant's market share is added to this sum. Thistotal is expressed as a proportion and not as a percentage.The squared value of seller concentration.For the three previous years, the average annual percentage growthrate of the value of total shipments by suppliers in the servedmarket or by suppliers of substitute products. This is based oncurrent, not constant dollars. The natural logarithmic functionalform is used, with the minimum growth rate set equal to 1.0.Since the year prior to entry, has the number of end users in theserved market1 = Increased by 50%or more?0 = Remained about the same?The percentage of the entrant's sales volume accounted for byproducts and services assessed from the perspective of thecustomer as "Superior", "Equivalent", and "Inferior" to thoseavailable from the three leading competitors. The sum of thesethree values equals 100%.1 = If the average level of"Equivalent" products andservices in the first two years ofcommercialization is 95% or

higher.0 = Otherwise.a Variable definitions are derived from the Start-Up Data Manual (1978).

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entrant's nitial success in the market.Shareof manufacturing apacityprovidesaproxyforexpectedmarketshare.It is also an importantmeasureof commitmentto anew market because of the high sunk costs associatedwith capacityadditions(seeSpence1977and Dixit 1980).Scale of entry is expectedto be importantand is classifiedconceptuallyas small,large,or very large.Becausereactingusually nvolvestradingoff short-termossesforlong-termgains,and becausesmall-scale ntrantsaregenerallynot threatening, hort-term losses typicallyshouldexceed any long-termgains. Consequently,reactionstosmall-scale ntryshould be infrequent.Large-scale ntryis a greater hreatandthere-fore reactionsareexpectedto increase.For verylarge-scale ntry,Biggadike1979, p.177) arguesreactionsactuallymay become less aggressivebecause a very powerfulentrantcannot be stoppedor even slowed down. Hence, the high short-termcostsassociatedwith fightingcan exceed any long-termgains. The inverted-Ufunctionalform is tested belowusingboth linearandsquared cale of entryterms.With the scale-of-entry eldconstant, nnovativenessof the entrystrategy an influ-ence reactions.Innovativestrategies an be a majorthreatand can motivatestrongincumbent reactions.However,when incumbentstrategiesmust be altered,reactingcan be veryslowand costly(Yip 1982,p. 119).Threemeasuresassesswhetheror notthe entranthad a majorproductadvantage,helda productpatentor tradesecret,andwas a marketpioneerbutwas not first o enterthe market.5Acquisitionentry, wherebyan acquired ncumbent s used as a baseforexpansion,should ead to lowerreactionshan directentryarising rominternaldevelopment.Yip(1982, pp. 118-119) found that reactions to 15 acquisitionentrantswere virtuallynonexistent.Two factorshelpexplain hisresult.First,becausean acquisitionprovidesa base for expansion,reactionsdesigned o limit the entrant's ootholdshould be lesscommon. Second,acquisitionentrantsare usuallyless threateningbecausethey cansurvivewithcurrent aleswhereasdirectentrantsneedto expandrapidly o breakeven.These two factorshelp explain Scripto'sdelayedreactions to BIC, which used anacquisitionto enter the United Kingdom'sballpointpen market(Dunn and Soren-son 1981).IncumbentCharacteristics

Two characteristics f the leadingcompetitor n the marketaretested,relativesizeand strategic mportance.A relatively arge incumbentwith "deeperpockets"canattemptto bullyan entrantout of the marketor severely imit its foothold(Rhoades1973).As an alternativehypothesis,relatively argefirmsareoften slowerto respondthan smaller,more nimblefirms.Attackinga strategicallymportantbusinessshouldincite more aggressive eactionsbecauseof the business's lagshipposition,synergiesthatarelinked to this key business,and the survival nstinct(Porter1980,p. 343). Astrategicallymportantbusinessmayalsoreactaggressivelyo developa reputation ortoughness6 see Milgromand Roberts 1982 and Krepsand Wilson 1982). Strategicimportances measuredby 50%or moreof the leading ncumbent's alesarising romthe servedmarket.5To clarify the market pioneer definition, pioneers in the start-updata are classified in two categories. Thedistinction is based on whether or not the pioneer was first to enter the market. As mentioned before, pioneersthat were first to enter are excluded from this study. In certain situations, even though a firm is not first, it canstill qualify as the pioneer. This typically occurs when one out of a number of relatively small firms isinnovative and is essentially responsible for getting the market started(Brozen 1982). For example, Ford wasnot first, but is nevertheless considered the pioneer in automobile manufacturing.6 IBM, for example, developed a reputation for toughness by reactingaggressivelyto Control Data Corpora-tion (CDC). "CDC thus sought to avoid future direct confrontation with IBM" (McAdams 1982, p. 265).

