The document discusses various marketing strategies for entering new markets as either a pioneer or late entrant. It notes that pioneers typically have significant market share advantages but can lose their lead if they become complacent. Late entrants can succeed through distinctive positioning or by taking advantage of gaps in pioneers' offerings. The strategies discussed include reducing price, improving products/services through niche targeting, entering new geographic markets, and developing new distribution channels.
Fordham -How effective decision-making is within the IT department - Analysis...
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1. A New Entrant's
Market Entry Strategy.
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Submitted by:-
Adil Musain(11067)
Anirban Mazumdar(11074)
Ankit Chouksey(11075)
Ankit Dubey(11076)
Ganesh Parvekar(11088)
Manish Prasad(11096)
Sachin Saurabh(11112)
2. Marketing Strategy
The marketing concept of building an organization around the profitable
satisfaction of customer needs has helped firms to achieve success in high-
growth, moderately competitive markets. However, to be successful in markets in
which economic growth has leveled and in which there exist many competitors
who follow the marketing concept, a well-developed marketing strategy is
required. Such a strategy considers a portfolio of products and takes into account
the anticipated moves of competitors in the market.
Marketing Research for Strategic Decision Making
The two most common uses of marketing research are for diagnostic analysis to
understand the market and the firm's current performance, and opportunity
analysis to define any unexploited opportunities for growth. Marketing research
studies include consumer studies, distribution studies, semantic scaling,
multidimensional scaling, intelligence studies, projections, and conjoint analysis. A
few of these are outlined below.
Semantic scaling: a very simple rating of how consumers perceive the
physical attributes of a product, and what the ideal values of those
attributes would be. Semantic scaling is not very accurate since the
consumers are polled according to an ordinal ranking so mathematical
averaging is not possible. For example, 8 is not necessarily twice as much as
4 in an ordinal ranking system. Furthermore, each person uses the scale
differently.
Multidimensional scaling (MDS) addresses the problems associated with
semantic scaling by polling the consumer for pair-wise comparisons
between products or between one product and the ideal. The assumption
is that while people cannot report reliably which attributes drive their
choices, they can report perceptions of similarities between brands.
However, MDS analyses do not indicate the relative importance between
attributes.
3. Conjoint analysis infers the relative importance of attributes by presenting
consumers with a set of features of two hypothetical products and asking
them which product they prefer. This question is repeated over several sets
of attribute values. The results allow one to predict which attributes are the
more important, the combination of attribute values that is the most
preferred. From this information, the expected market share of a given
design can be estimated.
Multi-Product Resource Allocation
The most common resource allocation methods are:
Percentage of sales
Executive judgment
All-you-can-afford
Match competitors
Last year based
Another method is called decision calculus. Managers are asked four questions:
What would sales be with:
1. no sales force
2. half the current effort
3. 50% greater effort
4. a saturation level of effort.
From these answers, one can determine the parameters of the S-curve response
function and use linear programming techniques to determine resource
allocations.
Decision algorithms that result in extreme solutions, such as allocating most of
the sales force to one product while neglecting another product often do not yield
practical solutions.
For mature products, sales increase very little as a function of advertising
expenditures. For newer products however, there is a very positive correlation.
4. Portfolio models may be used to allocate resources among major product lines or
business units. The BCG growth-share matrix is one such model.
New Product Diffusion Curve
As a new product diffuses into the market, some types of consumers such as
innovators and early adopters buy the product before other consumers. The
product adoption follows a trajectory that is shaped like a bell curve and is known
as the product diffusion curve. The marketing strategy should take this adoption
curve into account and address factors that influence the rate of adoption by the
different types of consumers.
Dynamic Product Management Strategies
Two fundamental issues of product management are whether to pioneer or
follow, and how to manage the product over its life cycle.
Order of market entry is very important. In fact, the forecasted market share
relative to the pioneering brand is the pioneering brand's share divided by the
square root of the order of entry. For example, the brand that entered third is
forecasted to have 1/√3 times the market share of the first entrant (Marketing
Science, Vol. 14, No. 3, Part 2 of 2, 1995.) This rule was determined empirically.
The pioneering advantage is obtained from both the supply and demand side.
From the supply side, there are raw material advantages, better experience
effects to provide a cost advantage, and channel preemption. On the demand
side, there is the advantage of familiarity, the chance to set a standard, and the
choice of perceptual position. Once a firm gains a pioneering advantage, it can
maintain it by improving the product, creating a standard, advertise that it was
the first, and introduce a new product in the market that may cannibalize the first
but deter other firms from entering.
There also are disadvantages to being the pioneer. Being first allows a competitor
to leapfrog the early technology. The incumbent develops inertia in its R&D and
may not be a flexible as newcomers. Developing an industry has costs that the
pioneer must bear alone, and the way the industry develops and its potential size
are not deterministic.
5. There are four classic price/selling effort strategies:
Price
Selling Effort
Low High
Classic Skim Strategy
Low Necessity Goods
Vulnerable to new entrants
Classic Penetration Strategy Luxury Goods
High
In general, products are clustered in the low-low or high-high categories. If a
product is in a mixed category, after introduction it will tend to move to the low-
low or high-high one. Increasing the breadth of the product line as several
advantages. A firm can better serve multiple segments, it can occupy more of the
distributors' shelf space, it offers customers a more complete selection, and it
preempts competition. While a wider range of products will cause a firm to
cannibalize some of its own sales, it is better to do so oneself rather than let the
competition do so.
The drawbacks of broad product lines are reduced volume for each brand
(cannibalization), greater manufacturing complexity, increased inventory, more
management resources required, more advertising (or less per brand), clutter and
confusion in advertising for both customers and distributors. To increase profits
from existing brands, a firm can improve its production efficiency, increase the
demand through more users, more uses, and more usage. A firm also can defend
its existing base through line extensions (expand on a current brand), flanker
brands (new brands in an existing product area), and brand extensions.
The history of the global economy is characterized by boom and bust.
6. Today, business schools are still teaching the same philosophies they taught in the
1980s. They include the:
Unmatched power of the free market
Pre-eminence of the shareholder
Inevitable inefficiencies of government intervention
These assumptions, however, are now under growing scrutiny. The free market
didn’t work, the shareholder is not the only stakeholder, and government
intervention has been essential in rescuing the private financial services sector.
Many believe that the recent financial crisis has raised issues that may require a
fundamental rethink about how the global economy should operate.
Business may never return to "normal"
As a follow-up to our investigation into their economic forecast, we asked
companies when they believed that business would return to "normal". Instead of
giving us a timeline, 31% responded that they believed business would never
return to "normal".
The number of business leaders who think that the changes made necessary by
the crisis will be permanent has increased over the last six months. Our May 2010
research has discovered that this number has now increased by 25%.
Further exploration revealed that our respondents share this sentiment across
sectors (from 29% in financial services through to 35% in manufacturing), but not
across countries.
Pessimists
The most pessimistic group of countries included France, the UK, Sweden
and the US. These developed economies have undergone significant market
change for some time. Almost 50% of these respondents believed that
business would not return to normal.
The presence of France, the UK and Sweden is not surprising because these
countries are aware of the ongoing challenge of competing in a global economy
from a high cost base.
7. The presence of the US is surprising, given the robustness of the US economy, and
the optimism and cultural confidence the US is associated with. This suggests that
the impact of the financial crisis, whether real or perceived, has been particularly
large.
Middle of the road
The neutral respondents included those from the Netherlands, Germany
and Russia, who mirrored the overall results, with around 30% believing
that business would not go back to usual. The Netherlands and Germany
are both developed trading nations that have seen many recessions before
and have historically exported their way to growth. But it is interesting that
Russia, one of the leading emerging economies, is in this group.
8. Optimists
The most optimistic group of respondents comprised some of the major
emerging economies; China, India, Brazil and the Middle East. Over 80%
believed that business would return to normal.
Characteristics of the optimistic, emerging economies group
In exploring this final group, we can make two observations:
1. The financial crisis has had less impact in emerging economies where
lending is less widespread, more companies are state-controlled, and GDP
has continued to rise over the past two years, e.g., China’s predicted GDP
growth for 2010 is 8% and India’s is 6%.
2. The concept of rapid change – perceived as a threat to "business as usual"
in many countries — is more ingrained into emerging economies’
perceptions of what "business as usual" means.
For example, it is common for companies in China to expand from employing a
handful of people to a workforce of several hundred in just a few years: and in
India, companies like Tata have acquired many international competitors in
recent years, turning themselves into global corporations.
9. The future will not resemble the past
We asked respondents why they thought business would not return to usual. It’s
possible to group their responses into five categories:
1. The market has fundamentally changed.
This response was driven by observations that customer behavior has
altered because of the crisis, with fewer consumers prepared or able to
increase their personal debt this will act as a major damper on some
business models. Similarly, there is a greater awareness that there has been
a shift in economic power toward the new economic giants such as China
and India, which have already demonstrated that they have a different
perspective on economic management than the West.
2. Businesses will be more cautious.
This is because tighter regulations and business failures are expected;
therefore risky behavior, such as derivatives investment, is now out of
favor. This may only be temporary, but it could refocus business efforts
onto innovation in product and process, rather than finance.
3. Businesses need to operate more efficiently
There is still a strong emphasis on cost reduction, with much more
competition from international rivals; this will raise the threshold for
companies as they review their activity portfolio.
4. Businesses need to become more adaptable to market changes.
This factor is applicable to all sectors, but particularly real estate and retail,
where a reduction in credit availability has caused a dramatic downturn.
5. Lessons have been learned from the crisis.
There are significant variations in the lessons that could, or should, be
drawn from the downturn. The financial services sector, in particular, has
had to learn some tough lessons about responsibility and transparency.
For US respondents, the most important issues concerned adaptability and the
fact that both the market and consumer behavior had changed. For respondents
in Western Europe, there was less emphasis on changing consumer behavior and
10. more importance given to businesses becoming more cautious and operating
more efficiently.
Predictably, drivers of change also vary by industry sector.
Manufacturers noted fundamental change and a slow rate of recovery
Financial services companies stressed the need to learn lessons
Consumer product companies know that customer behavior has changed
and that they require greater efficiency
Real estate, health care, and chemical industry respondents noted the
need for cost reduction and efficiency, along with the necessity to become
more adaptable to market changes
Market Entry Strategies: Pioneers versus Late
Arrivals
What is the best way to move into a new market? If you do not have a first-in
advantage, attack the one who does.
Want to be King of the Mountain in a new marketplace? Here is some advice: be
first or a close second, and do not pause for breath. Others want to be King of the
Mountain too. Even though you have a huge advantage in being first, you can lose
it in the blink of an eye over pricing or service or lagging technology. Aggressive
competitors have a vast array of weapons to knock you down.
11. Today's strategic planners, having created as much value as they could by cutting
costs, are looking now to grow domestic markets, as well as build new markets
and revenues in such countries as Brazil, China, India, Malaysia and Mexico.
Before striking out, though, they need the answers to some crucial questions:
Does it pay to be first with a product or service? Is being an innovator worth the
risk? Is it better to wait and learn from the experiences of the first entrant to the
market? What is the proper balance between the risks and rewards? If you are a
pioneer, what can you do to prevent share erosion when a new player enters the
market? If you are a late entrant, what strategies should you adopt to make your
entry successful?
Studies show that in most cases, being first to the market provides a significant
and sustained market-share advantage over later entrants. Still, later entrants can
succeed by adopting distinctive positioning and marketing strategies. Pioneers in
most industries, once they have reached the status of incumbent, are powerful.
Sometimes, however, they get complacent or are not in a position to cater to the
growing or shifting demands of the marketplace. New entrants can take
advantage of gaps in the offerings of these aging pioneers, or find innovative ways
to market their product or service. Pioneers with a distinctive presence in the
marketplace need to be in a position to react, or even better, anticipate potential
entrants and increase the barriers to their entry. For example, a pioneer may be
in a position to reduce its price and decrease the value of the business for a new
entrant, or it can block entrance entirely by controlling key distribution channels.
Whether a late entrant or a pioneer seeking to foil newcomers, it helps to have a
thorough understanding of the entry and defensive strategies available, a good
sense of timing and a game plan for decision-making.
BASIC STRATEGIC PLANNING
Competitive strategies typically depend on the market environment and the
positioning and product portfolio of the existing players. These are the basics:
Reduce price to penetrate an existing market. By introducing a product at a
lower price than the pioneer's, a latecomer can attract new customers who would
not have otherwise purchased such a product in effect expanding the total
market. Reduced price can also induce the pioneer's current customers to switch.
Still, this strategy is likely to result in reduced margins for the new entrant
12. compared with other players in the market, unless the new entrant's cost of
production is relatively cheaper. This can be adopted by both the incumbents and
pioneers.
Improve a product or service, with focus on a niche market. Companies can
compete by being innovative in the marketplace. The innovation may be radical
or incremental. One example of incremental innovation is an enhanced version of
an existing product. The enhanced product can compete directly with existing
products, or it can be positioned to attract a smaller segment of the existing
market. In addition, the improved product or service can sometimes attract new
customers that are not the current target for the existing product or service. For
example: potential satellite-based wireless service providers are currently offering
a new feature called global coverage. This service could both complement and
replace options available to current customers but most of the potential players
in the marketplace are targeting either traveling professionals who need to be in
constant touch or the rural market, in which the cost-to-provision
telecommunications infrastructure is very high and satellite-based options help
governments offer ubiquitous telecommunications services. In both cases the
telecommunications market is expanded, generating additional revenue.
Target new geographic markets for existing products. As markets mature in the
home base, companies traditionally look outside to more lucrative markets. Most
consumer goods companies, for instance, are setting their sights on China. Many
heavy equipment manufacturers are targeting newly emerging markets that will
need tractors and cranes for building. Faced with intense competition and
maturation in the local markets in the United States, regional Bell operating
companies such as BellSouth are expanding into emerging markets such as Brazil.
Develop new channels of distribution to access new markets or better
penetrate existing ones. Going global is not the only solution. Sometimes the risk
and the investment required to penetrate international markets may not be
worth the return. Focusing on existing markets, where your company has a good
understanding of the environment, can prove less risky and bring quicker
successes. This can be accomplished by repositioning the product or service
through marketing, advertising, packaging and so on. For instance, Dell Computer
went after the mass market by having customers place their orders directly with
Dell by phone, fax or computer. This direct channel revolutionized the method of
selling computers to the end users, including corporate clients.
13. In addition to choosing the appropriate marketing strategy, it is crucial to
determine the timing of the introduction of any new product. This is especially
true in high-tech industries, in which product life cycles are short and it is difficult
for late entrants to catch up and extract reasonable returns. In most cases, if you
are entering second or later in such a market, you should do so immediately after
the pioneer.
PIONEERING ADVANTAGE: FICTION OR REALITY?
Put simply, it costs the most to be the first, for two reasons:
1) The product innovation requires a higher investment in research and
development than does product imitation, and
2) The necessary marketplace education and testing forces the pioneer to spend
heavily on advertising and promotion. A second entrant enjoys the fruits of the
pioneer's labor.
Are there higher returns on market share and investments to offset the pioneer's
increased costs and relatively higher risks? Companies such as the Hewlett-
Packard Company and the 3M Company, which generate growth through
innovation, garner more than 60 percent of their revenues from products
14. introduced over the most recent three-year period. Obviously, these companies
have succeeded in pioneering at a very high level.
Does this occur in other industries and in countries other than the United States?
In fact, numerous studies have found that later entrants in a market achieve a
lower market share than earlier entrant’s and that this holds true in a variety of
product categories and industries, such as consumer packaged goods, industrial
goods and pharmaceuticals. Even when a company's tangible (e.g., financial) and
intangible (e.g., brand equity) resources and business skills are considered, early
entrants continue to hold market-share advantage.
What is the magnitude of market-share penalty for later entrants? A 1995 study
by Gurumurthy Kalyanaram and others in Marketing Science suggests that the
new entrant's forecasted market share divided by the first entrant's market share
equals, very roughly, one divided by the square root of order of entry of the new
entrant. (See Exhibit I.) Therefore, if there are two players in the market, the first
entrant will have a market share of 59 percent and the second entrant will have a
market share of 41 percent (which is 70 percent of 59 percent). This is validated in
the cellular industry in several countries in Europe in which the average market
share of the first entrant in Belgium, France, Germany, Italy, the Netherlands and
Spain is 58.5 percent and the second entrant is 41.5 percent. The figures are
consistent with the results in Exhibit I since the second entrant has about 70
percent of the pioneer's market share. (See Exhibit III.)
15. Why do early entrants so frequently enjoy a higher market share? First,
consumers in general are risk averse. If a product or service provides enough
satisfaction, consumers do not want to risk switching to a new product. Second,
the pioneer becomes the prototype for the product category. Later entrants are
compared to the pioneer, and always somewhat unfavorably. Whenever
consumers think of photocopying for example, Xerox is the name that jumps to
mind. Third, consumers learn best the attributes of early entrants. More
knowledge translates into more strongly held beliefs and great confidence in
choice. And lastly, early entrants are able to secure the best positioning in the
marketplace.
Does the pioneering advantage manifest itself in return-on-investment metrics
apart from market share? Yes, after substantial research and development
investments, being early in the market is rewarding. Research shows that the
pioneers enjoy a higher return on investment in both consumer and industrial
goods. (See Exhibit II.) This research and development investment and continuous
new product launch is also used as an entry barrier by several pioneers.
A recent analysis of the evolution of wireless markets in Europe indicates that first
entrants are also market leaders in most countries. (See Exhibit III.) Pioneers in
cellular service establish a presence in the marketplace, build brand equity and
16. create an excellent distribution network. Also, a peculiarity of this industry is that
the quality of service is primarily determined by coverage. Having evolved over
time, the first entrant's network usually has much better coverage. The customers
become used to enhanced coverage over time. So new entrants have to invest
significantly to achieve this same coverage -- an effort that is capital intensive and
time consuming. All new networks have initial bugs that take time to fix.
Subscribers are just not willing to go through another learning curve, when there
is already a robust supplier of service. Another frequent constraint is access to
property to build the towers, since the first entrants have already seized the ideal
sites for coverage. This, in turn, may require the later entrant to invest larger
amounts in network infrastructure to gain similar coverage. Given these hurdles,
it can take two to three years before a challenger achieves coverage competitive
with the incumbent's.