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WILLIAM T. ROBINSONIndustry Characteristics

The three industry characteristics examined are seller concentration, growth, andstandardizedproducts. Seller concentration influences incumbent reactions because, asmentioned before, almost no reactions arise in fragmented markets. Does concentra-tion, though, influence reactions across oligopolistic industries?As concentration increases, reactions are expected to increase (Porter 1980, p. 343).With increased concentration it is more likely that a large incumbent will suffer asignificant shareloss. The injured incumbent is more likely to reactbecause the benefitsfrom reacting accrue more to the incumbent than to the industry as a whole. Also, asthe distinction between fragmented and oligopolistic markets is crude, it is likely that anumber of fragmented markets are included in the sample. This also leads to a positiverelationship between concentration and reactions.With very high levels of concentration, reactions should decrease. Many incumbentswith very high market shares can realistically expect their share levels to deteriorategraduallyover time (e.g., see Caves, Fortunato, and Ghemawat 1984). Thus, dominantfirms and other high share firms may take short-term profits instead of aggressivelyreacting. The resultant inverted-U functional form is similar to the form expected forscale of entry.Industry growth should lead to decreased reactions.7Capacity constraints in growingmarkets (Scherer 1980, p. 248) and additional resource constraints, such as managerialand financial, can limit reactions. When sales are pushing up against these constraints,opportunity cost considerations suggest expanding critical resources rather than react-ing to an entrant. For example, explosive growth helps explain California Cooler'sone-year delay in copying the Wine Group's successful orange flavor (Business Week1984, Advertising Age 1985).Finally, reactions are expected to increase in industries with standardized products(Porter 1980, p. 343). With limited brand loyalty, incumbents are expected to reactrather than risk large share losses.

4. Model Specification and EstimationThe following model specification is used in an attempt to explain first- and second-year reactions to entry.

R1 = ao 0 a^iXI + qa2X2 + a* * onXn + 1, (1)R2 = /0 + XR1 + lIXI + 32X2 + * * * nXn +E2. (2)

R1 and R2 represent the reaction index for the entrant's first and second years ofcommercialization. The exogenous variables, Xi to Xn, assess the entrant's strategy,incumbent characteristics, and industry characteristics. Most of these variables haveidentical values in both years, but year 1 and year 2 measures are available for the scaleof entry, concentration, and sales growth variables. Reactions arealso influenced by thetwo random errorterms, el and E2.Having year 1 reactions included in the second-year equation indicates that year 1reactions are expected, at least to a degree, to carryoverinto year 2. If Xis near 0.0, fewyear 1 reactions carryoverinto year 2. If Xis near 1.0, most year 1 reactions carryover.Carryoveris probably more important for product and distribution reactions becausethey are more costly to reverse than price and marketing expenditure reactions.8

7Growth is measured by dollar sales growth and by the change in the number of end users. To reduce theinfluence of extreme outliers in the sales growth measure, the natural logarithmic functional form is used withthe minimum growth rate set equal to 1.0.8 Lagged reactions can also act as an instrumental variable to help the model correct for the omission ofrelevant explanatory variables that influence both year 1 and year 2 reactions. Potential candidates includeexecutive personalities, strategic goals, and a history of industry retaliation.

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MARKETING MIX REACTIONS TO ENTRYIt is important o recognize hatincludingyear1reactionsn theR2equationfunda-mentallyalters he economicinterpretationf the A coefficients.Whenyear1reactionsareincluded, he totalexplanatory ariablempacton second-year eactions or,say,a

unit change n X1equalsXac+ fl. This valueisderivedby substitutingherightsideofequation(1) into equation(2). Xa1representshe carryover mpactand Althe incre-mental mpact.Whenyear 1reactionsareexcluded, l representshe total rather hanthe incrementalX1 mpact.For the hypothesis esting,estimatesof the total variable mpactare needed.Onceboth equationsare estimated, he total can be calculatedeasilybecause t is a linearfunction of three leastsquaresestimates.A problemarises ortestingstatistical ignifi-cancebecause the carryovererm contains the productof two estimates.A nonlineartest is necessary.Unfortunately,nonlineartests are difficult o calculateand are notincluded n AQD,thecomputerpackageprovidedbytheStrategicPlanning nstitute oanalyze he data.To resolvethe problem, he year2 equation s also estimatedwithyear 1 reactionsdeleted.With thisspecification,he A estimatesrepresenthetotalyear2 impact.Thus,the statisticalsignificance ests are straightforward. he directestimates are biasedbecausea keyexplanatory ariable s deleted,but thebias doesnot seem to be a majorproblem.Forevery year2 estimate, he total impactwithyear 1 reactions ncluded swithin the intervalof plusor minus one standard rroraroundthe directlyestimatedtotal.Therefore,he directestimatesare usedin the hypothesis esting.For themodel,threepotentialproblemswithordinaryeastsquaresOLS)estimationmustbe addressed.First,the specificationdoes notaddress he simultaneitywithscaleof entry,which is specifiedas an exogenousvariable.A simultaneousmodel wasesti-matedby both two- andthree-stageeastsquares,butwas not successful n teasingoutthe impactof reactionson scale of entry.Because hetypical mpactof scaleof entryonreactions s expectedto be positive,and the reverse mpactis expected o be negative,ignoringsimultaneityshould weakenthe estimatedrelationship.Hence, if a positiveimpact of scale of entry on reactions is estimated,the true impact shouldbe evenstronger.9Second,because he reaction ndexvalues arecategorical, (and f2 are notnormallydistributed.Whenthe normalityassumption s violated,leastsquares s still the bestlinear unbiasedestimator,but in small samplesthe regressioncoefficientsare notnormallydistributed.A problemarises n testingstatistical ignificance,however,be-causethe testshingeon the normalityassumption.Fortunately,n largesamples, heregression oefficientsareapproximatelynormal(Kmenta 1971,p. 248). As 115is afairly argesample,the statistical ignificanceestsshouldprovidereasonable pproxi-mations.Third,heteroskedasticityrequently rises n cross-sectional ata.TheGlejser 1969)test confirms he presenceof heteroskedasticity, hichis related o the scaleof entryand marketgrowthmeasures.Generalized east squares GLS)adjuststhe model ofheteroskedasticity. modifiedversionof White's 1980)testindicates heGLSestima-tion eliminates he problem.Also, Durbin's 1970)test shows no evidenceof autocor-relationbetween he first-andsecond-yearGLS error erms. Moretechnicaldetailsareprovidedby Robinson1987.)Consequently,he GLSresults hatadjust orheteroske-dasticityarereported.

5. ResultsThe GLS resultsare reported n Table 5. All the significance evels are basedontwo-tailed ests. In this table,two equationsexplainsecond-year eactions.First-year9A related limitation is that a regression analysis can only establish association, not causation. In-depthindustry studies in future research could provide detailed causation insights.

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Generalized eastSquaresResultsVariable and Expected Sign

1) Constant2) Reaction Index: YR 1 (+)

EntryStrategy3) Scale of Entry: YR 1 (+)4) Scale of Entry Squared:YR 1 (-)5) Scale of Entry:YR 2 (+)6) Scale of Entry Squared:YR 2 (-)7) Major Product Advantage (+/-)8) Product Patent or Trade Secret (+/-)9) Market Pioneer (+/-)

10) Acquisition Entry (-)IncumbentCharacteristics11) Relative Size of LargestCompetitor(+/-)12) High Dependence on Served Marketby LargestCompetitor (+)IndustryCharacteristics13) Seller Concentration: YR 1 (+)14) Seller Concentration Squared:YR I (-)15) Seller Concentration: YR 2 (+)16) Seller Concentration Squared:

YR 2 (-)17) Log Industry Dollar Sales Growth:YR 1 (-)