In addition to coverage and related quality of service, another huge barrier to
entry for new entrants is the issue of number portability. Customers would have
to get a new cellular number when they switch carriers since they cannot take the
same phone number with them as is done in land line networks. In general
customers do not like to change their phone number, especially in Europe, where
customers receive calls in their mobile phones. Thus, we see the inherent
advantages to being first in the market in the wireless industry: control of ideal
sites; freedom to evolve and fine-tune network coverage; building of brand
loyalty by offering superior customer service; locking in customers by subsidizing
equipment for an extended period under fixed-service contracts, and gaining
control of key channels of distribution.
AGILITY NEEDED FOR LATE ENTRANTS
The picture, however, is not always so rosy for pioneers and bleak for late
entrants. In some industries and some geographic areas, pioneers have lost
market-share advantage relatively quickly. This can happen for any of several
reasons:
1) An entrenched pioneer may not be offering a superior level of customer
service.
2) A new technology may have changed the cost equation, so that a new entrant
can offer similar or better service at a lower cost.
17. 3) The new entrant may have developed a new way to access the market, with an
innovative distribution strategy.
4) The latecomer may simply be pricing aggressively, targeting selected segments
by taking advantage of the incumbent's tendency to average pricing across all
segments.
In what situations is the pioneering market-share advantage muted? For a start,
when consumer learning is limited, the pioneering advantage is likewise bound to
be limited. Consumer learning becomes very difficult if the product becomes
complex and technical. For example, when picture phones were introduced in the
late 1970's, the market did not respond because consumers could not find
occasions to use the product.
The pioneering advantage is also limited in a cluttered market: If there are many
available brands, consumers react by becoming confused.
Moving beyond such issues, what can later entrants do to overcome any inherent
market-share disadvantage? First, the later entrant should differentiate itself
substantially in the minds of the consumers. Such positioning can be
accomplished through substantial changes in either the product or promotion
strategies. For example, the Chrysler Corporation redefined perceptions of its
minivans by introducing Caravan, a two-door van. The Ford Corporation's
Windstar, expected to be a marquee van, substantially lost its glamour to the
Caravan. When the General Motors Corporation decided to reposition its
Oldsmobile, it changed not only its product but also its advertising copy. The new
copy appealed to consumers over 30 years old, projecting the image of a younger
professional woman via this voice-over: "This car is not only for your father's
generation, but it's for you too."
A second route for later entrants is to discover creative ways to increase product
trial. At best, one study has found that the market-share advantage for the early
entrants comes from higher trial penetration. If the later entrant can generate
greater trial market share, then its disadvantage can be overcome. Sample-
product trial is an appropriate mechanism. For example, in consumer goods,
consumers can be supplied with a sample product for trial. In non-consumer
goods, other creative mechanisms must be designed. Limited demonstration of
usage or prototypes is possible in software products, and test usage is possible in
18. automobiles. Also, distributing the product through new channels such as direct
marketing (think of the Lands' End catalogue or the Mary Kay cosmetics parties)
or a home-shopping-network channel would place the product in the hands of
more consumers.
The later entrant can also segment the market, focusing on a particular target. By
providing appropriate value, the later entrant can extract additional rents. A good
example of this is the competition among the International Business Machines
Corporation, Compaq Computer and Dell Computer in the personal-computer
market. Finally, later entrants can position themselves as variety enhancers,
rather than as replacements or substitutes for the pioneers.
An example is Orange, the late-entry cellular service provider in Britain, which
successfully nudged aside the pioneers. Orange entered the market almost 30
months after the first entrant, Vodafone, and nine months after One-2-One, and
with technology similar to One-2-One's. Orange, however, has followed a very
aggressive entry strategy. It has not only invested heavily in the network over the
first two years of introduction, but also developed aggressive pricing strategies.
Orange seized a third of Britain's total market's first quarter 1996 growth by
offering about a 30 percent savings to end users, compared with Vodafone and
Cell net. The pricing strategy was effective enough to compensate for Orange's
relatively poor network coverage. (This rapid increase in penetration of new
subscribers decreased in the second quarter, after Vodafone and Cellnet lowered
the price differentials in key segments.) Thus, aggressive pricing tactics,
investment in network infrastructure and innovative marketing tactics such as
aggressive advertising and creative service bundling have made Orange a credible
player.
Different markets require different strategies. What worked for Orange in Britain,
for example, will not work for new entrants in Scandinavia. There, the
incumbent's monopolies are not driven by profits from the wireless industries,
and thus they price their wireless services below the average price for the rest of
Europe. This is a significant barrier to entry for new players, especially since
entering the industry requires a high capital investment. So the key source of
differentiation for new entrants in such situations is going to be creative
marketing, innovative advertising, new service packages and superior customer
service. This is especially true since the incumbents offer a relatively poor level of
customer service, a concern to end users.
19. Later entrants can also succeed by attacking high-growth markets particularly
when there is a significant shift in the industry. Such shifts can be due to changes
in regulation, or technological breakthroughs that improve the product, or
breakthroughs that improve the process of manufacturing and delivering the
product. The classic example is MCI's success in penetrating the long-distance
market and winning a regulatory battle with the AT&T Corporation.
Another strategic option for the later entrant is micro-segmenting the customer
base -- that is, targeting high-value customers who are able and willing to pay a
higher price for the product or service relative to the cost incurred in catering to
that segment. For example, the competitive-access providers (now Competitive
Local Exchange Carriers, or CLECS), in order to provide local telecommunications
services, basically skimmed the best customers of the regional Bell operating
companies by offering a lower price. This was possible because the regional
companies had adopted an average price scheme partly dictated by the Federal
Communications Commission.
Innovators have also been successful in entering markets with a significantly
better technology. Usually, however, technological innovation gives a company an
edge for only a time, since incumbents catch on fairly quickly. Given that this is
the case, new entrants should support their innovations with effective
positioning, appropriate pricing and aggressive advertising. For example, I.B.M., a
later entrant to the personal computer market, captured the lead in the 1980's by
developing the technology and using its powerful marketing engine. Later,
Compaq and Dell fundamentally redefined the business. Compaq reduced the
cost by changing the manufacturing process and having superior logistics. Dell, in
addition to using an efficient manufacturing process and superb logistics,
invented the mail-order or direct channel to access end users, who by now were
comfortable with personal computer technology. I.B.M. was not able to react to
these changes fast enough and lost its lead in the 1990's.
DEFENSE STRATEGIESFOR PIONEERS
Even as new entrants attempt to redefine the business or formulate niche
strategies to attack profitable industries and market segments, pioneers can fight
back to retain their competitive advantage. The major strategies for the pioneers:
1) Increase the barriers to entry for later entrants,
20. 2) Innovate faster than the latecomers, and
3) Build a market-responsive and flexible organization.
In most markets both pioneers and later entrants operate with incomplete
information. Pioneers can take advantage of this by using effective signaling
mechanisms as a deterrent. For example, pioneers can cut price, signaling to
potential new entrants that it is a low-cost industry and it will be difficult for them
to survive. Pricing below variable cost, however, is illegal in most countries. On
the other hand, new entrants traditionally focus on a few key segments of the
market typically those that are subsidizing the cost to serve other segments of
the incumbents. So, it is important for pioneers to understand their end-user
segments and to adopt a differential pricing scheme to extract optimal rent from
each of the segments.
Pioneers can also attempt to lock up the key channels of distribution, making it
difficult for new entrants to get access to the market. In several industries and
countries, however, it is not possible to get exclusive distribution rights. Pioneers
can also offer special types of enhanced customer service packages or reward
programs to make it harder for key customers to switch.
Another route, especially in the high-tech industries, is for a pioneer to remain
innovative and launch the next generation of products or at least announce the
next generation of products, thus deterring the entry of competition. The Intel
Corporation's strategy in this regard is an example.
Finally, a responsive and flexible organization may be the most productive route,
especially when the structure of an industry changes drastically or there is a
seismic shift in the regulatory environment. In the telecommunications industry,
for instance, the 1996 Telecommunications Act has fundamentally changed the
rules of the game, leaving almost all the markets open for competition. This has
forced both the regional Bell operating companies and the long-distance carriers
such as AT&T and MCI to revise their strategies. Aging pioneers in other industries
have also followed the strategy of attack as best defense, targeting potential new
entrants' home bases -- be it geographic or product markets. As Fuji penetrated
the photographic film market in the United States, for example, the Eastman
Kodak Company's strategy was to attack Fuji in its home market. This strategy met
with mixed results, due to the tight controls in the Japanese market.
21. The underlying parameters for all these strategies are that companies should be
aware of the market dynamics and have an organization that is flexible with the
right culture to adapt, not only reacting to potential competition but also
proactively developing their strategies. It is easier to lose a market-share point
than it is to gain one.
An example of a good blocking strategy is Vodafone's decision to lower its prices
in key market segments to match those of its new competitor, Orange, thereby
reducing the price differential between the two companies. While doing this,
Vodafone kept its average price in the market constant and extracted more rent
from customers who were not targeted by the competition.
Managers should have a feel for the marketplace, to correctly estimate the
switching barriers for customers and set the price differential accordingly.
Another example in the wireless industry is the case of cellular companies in the
United States. These companies have undertaken a suite of counterattacks,
including innovative service packages and special deals on the equipment for one-
year contracts, thereby increasing the switching barriers for the customers. This
has also slowed the penetration of personal -communications-services (P.C.S.)
players among the cellular customer base. But as these companies, which offer a
service similar to cellular but based on a different technology, build their
networks and offer enhanced services, they will inevitably begin to attract cellular
customers unless cellular companies can offer similar features in the long run.
Meanwhile, both the P.C.S. companies and the cellular companies have launched
aggressive advertising campaigns.
KEY SOURCES OF DIFFERENTIATION
It is important to note that in the case of the telecommunications industry,
pioneering advantage can be sustained only through continuous investment in
building network infrastructure and the offering of superior customer service the
two key sources of differentiation. In the wireless industry, customers are repeat
purchasers, since their contract terms typically last for only one year and the cost
of handsets is dropping rapidly. This situation could enable a late entrant to
compete effectively by developing a good network infrastructure and by gaining
access to good distribution networks. This is evident from the fact that the
incumbents in several countries have not been able to sustain their lead and the
22. differences between early entrants and second entrants are decreasing rapidly.
For example, in Britain, Vodafone had an 18-month advantage over its prime
competitor, Cellnet, with similar technology. Three years after the launch of
Cellnet, however, the difference in market share in annual net additions between
Vodafone and Cellnet is only 11 percent. Vodafone has been able to retain its lead
in the recent past only by fighting back efficiently on the customer-service
dimension and by developing creative service-bundling strategies.
MARKETING-STRATEGY FRAMEWORK
Having thoroughly analyzed the various strategies adopted by successful pioneers
and later entrants, we have developed a framework both can employ to
formulate strategies for growth, penetration or share retention, as the case may
be. The first component in our framework involves developing an understanding
of the dynamics of the market. The critical areas to be analyzed are:
1) Those fundamental drivers of technology that may cause a significant shift in
the market;
2) Changes in governance, such as any shifts in regulatory policies that might have
a marked impact on the industry structure;
3) The size and growth of the potential market, and
4) The competitive profile.
Several qualitative and quantitative tools are available to assist in evaluating
these critical issues. For instance, the model developed by F.M. Bass, the Bass
model (1969, 1987), and the Booz-Allen & Hamilton model (1997) are highly
useful for forecasting market size and growth. Competitive assessment on the
other hand, is primarily done by conducting extensive secondary research on the
key players. Our experience indicates that more than 60 percent of relevant
information can be found in public sources and that the challenge lies in the
gathering and synthesis of this information.
The second component of the framework involves conducting an internal
assessment of your company's capabilities and product offerings. Product or
service development is an iterative process between developers and researchers,
one involving marketplace feedback.
23. Once a product is defined and the positioning determined, it is important to
understand the economics of manufacturing. In a competitive environment in
which a technology edge is short-lived, try to think beyond simply making a good
product in an economical way. Companies need to evaluate and develop non-
product-related sources of differentiation, such as customer service, innovative
ways to access end-users, creative marketing partnerships with other services
such as frequent flyer programs, and so on.
At the completion of external and internal assessment, a company is ready for the
final component of the framework: the actual development of the product
strategy. Strategic elements here include segmentation, positioning and decisions
on marketing instruments.
One of the most important strategic elements is the timing of product entry.
Should the company be the first to enter the market or a later entrant? Just what
are the risks and rewards? Again, there are some important tools available to
facilitate scenario planning and decision making. These include the formulation
24. suggested by Dr. Kalyanaram in the journal Marketing Science (1995) and market
share models by Dr. Kalyanaram and Glen L. Urban (1992) and by Dr. Urban and
others (1986), again in Marketing Science. Other useful approaches for product
strategy are the lead-user technology proposed by Eric Von Hippel, and the
"wargaming" simulation analysis methodology developed by Booz-Allen. Thus,
based on the market, internal and product strategic assessments, an optimal
strategy can be formulated.
Competing for growth: Winning in the new
economy Customer reach
When asked, some 60% of respondents believed that it would take over a year
before they would break even in a new market.
Growth is a reflection of how effectively a company can meet the demands of a
market. The scale of opportunity is therefore determined by the size of the
market that a company can reach. Customer reach is a good starting point for any
discussion on growth.
Maximizing reach — and opportunity
Given the sheer size of some of the emerging markets and their relative economic
growth, they are often cited as likely sources of growth. But our survey suggests
this is not always where companies will find competitive success. When asked,
some 60% of respondents believed that it would take over a year before they
would break even in a new market — time to break even is only slightly shorter
with high performers than the others.
Which factors have driven the increased competitiveness of your market
over the past two years?
% of respondents
25. Focus on segment — who is your buyer?
It remains true that the cheapest route to market is through an existing
relationship. High performers have been investing more time and resource in
seeking to both secure and strengthen their position with current customers.
While 35% of respondents reported having increased their focus on the most
profitable customer and product segments, a full 45% of high performers
reported that this was one of their top priorities.
Which of the following tactics have been most effective in driving growth for
your company?
Similarly, there is a focus on developing new distribution routes to serve the
existing client base and enhanced marketing activities to maximize the current
opportunity.
Broaden product/service offer — what are you selling?
Part of the process of maximizing the return from existing customers is
introducing a broader range of products and services to better meet their needs
— both across the value and the life cycle. This is the top priority for high
performers.
Effective account management is believed by high performers as being the
greatest source of growth for the next two years. High performers are innovating
new products, increasing marketing, opening new distribution channels and
innovating market-entry approaches to reach those markets more effectively.
26. While low performers are focused on cost competition, high performers are
driving into new markets and product areas.
What action is your company taking to increase sales?
Many companies in developed markets have recognized that innovating new
services and products is central to their competitive strategy. Interestingly,
leading players are focusing on incremental innovation around distinct
buyer groups.
Prioritize market — where are you selling it?
By some margin, the focus of all our respondents has been on finding growth
from existing markets, but leading performers are also ahead of others in
identifying the “thread that connects” groups across national borders and in
following that thinking to establish new operations and outlets.
When respondents were asked where they thought their growth would come
from in the next two years, 60% cited developed markets as the likely source —
down from the 67% who had achieved most growth in these markets in the past
two years.
They are significantly more optimistic about China, India and other parts of Asia
Pacific than other parts of the world. The slight decrease in focus on Western
Europe, and increased focus on Africa and Latin America is shared by low
performers.
27. What growth have you experienced over the past two years and what growth do you
anticipate over the next two years?
In almost all cases, companies are looking to their own region as their first source
of cross-border opportunity, but subsequent interests vary significantly.
Why would they buy from you?
Marketing has typically been included as a cost in this and has, consequently,
suffered. But as companies turn their attention back to growth, there seems to be
recognition — especially among high performers — of marketing as a driver of
growth that goes well beyond sales support.
Marketing builds awareness to establish products in new markets, and branding
builds differentiation and loyalty, mitigating the impact of price reduction. It
remains a truism that companies compete on price only when they have failed to
achieve a meaningful differentiation based on performance or perception.
Of particular note is the growing importance of branding in emerging markets in
creating a value segment, often for the first time. Leading performers seem to
recognize that branding can play a central role in taking existing products into
new markets and building barriers to new competitors in existing markets.
28. Market Entry Strategies:
What is the best way to move into a new market? If you do not have a first-in
advantage, attack the one who does.
Want to be King of the Mountain in a new marketplace? Here is some advice: be
first, or a close second, and do not pause for breath. Others want to be King of
the Mountain too. Even though you have a huge advantage in being first, you can
lose it in the blink of an eye over pricing or service or lagging technology.
Aggressive competitors have a vast array of weapons to knock you down.
Today's strategic planners, having created as much value as they could by cutting
costs, are looking now to grow domestic markets, as well as build new markets
and revenues in such countries as Brazil, China, India, Malaysia and Mexico.
Before striking out, though, they need the answers to some crucial questions:
Does it pay to be first with a product or service? Is being an innovator worth the
risk? Is it better to wait and learn from the experiences of the first entrant to the
market? What is the proper balance between the risks and rewards? If you are a
pioneer, what can you do to prevent share erosion when a new player enters the
market? If you are a late entrant, what strategies should you adopt to make your
entry successful?
Studies show that in most cases, being first to the market provides a significant
and sustained market-share advantage over later entrants. Still, later entrants can
succeed by adopting distinctive positioning and marketing strategies. Pioneers in
most industries, once they have reached the status of incumbent, are powerful.
Sometimes, however, they get complacent or are not in a position to cater to the
growing or shifting demands of the marketplace. New entrants can take
advantage of gaps in the offerings of these aging pioneers, or find innovative ways
to market their product or service.
Pioneers with a distinctive presence in the marketplace need to be in a position to
react, or even better, anticipate potential entrants and increase the barriers to
29. their entry. For example, a pioneer may be in a position to reduce its price and
decrease the value of the business for a new entrant, or it can block entrance
entirely by controlling key distribution channels.
Whether a late entrant or a pioneer seeking to foil newcomers, it helps to have a
thorough understanding of the entry and defensive strategies available, a good
sense of timing and a game plan for decision-making.