Mean1.000.29

0.120.040.160.05

S.D.0.000.67

0.170.120.170.12

Year 1a0.30

(0.47)

2.21(2.10)**-2.68

(-1.98)**

0.14 0.35 0.15(1.02)0.30 0.46 0.12(1.17)0.29 0.45 0.04(0.35)0.12 0.33 -0.35

(-2.73)***2.23 0.90 -0.05

(-0.99)0.36 0.48 0.31(3.37)***

0.780.650.790.652.77

0.190.280.180.271.12

-0.80(-0.39)0.20

(0.15)

Reaction IndexYear 20.53

(0.64)0.66(5.1 1)***

-0.12(-0.08)0.46

(0.20)0.38(1.63)0.20(1.52)0.32(2.14)**0.15(0.82)

-0.02(-0.30)0.17

(1.29)

-2.10(-0.83)1.43

(0.82)

Year 21.25

(1.36)

2.68(1.74)*-3.37(-1.35)0.53(2.05)**0.29(2.00)**0.36(2.12)**-0.10(-0.53)

-0.06(-0.86)0.46

(3.41)***

-4.01(-1.43)2.39

(1.23)0.08(1.75)*

18) Log Industry Dollar Sales Growth: 3.05 1.13 0.11 0.12YR 2 (-) (1.92)* (1.87)*19) Change in Number of End Users (-) 0.28 0.45 0.26 0.26 0.42(1.93)* (1.40) (2.08)**20) Standardized Product (+) 0.14 0.35 0.12 -0.06 -0.02(0.87) (-0.36) (-0.10)

R2 0.26b 0.46 0.34The values in parentheses are z-statistics. All of the tests are two-tailed with * = 10%,** = 5%, and

*** = 1% ignificance.b The R2 values are calculated from the raw variablesand the GLS estimates. This is done by multiplyingand summing these values to predict the reaction index and then squaring the correlation with the actualreaction index.

reactionsaredeleted romthe secondequationand,as discussedbefore, hisequation sused in the hypothesistesting. The key findingssummarizethe hypothesistestingresults.Thena sensitivityanalysiswhichexaminesrobustnessn termsof modelspecifi-cationchanges s reported.Finally,4 implicationsarediscussedbriefly.

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Key FindingsIn Table 5, scale of entry has the significant inverted-U functional form predicted by

Biggadike. (Recall that scale of entry equals the average of market share and capacityshare.) This form is based on the linear term being positive and statistically significant(z = 2.10) and the squared term being negative and also statistically significant (z= -1.98). Taking the first derivative of RI with respect to scale of entry and setting itequal to zero provides an estimate of the maximum reaction level. This level occurswhen scale of entry equals 41%.Economic significance for scale of entry is derived by using the GLS estimates topredict the increase in the reaction index when the median entry scale of 6% increasesto the maximum level estimated at 41%. This step provides a rough estimate of thereaction increase associated with large- versus small-scale entry. By substituting thevalues in the reaction equation, the increase is estimated to be 0.33. Recall that first-year reactions are much more aggressive than accommodating and also tend to arisealong a single dimension. Hence, the 0.33 estimate indicates that roughly one in threelarge-scaleentrants face an additional reaction. Similar resultsarise for year 2 reactions.Because the major product advantage, product patent or trade secret, and marketpioneer estimates are all positive, strategy innovativeness appears to motivate firstyearreactions. While none of the individual estimates are statistically significant, their sumof 0.31 is significantly greaterthan zero (z = 1.60).In year 2, each individual estimate for innovative strategiesis statistically significant.Economic significance is also much stronger because the major product advantagecoefficient more than triples from 0.15 to 0.53, the product patent or trade secretestimate increases from 0.12 to 0.29, and the market pioneer's value jumps from 0.04to 0.36. Thus, time delays restrictfirst-yearreactions to innovative strategies,but by thesecond year important reactions occur.With acquisition entry, first-year reactions are estimated to decrease by 0.35 (z= -2.73). Second-year reactions, though, are not significantly reduced. Consequently,an acquisition seems to reduce only first-yearreactions.When the leading incumbent has a high level of dependence on sales from the servedmarket, RI is estimated to increase by 0.31 (z = 3.37). An economic interpretation ofthis coefficient indicates that in about one in three instances, an additional reactionarises along a single dimension of the marketing mix. The increase for second-yearreactions is somewhat largerat 0.46 (z = 3.41).Without question, the biggest surprisefor first-yearreactions is the result for industrygrowth. The log of the industry dollar growth rate has a positive ratherthan a negativeimpact and is statistically significant. Reactions are also significantly higher in marketsundergoing a sharp increase in the number of end users.Economic significance for the market's growth rate is calculated by taking the aver-age values in the upper and lower quartiles. The difference of 2.67 is multiplied by 0.08,which is the impact of the growth rate on first-yearreactions. The product is 0.21. Asimilar result arises when the dummy variable estimate of 0.26 is used to assess eco-nomic significance for the change in the number of end users.The corresponding year 2estimates are 0.33 and 0.42.