BASIC STRATEGIC PLANNING
Competitive strategies typically depend on the market environment and the
positioning and product portfolio of the existing players. These are the basics:
Reduce price to penetrate an existing market: By introducing a product at a
lower price than the pioneer's, a latecomer can attract new customers who would
not have otherwise purchased such a product ¬¬ in effect expanding the total
market. Reduced price can also induce the pioneer's current customers to switch.
Still, this strategy is likely to result in reduced margins for the new entrant
compared with other players in the market, unless the new entrant's cost of
production is relatively cheaper. This can be adopted by both the incumbents and
pioneers.
Improve a product or service, with focus on a niche market: Companies can
compete by being innovative in the marketplace. The innovation may be radical
or incremental. One example of incremental innovation is an enhanced version of
an existing product. The enhanced product can compete directly with existing
products, or it can be positioned to attract a smaller segment of the existing
market. In addition, the improved product or service can sometimes attract new
customers that are not the current target for the existing product or service. For
example: potential satellite-based wireless service providers are currently offering
a new feature called global coverage. This service could both complement and
replace options available to current customers -- but most of the potential players
in the marketplace are targeting either traveling professionals who need to be in
constant touch or the rural market, in which the cost-to-provision
30. telecommunications infrastructure is very high and satellite-based options help
governments offer ubiquitous telecommunications services. In both cases the
telecommunications market is expanded, generating additional revenue.
Target new geographic markets for existing products: As markets mature in the
home base, companies traditionally look outside to more lucrative markets. Most
consumer goods companies, for instance, are setting their sights on China. Many
heavy equipment manufacturers are targeting newly emerging markets that will
need tractors and cranes for building. Faced with intense competition and
maturation in the local markets in the United States, regional Bell operating
companies such as BellSouth are expanding into emerging markets such as Brazil.
Develop new channels of distribution to access new markets or better penetrate
existing ones: Going global is not the only solution. Sometimes the risk and the
investment required to penetrate international markets may not be worth the
return. Focusing on existing markets, where your company has a good
understanding of the environment, can prove less risky and bring quicker
successes. This can be accomplished by repositioning the product or service
through marketing, advertising, packaging and so on. For instance, Dell Computer
went after the mass market by having customers place their orders directly with
Dell by phone, fax or computer. This direct channel revolutionized the method of
selling computers to the end users, including corporate clients.
In addition to choosing the appropriate marketing strategy, it is crucial to
determine the timing of the introduction of any new product. This is especially
true in high-tech industries, in which product life cycles are short and it is difficult
for late entrants to catch up and extract reasonable returns. In most cases, if you
are entering second or later in such a market, you should do so immediately after
the pioneer.
31. Integrating RFID: how and when will this
technology change supply chain management?
RFID commanded the attention of nearly everyone at Frontline's International
Supply Chain Week Expo in Chicago. Attendees sought out conference programs
and symposiums to learn what the new technology was and how it worked.
Exhibitors worked hard at explaining how they were incorporating RFID into their
product lines. And vendors tried to sell their vision of a future that included the
technology. These are all pieces of a gargantuan effort to figure out how RFID will
fit into the existing supply chain infrastructure and how companies should use it,
from the introduction of the technology to more mature deployments.
"People are just now getting past the gee-whiz factor the technology evokes to
explore how this can create value in their supply chain," says John Thorn, general
manager of the supply chain and brand solutions group at Checkpoint Systems
Inc., Thorofare, N.J.
Questions and issues
RFID is not new. Some areas of the manufacturing sector (e.g., automotive) have
been using it for a while now. But for many retailers and consumer goods
manufacturers, RFID is a newcomer on the scene, and it comes with more
questions than answers.
"While the benefits of RFID technology in the supply chain are rapidly being
realized in real-world applications and installations, companies are going to have
to answer a number of important questions," says Michael Liard, a research
analyst at Venture Development Corp., Natick, Mass.
* How will RFID tie into existing systems, such as warehouse management, ERP
and customer relationship management?
* Who will help with the bar code/RFID transition? Large systems integrators,
pure software vendors, RFID hardware suppliers or traditional data collection
hardware manufacturers?
* Who is responsible for post-installation support?
32. * If there is no standard developed for RFID's use in a particular industry or
application environment, should customers wait to implement or move forward
without a standard?
* What do end users do with all the data RFID can provide?
Liard believes data synchronization concerns also need to be addressed, because
the lack of a common nomenclature could be the Achilles' heel for RFID in the
supply chain. The lack of education among end-user employees will require
companies to spell out what RFID is, how it's used, what the benefits are and why
the company is implementing RFID.
Probably the biggest question is: Will RFID supplant bar code? The answer is no.
"It is important to understand that RFID won't replace bar code," says Dan
Bodnar, director of product marketing for data capture systems at Intermec
Technologies Corp., Everett, Wash. "It's really going to be used to augment the
existing data collection system."
Bodnar says that Intermec's customers are facing compliance issues with RFID
because of mandates from companies like Wal-Mart, and that's what will drive
companies to implement RFID in a more timely manner. But in the long term, they
need to understand how they can integrate RFID into their existing data collection
system.
"The systems will coexist as folks become comfortable with the data they are
extracting from these systems. If the promise of RFID pans out--that is, the
benefits outweigh the cost--there will be certain areas of the supply chain that
will be converted to the new technology. But this may take years before any
substantial impact is seen," says Checkpoint's Thorn.
What to do
Many companies will be tempted to hold back. But a wait-and-see approach will
hurt more than it will help. While there are no scientific or tested roadmaps to
integration, companies can do some things to make the migration to RFID
smoother.
Venture Development's Liard suggests you take the following actions:
33. * Find a need--if you don't require an RFID solution, don't force its
implementation.
* Gain an understanding of the technology (e.g., the physics, use, frequency and
various parts of the system), and then educate your colleagues.
* Review and evaluate commercially available technologies.
* Select the appropriate frequency range for your requirements and
environments and narrow the field of suppliers.
* Talk with other end users and share experiences and information.
* Obtain references for each player being considered for your system
implementation (e.g., hardware, software/middleware, and integration
providers).
* Determine the ROI with those vendors you are seriously considering.
* Select a vendor/integrator.
* Perform a site evaluation.
* Test the solution in a real-world setting.
"As they go through this process, they need to fully understand their business
processes and benchmark them against the legacy systems. With a baseline
established, they can then begin to look for opportunities to reduce error, reduce
labor/handling and speed throughput," says Thorn.
Applications
If bar code and RFID are expected to coexist within the consumer product goods
and retail vertical markets, in which segments of ADC will each dominate?
Venture Development's Liard believes that bar code technology will continue to
dominate item labeling and marking, and that RFID use will center around the
crate and pallet.
34. RFID: Payback for Manufacturers
The RFID mandates issued by Wal-Mart, the DoD, and others place a significant
burden on suppliers, but of course this kind of thing has happened before. EDI, for
instance, required major expenditures on software, systems development, and
ongoing VAN fees. RFID deployment has its own systems costs--for integration to
the ERP; for an ongoing supply of tags; for the network infrastructure, portals, and
readers; and for "savant" software that can sort and select specific data from the
myriad signals emanating simultaneously from thousands (or tens of thousands)
of tags. And for many manufacturers (particularly makers of "low-impact
“products like groceries and household commodities), tag cost alone is a
significant barrier to RFID mandate compliance.
Industry observers and analysts were quick to note that, in order to justify the
cost of RFID compliance, manufacturers would need to find other ways to make
RFID technology pay off for them. Thus, an unplanned benefit of the movement
toward RFID is that manufacturers have renewed their focus on business process
improvements in the factory. Smart manufacturers are already thinking well
beyond RFID "slap and ship."
Companies that are considering RFID will have to choose one of two paths. On the
first path, there is no clear return on investment (ROI) other than the follow-on
benefits of being in compliance with customer mandates. The second path leads
to where the real benefits can be found: RFID can be used to make business
processes more efficient.
Not all companies can benefit equally from internal use of RFID technology, but
many (or even most) can benefit from process improvements that are driven by
data capture. This is especially true if the flow of real-time data is fully integrated
to the ERP such that ERP processes become automated. The amount of benefit
you can get from RFID is relative to the performance level of the company. In
looking for potential RFID benefits, find the processes in which barcodes are
currently being used.
Companies that take the second path will find opportunities to eliminate tasks,
save time, and add a new dimension of value through strategic application of
more accurate and timely transaction data. Although this approach is likely to
35. require a bigger initial investment, operating cost reductions can easily justify it.
In "closed-loop" applications in the factory, even the gap between RFID tags and
barcode labels begins to narrow. Each time the tag is read or written to, the cost
of the tag will continue to go down. In contrast, label cost accumulates over time.
The world of data capture has become more complex in recent years. Gone are
the days when one technology or symbology was all that a manufacturer needed
to meet its data capture needs. RFID creates compelling opportunities to change
how the data is captured and used, but you can be sure that barcodes and RFID
will co-exist for a long time. These are the key questions to ask: Where is the
barcode method failing, and what can RFID do that barcodes cannot do?
Here's one example of the answer to those questions: RFID can report finished
production and reconcile the product quantities with the finished goods
warehouse. Picture the end of a production line, where product is being put onto
pallets. The pallet contains a barcode that is associated with the items put on the
pallet. Such a barcode is referred to as a "license plate." Full pallets are picked up
by a forklift operator. Each time a pallet is picked up, the forklift operator is
supposed to scan the pallet barcode to record the production yield and back-flush
the components used. The same transaction also automatically receives the
finished product into a generic holding area in the finished goods warehouse.
We'd like to think that this happens correctly every time a pallet is moved, but it
doesn't. The forklift operator's concern is to move the material quickly, so the
barcode scan is not always done. And even if it is done, the barcode label may be
missed so the read may not be completed.
Then, a material handler from the warehouse moves the finished product away
from the generic holding area. He scans the barcode and moves the material to a
finished goods location and completes his transaction. Now the warehouse has
finished product on the records, but because the first scan never happened, the
production was never reported as being completed. Every day, the finished goods
warehouse reports how much finished product is put away and the report is
compared with what was produced, at which time errors are found. It is
commonplace in many factories for skilled personnel to spend significant time
hunting down just where the transaction error occurred so that the error can be
reconciled.
36. Fixing the Problem with RFID
The problem could be fixed if the pallets had RFID smart tags. A smart tag has
both a bar code and an RFID chip. An RFID portal could be put in place at the
passage point between the production area and the finished goods warehouse. As
finished goods fill the pallet, the production number is encoded into the smart
tag. This way, when the forklift operator takes the finished goods from the
production lines to the generic holding location in the warehouse, passing
through the portal, the transaction is completed every time, without doing a
barcode scan. (Read-rate accuracy on slow-moving tags is not a problem.)
Similarly, RFID could be deployed anywhere in the factory that a reusable tote or
container is utilized as product travels from one work center to another. Portals
can be positioned in the automatic conveyer lines to automatically record the
production transaction.
Take the Right Path
Many companies seem to view RFID utilization as one big, expensive deployment
of challenging new technology. This leads them to try to identify everything that
can be (or needs to be) done, which has the effect of stalling the whole effort. The
best way to start is to focus on the small benefits that will add up to a big benefit.
This can be called your "benefits stack."
In factory applications, RFID utilization can be far less difficult than RFID
deployment in high-volume distribution. So rethink the top-down approach to the
business case for RFID. Consider a bottom-up approach in which you start by
fixing one problem at a time. It is surely more efficient to start with small,
inexpensive tactical deployments, and the first solution doubles as your proof of
concept. Then, following your "benefits stack" priorities, the small solutions
combine to solve the bigger systemic business problem.
Part 2 of this article will look at more ways that RFID can be used to create value
in the manufacturing process and more ways that potential benefits can be
gained.
Anthony Etzel is VP of Data Capture Solutions at RTTX: RealTime Technologies,
37. Inc. He has been designing and deploying automatic data capture solutions in
manufacturing for over 20 years.
RFID Adoption in the Paperboard Packaging Industry
Introduction
Radio Frequency Identification (RFID) has generated much buzz in the supply
chain arena. The technology itself is not new, and it has been used in various
applications for more than 20 years. However, the technology is maturing and
costs are continuing to decrease. Increasingly RFID is viewed as a tool to track the
movement of items throughout a supply chain, not just within a facility (Hugos,
2006). RFID has the potential to add value across the entire supply chain. Both
manufacturing and retail operations have the opportunity to be involved with the
adoption of this technology. While much of the research to date has been focused
on the retail industry, increasingly research suggests that RFID applications will be
taking off in many other diverse industries including transportation, aerospace,
utilities, and defense, to name a few (Bendavid, Lefebvre, Lefebvre, Fosso-
Wamba, 2009; Bhattacharya, Chu and Mullen, 2008; Das, 2007; White, Johnson,
and Wilson, 2008). One such industry seriously considering the adoption of RFID
technology is the Paperboard Packaging Industry (Andel, 2005). Experts believe
that many opportunities exist for early adopters of RFID technology within this
industry.While numerous studies (Aberdeen Group 2006; Boeck and Fosso
Wamba, 2007; Loebbecke and Palmer, 2006; Fosso Wamba, Lefebvre, Bendavid,
Lefebvre, 2007;Vijayaraman and Osyk, 2006) have been conducted to study the
impact of RFID technology on other portions of the supply chain including
retailers and consumer goods companies, not much work has been published
regarding the impact of RFID technology on packaging providers.
A review of the case study material available to date indicates that early adopters
in the packaging industry are uncovering real bottom line benefits from the use of
RFID within their own operations and that further benefits arise when integrating
applications with their trading partners (Poirier and McCollum, 2006). However,
not all in the supply chain have looked at RFID as a strategic enabler.A majority of
the early adopters have implemented RFID because of the mandate by their
business partners. These adopters have simply looked at RFID as a technology
upgrade and an added cost of doing business with no ROI in the near future.
38. In order to keep the deployment cost down and meet the compliance mandated
by their business partners, many implementers have adopted the "slap and ship"
approach to RFID technology deployment (Vijayaraman and Osyk, 2006). Since
such an approach applies RFID tags at the last step in the fulfillment process, it
limits the ability of a business to exploit the technology through its supply chain
process and realize a positive ROI. White, Johnson, and Wilson (2008) found that
companies employing a "slap and ship" approach did not expect the same
benefits as those that integrated RFID into their enterprise systems.
A number of packaging companies, like other manufacturing companies have
been mandated by their customers to implement RFID at the case and pallet level.
Apart from this some of the packaging companies are exploring the option of
embedding RFID tags in the individual packages such as cardboard cartons so that
they can meet the mandates by the retail company without spending money on
RFID tag applicators. According to Andel (2005), with rapid adoption of RFID
technology in the consumer product goods industry, it is possible that these
mandated suppliers and manufacturers would request packages with already
applied or embedded RFID tags from their packaging providers. This presents
double the challenge for companies in the packaging industry compared to
companies in the manufacturing industry.
Strategic uses of RFID technology
It is difficult to determine the extent to which packaging companies are
strategically using RFID within their organizations. Many of the reported benefits
of RFID are anecdotal. Angeles (2005) cites a number of benefits realized or
anticipated by diverse organizations including Unilever, United Biscuits,the Port of
Singapore, and Toyota. These organizations and others have reportedly realized
benefits in time savings, improved workflow, better tracking, and improved
quality. From a business process standpoint, supply chain adopters, including
packaging providers, stand to derive several potential benefits from RFID. First,
within the company's warehouses, RFID can improve receiving, picking, and
shipping accuracies (Asif and Mandviwalla, 2005). This could in turn facilitate
greater efficiencies in shipping and receiving of goods. Second, improving
inventory visibility decreases stock failures (Moran, Ayub, and McFarlane, 2003).
Benefits can be gained here with improved ability to track goods and savings of
assets as well as eliminating loss of revenues through out-of-stock conditions.
Industry research has also shown that retail shrink levels historically are
39. approximately two percent of sales, costing retailers an estimated $32 billion in
the USA and some $30 billion in Europe in 2001 (Hidaka, 2005). RFID is expected
to have drastic effects in reducing the amount of shrinkage and claims/thefts
occurring in the retail environment and other delivery processes.
Further, by automating data collection, businesses can eliminate the manual data
entry and manual business process transactions. This can provide significant
benefits in terms of labor efficiency and overall cost reduction. Since with RFID
the data captured from the tags is sharable by the business partners and could be
made available in real-time, closer connections with supply chain partners are
possible.This could provide for realtime visibility into customer purchase decisions
in value chains, which in turn can position businesses to react more quickly to
market trends.
RFID technology is often cited as an alternative to and eventual replacement for
bar codes, although it has been argued that there is a lack of empirical evidence
to support this claim (White, Gardiner, Prabhakar, Razak, 2007). Some of the
advantages of RFID technology over the use of bar codes include the fact that
RFID does not require line of sight and it can potentially be read at large distances
(Clampitt,2009). This would be an advantage in the packaging industry where the
tags may not be visible. RFID has other advantages over bar coding, including the
potential for a longer lifespan,the ability to withstand harsh environments, and
the increased traceability capabilities. The main disadvantage compared to bar
codes is the high cost of RFID technology, including the cost of tags, readers, and
the necessary software. However it has been argued that the various benefits of
RFID in the supply chain including reduced shrinkage, better visibility, and better
protection against counterfeiting, improved stock management, and reduction in
labor costs, must also be considered (Lewis, 2005). These and other potential cost
savings should be considered when determining the ROI of an RFID
implementation.
So where do packaging providers fit in with respect to the benefits in the overall
supply chain? What is their role in contributing to the value proposition that RFID
might have to offer in the supply chain? The Aberdeen Group (2004) research
suggests that RFID benefits will vary depending on the type of enterprise. They
suggest that one of the most promising areas of application will be for
manufacturers of high value and low volume products (such as pharmaceutical
distribution). Also, in cases where retailers create mixed pallets also may result in
40. high value. On the other hand, distribution centers receiving many mixed pallets
may not see much value in using RFID. So perhaps the packaging industry may or
may not be able to make much of a contribution, depending on where in the
process its services are required. Packaging provided to distribution centers
receiving mixed pallets may be of no value, while packaging provided to
manufacturers of high-value products may be of significant value.
Challenges of RFID technology
Despite potential benefits, many companies continue to implement RFID based
on compliance rather than based on ROI (Warehousing Education and Research
Council, 2006).This can be attributed to several reasons. Lack of demand from
business customers has been one major reason. Since the technology demands
large initial investments, little incentives exist for organizations that see no
customer demand for RFID. Another challenge to RFID adoption is the lack of
worldwide tag standards. The standards for RFID technology are still evolving.