Multicollinearity cannot explain the surprisingresult because the simple correlationsof these two measures with RI and R2are all positive. At least three other explanationscan be provided. First, entrants in growing marketscan uncover overlooked opportuni-ties that motivate competitive imitation. For example, Uni-Charm introduced a supe-rior disposable diaper in Japan that Procter & Gamble, the market pioneer, has strug-gled to imitate (Business Week 1986a). Second, Aaker and Day ( 1986, p. 411) point outthat reactions are influenced by the difference between actual and expected sales. When

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WILLIAM T. ROBINSON

entry causes actual sales to fall below expected sales, reactions can arise in mature orgrowing markets. Finally, because growing markets are relatively young, they havegreater discounted profit opportunities than mature markets. This motivates incum-bents to make strategic investments to repel entry.Sensitivity Analysis

How sensitive are the results to model specification changes? When a consumerdummy variable is added to the first- and second-year reaction equations, the dummyvariable is not even close to being statistically or economically significant. Thus, meanreactions are not influenced by the distinction between consumer and industrial goods.For scale of entry, is an S-shaped functional form reflecting a threshold and satura-tion level of response more appropriate?The threshold level is justified by both fixedreaction costs and reaction detection problems for small-scale entrants that can beeasily overlooked. The saturation level is justified if incumbents do not back down inthe face of very large-scale entry.Naert and Leeflang (1978) describe several S-shaped functional forms, but suchforms cannot be used unless major changes are made in the model specification andestimation. However, some insights can be gained from the descriptive statistics thatrelate scale of entry to reactions.For the threshold argument, a clear threshold does not arise. If a threshold exists, it isat a small scale of entry that is less than 4% in year 1and less than 2% n year 2. For thesaturation argument, recall that year 1 reactions are estimated to turn down when theentry scale exceeds 41%. Though this empirical result is in contrast to the saturationargument, it is still tentative because only 10 entrants have an entry scale exceeding41%. More data are needed to establishwhether or not reactions actually decrease in theface of very large-scale entry. One can conclude, though, that for the vast majority ofentrants, reactions typically increase with the scale of entry. The reactions also appearto be increasing at a decreasing rate.Implications

The hypothesis testing results are summarized in Table 6. The results along with thedescriptive statistics provide insights into four important issues. First,why are first-yearreactions so infrequent? The typical entrant seems unlikely to threaten the leadingincumbents. The reason is that the median scale of entry is only 6% and the typicalentrant is not particularlyinnovative because 14%reporteda major product advantage,only 30%had a significant product patent or trade secret, and 29% were market pio-neers. (The high proportion of market pioneers indicates the sample is much moreinnovative than a typical sample of entrants.)When an entrant is threatening, an important constraint for incumbents is that manyproduct and distribution changes cannot be implemented in one year or less. Hence,year 1 marketing mix reactions are infrequent because most entrants are not threaten-ing and also because product and distribution reactions are often infeasible.Second, why are year 2 reactions substantially greaterthan year 1 reactions?There isa high carryoverof reactions from year 1 to year 2. Therefore, if an entrant faces strongreactions in year 1, it is likely to face strong year 2 reactions as well. In addition, timedelays in reacting to innovative strategies limit reactions in year 1, but by year 2important reactions arise. (This point is consistent with the conclusion that productreactions are difficult to implement in year 1, but by year 2 they are as frequent asmarketing expenditure and price reactions.) Finally, the average scale of entry is about25%higher in year 2 and the median scale is about 50%higher. Increased scale shouldattract more attention and more aggressivereactions.