EPCglobal, a non-profit organization, is working with member organizations to
establish standards for tags. Retailers such as Wal-Mart, Target, Tesco, etc. are
requiring suppliers to use the EPC standards (Vijayaraman and Osyk, 2006). In the
packaging industry itself, a number of operational and technical concerns have
been raised regarding the limitation of RFID systems (Albright, 2006).
These concerns continue to represent a challenge to the packaging providers in
deploying RFID technology.The placement of tags on the packages for readability
is one such concern. According to Clarke, Twede, Tazelaar and Boyer (2006), even
though tag orientation has little effect on readability for empty cases, when a
product such as rice or bottled water is added, tag orientation has a great effect
on readability.The overall cost of implementation is another major factor in
determining the speed at which RFID technology is adopted. RFID system requires
expenditures for tags, readers, hardware, software, and system maintenance.
Within the packaging industry, significant cost additions to packaging operations
are seen as a concern.
Achieving a positive ROI on RFID implementations in the supply chain continues to
be a challenge for many organizations. The cost of high technology is still the
make or break issue for many packaging suppliers and their customers (Andel,
2005). A primary cost component of RFID technology is the repetitive cost of RFID
tags. Additionally, companies considering RFID need to plan for additional
41. network infrastructure, storage capacity, RFID printers and readers, and
additional data generated by millions of new tags flowing in its supply chain (Asif
and Mandviwalla, 2005). With regard to the cost, the recent focus within the
supply chain industry has been on low cost RFID tags. Over 1.3 billion RFID tags
were produced in 2005, and by 2010 that figure is expected to soar to 33 billion
reports InStat (Mumford,2006). With the anticipated scale and scope of RFID
deployments, tag costs are expected to continue their decline. However, even at
low cost, they are a significant investment for packaging providers since they
represent a recurring cost for them in an open supply chain. As discussed earlier,
some feasible benefits which have the potential to improve ROI for packaging
providers include an improved ability to track packages, greater efficiencies in
shipping and receiving, claims/theft reduction, out of stock reductions, inventory
reduction, labor efficiency and closer connection with supply chain partners.
According to Mahna (2005), the use of RFID will demand more flexible processing
systems irrespective of whether the packaging is done at the production facility or
at a co-packer. This will have a direct impact on the operational efficiency and
profitability of the packaging company. For instance, if packaging suppliers were
to consider adding tags to their boxes and displays, each tag would have to be
individually identified and placed according to a specific product packaging
level.This would require each batch of material to be specifically designed for the
ultimate product packaging level and would require a certain placement precision
(Andel, 2005). In addition, the presence of products or packaging containing metal
components that block the RFID signal, or conveyor belts made up of static
producing nylon, or glass fiber that produces radio noise may necessitate
expensive changes in the physical infrastructure, thereby increasing costs
(Margulius, 2004).
System integration has been another major concern for adopters.The challenge of
RFID implementation comes from integrating RFID systems and the data they
generate with other functional databases and applications (Jones, Clark-Hill,
Shears, Comfort, and Hillier, 2004). Presently, since a majority of the adopters are
building their own RFID system from parts offered by different vendors, they are
faced with the additional challenge of integrating these systems with their
internal database and ERP systems. Given the vast amount of data involved,
capturing and communicating the data among disparate systems is a major
concern.A survey by Cap Gemini Ernst &Young of 275 respondents working in the
packaging industry revealed that 46 percent of the respondents consider
42. integration as the single biggest concern with RFID (Ferguson, 2004). Lack of
standards is yet another concern for packaging converters.To derive benefits from
their RFID investments,supply chain partners need to use similar tags, readers and
operational frequencies. According to Whitaker, Mithas, & Krishnan (2007), the
lack of RFID standards leads to a delay in realizing a return on investment of RFID
technology. While standardization of information formats placed on the RFID
consumables have gained wide support with the Electronic Product Code (EPC) in
the retailing industry; standards dealing with RFID frequency and protocols for the
communication of readers and consumables such as tags and labels are
continuously evolving. The lack of technology uniformity and standards has kept
the overall cost of implementation high and is a concern for the packaging
suppliers.
Embedding of RFID tags in packages
The trend towards embedded RFID tags in the packaging material is gaining
momentum within the packaging industry. A popular trend is smart packaging,
which involves the use of chemical, electrical, electronic, or mechanical
technology,adding numerous features and functions to packaging (NanoMarkets,
2006). Smart packaging is expected to consume $1.1 billion in printable and chip-
based RFID tags by 201 I (RFid Gazette, 2006). For packaging suppliers, though,
embedding these tags within their packages may pose challenges during the
corrugating process. A bigger challenge could be the placement of tags,
considering the chance the tag could be cut off or diecut out (Palmieri, 2006).
Despite the concerns and challenges, there is little doubt that tremendous market
opportunity exists for packaging providers given their market customer
relationships and expertise in product labeling. Even though the cost may
outweigh the returns at this point, RFID provides an ideal platform for packaging
providers to offer added value to their customers.With the advent of newer
printing technologies and RFID adoption by multiple participants in the supply
chain, RFID embedded packaging may prove to be a very attractive option for the
customers facing the mandates.
According to Roberti (2006), end users want to move toward embedding RFID in
cartons for shipping cases rather than applying labels. Some packaging companies
such as Georgia Pacific, Smurfit Stone, and Weyerhauser have begun to research
how to embed RFID tags in corrugate but the vast majority of the industry is
43. behind. According to O'Connor (2006),Tl and Smurfit-Stone Container Corporation
have co developed a prototype consisting of corrugated cardboard case
containing an integrated RFID inlay made with an antenna printed directly into
the case with conductive ink. The companies predict that using packaging
materials with integrated RFID tags could save labor and materials costs for
consumer packaging goods companies since doing so would eliminate the need to
purchase separate RFID labels and place them on cases. According to Smurfit-
Stone Company, despite the low demand for RFID integrated packaging today, the
demand will rise as tagging mandates and the number of goods that must be
tagged continue to grow. Therefore, in order to be cost effective, consumer
packaging companies are going to move to the embedded approach (O'Connor,
2006)
In an effort to determine the extent to which packaging companies are pursuing
these potential benefits, a research study was undertaken. The rest of the paper
discusses the analysis of the data collected from Paperboard Packaging
companies in the US and Europe and highlights the benefits, challenges, future
trends,and implications of RFID in the Paperboard Packaging industry.
Methodology
A research study was undertaken to determine the extent to which the
Paperboard Packaging industry has adopted this technology to date and to
determine what problems they have faced. In February and March of 2006, emails
with links to a web-based RFID survey were sent to U.S. readers of Paperboard
Packaging magazine and to members of the European Federation of Corrugated
Board Manufacturers (FEFCO), requesting they fill out the survey. One follow up
reminder was sent to each group approximately three weeks later. A web-based
survey was chosen because it was an effective means of collecting data from the
targeted group of Paperboard Packaging magazine readers. Other reasons for
using a web-based survey were lower cost, time savings, automated data capture
for analysis, and the flexibility to ask only relevant questions in each of the
adoption categories. The respondents included the following:
Geography
44. A total of 174 companies participated in this survey. Of the 174 companies that
participated, 136 companies were from the US and the remaining 38 companies
were from Europe.
Job Title/Function
A majority of the participants who responded (81%) were in the management
category and the rest were in the supervisory or staff specialist category. The
largest percentage of survey respondents were owners (13.8%), general managers
(12.6%), presidents &vice presidents (12.6%),and sales managers (9.8%).
Industry
Fifty-two percent of the companies who participated in the survey were
independent corrugated or folding carton converters, and 32% of the companies
were integrated converters of corrugated and/or folding carton, or rigid box
converters. A majority of these companies provide packaging products to
consumer packaged goods and food products industry. Only a small number of
companies provide packaging products to the apparel industry. Most of the
companies surveyed have more regional sales and manufacturing presence and
were evenly distributed between national and international sales and
manufacturing.
Company Size
The size of the companies ranged from small to very large, in both annual revenue
and number of employees. The largest percentage (55%) of these companies
were small with annual revenue for 2005 of less than $50 million,followed by
companies with annual revenue of 50 million to $100 million (13%) and $100
million to $500 million (12%). Only 14% of the companies surveyed reported
annual sales of more than $1 billion. A majority of the responding companies
(69%) were small, with fewer than 500 employees, where 10% of the responding
companies were very large, with more than 10,000 employees.
Table 1: Status of RFID Implementation (US versus Europe)
Implementing Pilot Considering Not Total
Testing Considering
45. US 11 5 44 76 136
Europe 0 5 19 14 33
Total 11 10 63 90 174
Percentage 6% 6% 36* 52% 100%
Data Analysis and Findings
Table 1 indicates the status of RFID implementation among the companies
surveyed. A very small percentage of respondents (12%) are either pilot testing or
implementing RFID. Fifty-two percent of the respondents are not considering
implementing RFID technology in the near future whereas 36% of the companies
are at least considering implementing RFID during the next couple of years. All the
companies that are implementing RFID are in the US and the companies that are
pilot testing are evenly split between the US and Europe.