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TABLE 6Summary of Hypotheses and Empirical Results

Variables Hypotheses Empirical ResultsI. Entry Strategy1) Scale of Entry

2) Innovativeness

3) Acquisition Entry

II. Incumbent Characteristics1) Relative Size

2) Strategic Importance

An increase should lead to more frequent reactions,although reactions may decline with very largescale entry.

Innovative strategies represent a major threat andincite strong reactions.versusIt is difficult and costly for incumbents to respondand this limits reactions.Acquisition ratherthan direct entry leads to lessfrequent reactions because incumbents cannotlimit the entrant's foothold.

An incumbent with "deeper pockets" may try tobully the entrant out of the market.versusLargeincumbents are slow and sluggish and can notrespond quickly.When the market is strategically important for theleading incumbent, reactions will be moreaggressive.

The inverted-U functionaform is supported.

Innovative strategies havelimited, positive influenyear 1 reactions. Thesereactions increasesubstantially in year 2.

Acquisition entry only rereactions in the first yeaSecond year reactions anot influenced.No impact

More frequent reactions afound in both the first asecond years followingIII. Industry Characteristics1) Seller Concentration

2) Growth

3) Standardized Products

In oligopolistic markets, as concentration increasesreactions are expected to increase. These reactionsshould decline in very concentrated markets.Reactions should be less frequent in growing marketsbecause of resource constraints.

No impact.

Reactions tend to be morrather than less frequen

More frequent reactions are expected with limited No impactbrand loyalty because large share losses can arise.



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WILLIAM T. ROBINSONThird, the results help explain Scherer's(1980) observation, "When entry does occurat a substantial scale, the reactions to it by leading established firms appear to varywidely in ways predictable only if one has rich information on demand and cost

conditions, industry traditions, and perhaps even personalities, if indeed confidentpredictions are possible at all." (p. 248). Let us assume that large-scaleentrants have anentry scale of at least 15%by year 2 and that innovative entrants satisfy at least one ofthe three strategy innovation measures used here. For the large-scale entrants that arenot innovative, only two out of eight or 25%faced one or more year 2 reactions. For theinnovative large-scaleentrants, 20 of 29 or 69% faced year 2 reactions.10While these aresmall samples, strategyinnovativeness appears to play an important role in explainingreactions to large-scaleentry.A final implication pertains to the substantial market share advantages pioneerstypically maintain in relation to later entrants (See Robinson 1988, Robinson andFornell 1985, and Urban et al. 1986.) Because initial marketing mix reactions aretypically limited, aggressiveand damaging reactions play only a minor role in explain-ing later entrant share disadvantages.

6. Summary and ConclusionsThe study addressestwo major questions. First,are initial marketing mix reactions toentry typically aggressive,passive, or accommodating? Product, distribution, marketingexpenditure, and price reactions by the three leading incumbents are examined inoligopolistic industries.For the individual marketing mix elements, the typical reportedreaction in year one

is no reaction. Only one in five entrants faced an aggressive reaction along a singlemarketing mix element and only one in 25 faced two or more aggressivereactions. Year2 reactions are more aggressive because roughly one in four entrants faced a singlereaction and roughly one in six faced multiple reactions. Still, by year 2, roughly half ofthe entrants reporteda passive response across the entire marketing mix. (In both years,accommodating reactions that make entry easier are very infrequent.) The infrequentreactions are consistent with the descriptive results reported by Biggadike and Yip.The reported reactions may be too low, however. Reaction detection can be difficultin growing, "noisy" markets and entrants often develop strategies to avoid aggressivereactions. The biases should be offset, at least to a degree, because the entrants tend torepresent diversification efforts of Fortune 500 firms, and therefore are a greaterthreatto incumbents than typical entrants.The second major question addressed is how the entrant's strategy,incumbent char-acteristics, and industry characteristicsinfluence reactions. In year 1, an increase in thescale of entry typically leads to increased reactions. Positive but small reactions arefound in response to innovative strategies.Greaterreactions are found when the leadingincumbent is highly dependent on sales from the entered market and, surprisingly, ingrowing markets as well. Acquisition entry is associated with lower reactions.For second-year reactions, there is a strong carryovereffect from firstyear reactions.If an entrant is attacked in year 1, the attack typically continues into year 2. Innovativestrategies face substantially higher reactions in year 2, probably because incumbentshave had adequate time to implement product and other strategic changes. Also, thetypically largerscale of entry in year 2 should motivate stronger reactions.The results help explain why reactions to entry are often limited. First, because mostentry is on a small scale and is not very innovative, typical entrants do not representa

10The difference between these two percentages is 44% and is statistically significant at the 5% level (z= 2.24). Unfortunately, the test is based on the assumption that each sample is large, which is certainly nottrue for sample sizes of 8 and 29.

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MARKETING MIX REACTIONS TO ENTRYserious threat to the leading incumbents. Second, in terms of profit, aggressivemarket-ing mix reactions can be very costly. The costs of reacting to a small-scale entrant thatblends in with many other small share firms often exceeds any expected revenue gain.These findings yield the counterintuitive conclusion that, when facing the typical en-trant, an incumbent's best defense is usually no defense or only a limited defense.Because this study is the first to explain reactions to entry in a multivariate setting,several important limitations should be recognized. The reactions reported may not beoptimal. If they are not, the theoretical models that recommend aggressiveand damag-ing reactions could dramatically improve managerial decisions. Still, the markets stud-ied are all in the private sector and consequently the firms must maintain a certaindegree of competence for economic survival.Nonoptimal reactions do arise in the private sector, however. By essentially ignoringKomatsu's entry into the United States earthmoving industry, Caterpillar helped Ko-matsu gain a foothold (Sims 1986). Over time Komatsu grewand Caterpillareventuallywas forced to make dramatic changes. This example shows it is often difficult torecognize a long-term threat. Also, when incumbents have a relatively short timehorizon, it can limit initial reactions to entry. If long-term threats are systematicallyunderestimated or if incumbent time horizons are too short, many reactions to entryshould be more aggressive.A second study limitation is that only the direction and not the importance or eventhe magnitude of incumbent reactions is examined. The latter factors can be veryimportant because a single reaction, such as California Cooler imitating the WineGroup's orange flavor, can damage an otherwise successful strategy. Even so, manyreaction magnitudes are limited, with the majority of the price cuts being in the 1% o10%range.Third, the impact of expected reactions on the entry strategy cannot be assessed.Sophisticated entrants, such as Strategic Planning Institute clients, often devise entrystrategies that help them avoid aggressivereactions. This fact helps explain the limitedreactions, but the major factor seems to be that the typical firm enters on a small scaleand is not very innovative. Though the fear of aggressive reactions can motivate en-trants to develop reaction-avoidance strategies, it is unlikely that expected reactionsmotivate most small-scale and noninnovative entry. This is because such strategiesusually hold limited promise.

Fourth, only initial marketing mix reactions are examined. Reactions prior to entryand reactions more than two years out are excluded. The latter factor is probably mostimportant for product and distribution reactions, which can take years to implement.Important reactions outside the marketing mix, such as lawsuits and capacity changes,are also excluded.Despite the limitations, the results indicate that the most common initial marketingmix reaction is either no reaction or only a single reaction. This information is valuablefor potential entrants because conventional wisdom points to more aggressive anddamaging reactions. For example, Porter (1985, p. 498) says, "As a general rule, quickand vigorous retaliation is necessary to limit an attack." Though a "quick and vigorousretaliation" can arise, the results indicate it is more the exception than the rule."'

Acknowledgements. The author thanks Richard Caves, Manu Kalwani, George Yip, his University ofRochester colleagues, and three anonymous reviewers for their helpful comments. The Strategic PlanningInstitute is also thanked for providing access to the start-upbusiness data. The conclusions and any remainingerrorsare the author's responsibility.

" This paper was received in February 1987 and has been with the author 5 months for 2 revisions.

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WILLIAM T. ROBINSONReferences

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marketing mix reaction to entry

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