Table 2: Status of RFID Implementation by Annual Revenue
for 2005
Revenue Implementing Pilot Considering Not Total
Testing Considering
Less 1 2 24 69 96
than
$50
Million
550 to 1 3 8 10 22
$100
Million
$100 3 1 10 6 20
Million
to $500
Million
$500 0 1 8 1 10
Million
to $1
46. Billion
$1 2 0 7 2 11
Billion
to $5
Billion
More 4 3 5 1 13
than $5
Billion
Total 11 10 62 39 172
Table 2 indicates the breakdown of the status of RFID implementation among
companies by their annual revenue. Over half of the companies who are
implementing RFID have revenues of more than $ I billion. However, a majority of
companies with revenues of $50 million or above are at least considering the
implementation of RFID. Only in the smallest companies (less than $50 million)
did a majority (69 out of 96) respond that they were not considering the
technology. So it would appear that this technology is of interest to all but the
smallest companies. This is consistent with the Information Week 500 survey
analyzed by Whitaker, et. al. (2007). They found the company's revenue was
positively correlated with RFID adoption, implying that large firms are more likely
to adopt RFID.
47. Companies that are not considering RFID technology at present
Slightly over half (52%) of the companies surveyed are not considering RFID
technology at present. A majority of these companies (70%) expects to implement
RFID in 2008 or beyond, and 24% of these companies think they would never
implement RFID technology in their organization for their internal supply chain or
integrating with their packaging materials. A majority of survey respondents see
RFID technology adoption over the next few years. Lack of customer demand was
the most important reason for these companies for not considering RFID
implementation. Lack of standards, cost, lack of foreseeable benefits, and lack of
understanding were other reasons for not considering RFID technology. Major
concerns for these companies with respect to RFID technology were cost related,
including the cost of implementation, the cost of tags, and the cost of automated
label applicators. Other concerns that were somewhat important were lack of
foreseeable benefits and lack of implementation standards. Altering the package
design due to RFID implementation and the placement of tags on the packages for
recyclability and readability were of the least concern (see Figure I).
48. Companies that are currently considering RFID technology
Thirty-six percent of the companies surveyed indicated that they are currently
considering implementing RFID technology. Seventy-one percent of these
respondents indicated the reason for considering RFID is to meet their customers'
requirements and the rest (29%) indicated the reason is to improve their internal
supply chain efficiencies. When they were asked to rate the reasons on a scale of I
- 5, I being least applicable and 5 being most applicable, meeting their customer
requirements ranked the highest (4.73) followed by a closer connection with
business partners (3.56). Other reasons such as claims/theft reduction, out-of-
stock reduction, inventory reduction were not rated very high. Reasons that
improve internal supply chain efficiencies, such as improved ability to track goods
and greater efficiency in shipping & receiving were considered somewhat
important. A majority of companies (57%) that are considering RFID technology
expect to implement RFID in less than 2 years (see Figure 2).
Many of these companies (75%) are still doing initial research and gathering
information on RFID systems, another 16% of these companies are doing cost
justification and budgeting, 7% are developing a project plan, and only one
company is at the stage of selecting a vendor. Five of these companies are
expected to implement RFID technology is less than one year, 30 in one to two
years, and the rest in more than two years. A majority of these companies expect
that the RFID applications which help manage inventory services for customers
would be the most beneficial reason for implementation, followed by package
tracking. Other RFID applications such as raw material tracking, container
tracking, component tracking, loss prevention, asset management and security
are beneficial to a limited number of companies (see Figure 3). Many of these
companies expect their RFID technology to be integrated with warehousing and
supply chain applications and with IT infrastructure. The RFID solution will also be
integrated with organization and IT strategy by many companies. Only a small
number of companies expect their RFID application to be stand-alone.
When asked about the concerns they have with respect to issues related to RFID
technology, several issues emerged as very important to these companies. Cost of
implementation, cost of RFID tags, cost of automated label applicators, and lack
of implementation standards all scored very high on the list of concerns (see
Figure 4). Altering the package design and lack of foreseeable benefits were
comparatively the least of their concerns. The placement of tags on the package
49. for readability and integration with warehouse and inventory systems were
concerns to some extent.These concerns were very similar to the concerns of
responding companies that are not considering RFID technology at present. Cost
seems to be one of the biggest barriers to RFID implementation for many
companies. Cutting the cost of RFID tags and the cost of implementation would
be critical to widespread adoption of RFID technology.
50. Companies that are pilot-testing/implementing RFID
Technology
A very small percentage of companies (12%) that responded to the survey are
either pilot testing or implementing RFID technology. When these companies
were asked for reasons for deploying RFID, meeting customer requirements was
the overwhelming response. This is consistent with the findings of White,
Johnson, and Wilson (2008), based on their survey of European supply chain
managers. Seven companies also indicated "improvement to their supply chain
efficiencies" as a reason for implementing RFID.
When asked to rate nine different reasons on a scale of I to 5 from least
applicable to most applicable, meeting customer requirements was ranked the
highest followed by closer connection with business partners (see Figure 5). The
least important reasons were claims/theft reduction, out-of-stock reduction,
inventory reduction, and cost reduction. Reasons such as improved ability to track
goods, greater efficiency in shipping and receiving, and labor efficiency were
somewhat applicable. The reason for RFID deployment for many companies
surveyed is still driven by customer requirements and not very much on
improving internal supply chain efficiencies.These results were very similar to
companies that are considering RFID technology.
The companies that are pilot testing/implementing RFID are at different stages of
implementation with a small number of the companies having already purchased
and developed the RFID systems. A majority of these companies are offering
packages with applied RFID labels. Some of the major concerns of these
companies were cost: cost of tags, cost of implementation, and cost of label
applicators. The other major concern was the placement of tags on the packages
for readability. Minor concerns were integration with warehouse/inventory
systems, lack of implementation standards, and lack of foreseeable benefit.
Altering the package design was at the bottom of the list of concerns (see Figure
6).
51.
52. When asked about the time it takes to implement RFID, companies that are pilot
testing indicated anywhere from 3 months to 6 months. These companies were
also asked to indicate the types of problems they are experiencing in their pilot
testing. Some of the problems these companies indicated are licensing, cost and
general availability of tags, combining generation II tags with standard laser-
printable paper labels, strength and durability of generation II tags, cost of
implementation and variety of choices of RFID tags, and damage to tags/antenna
during the application process.
Among the RFID applications that the organization benefit from the most,
inventory management services for customers was ranked highest followed by
package tracking. A handful of companies are expected to benefit from
applications such as container tracking, asset management, loss prevention, raw
material tracking and security. Only two companies indicated component tracking
to benefit from RFID application.
With respect to integration of the RFID application with other systems, the
majority of these companies are integrating with their current IT infrastructure
followed by warehouse applications. A third of these companies are deploying
RFID applications as stand-alone systems. Several companies expect to integrate
their RFID applications with warehousing and SCM applications. Responding
companies also indicated that their RFID solution would be integrated with overall
organizational and IT strategy.
Many of the companies that are pilot testing and implementing have a small
budget for their RFID project. Five companies indicated that they are spending
less than $100,000 and 5 other companies indicated $100,000 to $500,000. Only
one company is spending up to one million dollars and another company is
spending more than 10 million dollars. These companies expect their cost savings
to come from improved ability to track packages, out of stock reduction, and
minimized inventory losses (see figure 7). Cost savings from a better ability to
identify the source of defectives was at the bottom of the list.
Of the companies that responded to the question on anticipated savings from
their RFID projects in the year after implementation, forty percent expected no
savings at all. Another 40% indicated I to 5% savings and 15% indicated 6 to 10%
savings. Only one company indicated savings of I I to 15%. Although not many
companies are satisfied with RFID technology at this time (overall satisfaction of 3
53. on a scale of I to 5 where I is not satisfied and 5 is extremely satisfied), companies
are somewhat pleased that they do not have to alter the design of the package.
Security and integration with warehouse and inventory systems were high on the
average satisfaction rankings. Respondents were less satisfied with the cost of
RFID tags, automated applicators and overall implementation. Standards and
overall performance also had satisfaction scores under 3 (see Figure 8).
54. When the companies were asked about the status of embedding or applying RFID
tags on the packaging materials, only 9% of these respondents indicated that they
are implementing it whereas 21 % indicated that they are investigating it. Only
23% of the companies have been contacted by RFID vendors or printing
companies with an offer to embed RFID tags/labels into their packaging materials,
whereas 32% of the companies have been contacted by customers about the
possibility of implementing RFID tags into packaging material at the case, pallet or
item level. Twenty-four percent of the companies indicated that their customers
require them to embed RFID tag into the packing materials and 29% said
embedding tags was not currently a customer requirement.
All of the survey participants were asked about their opinions on the future of
RFID. There was a strong agreement among all the respondents that RFID
implementation will add significant cost to their packaging operations.
Respondents were neutral when it comes to benefits outweighing the cost of RFID
implementation (see Figure 9). There were no statistically significant differences
between the two groups: adopters and non-adopters on any of the issues
presented to them.When asked about their opinion on whether packaging
converters should provide materials with RFID capabilities, 73% said "yes" and the
remaining 27% said "no." A majority of them (85%) expect to share the cost of tag
application with their business clients and only 15% would absorb the cost by
providing RFID tag application as a value-added service.