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Pioneering plus a broad product line strategy: higher profits or deeper losses?

Author: Boulding, William ; Christen, MarkusINSEAD Area: MarketingIn: Management Science, vol. 55, no. 6, June 2009 Language: EnglishDescription: p. 958-967.Type of document: INSEAD ArticleNote: Please ask us for this itemAbstract: Previous research suggests firms can build a market share advantage by preempting later entrants with a broad product line and expanding rapidly into related markets. Whether such a strategy leads to a pioneering profit advantage relative to followers also depends on its cost effects. In this paper, we examine when the market share advantage of a pioneering firm with a broad product line strategy translates into a profit advantage by examining the cost effects of this strategy. Using the profit impact of marketing strategies data and an estimation method that controls for various unobserved factors, we find significant differences between different industry settings. From these contrasting findings, we generate an emerging theoretical framework that we subject to empirical testing. We conjecture, and empirically verify, that creating a broad product line with a versioning strategy—creating variety from a standard product in anticipating customer demand—does not increase the pioneering cost disadvantage, and thus results in a pioneering profit advantage. On the other hand, with a tailoring strategy—creating variety by customizing a product to actual customer demand—a broad product line substantially increases the pioneering cost disadvantage, thereby making a preemption strategy counterproductive
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Previous research suggests firms can build a market share advantage by preempting later entrants with a broad product line and expanding rapidly into related markets. Whether such a strategy leads to a pioneering profit advantage relative to followers also depends on its cost effects. In this paper, we examine when the market share advantage of a pioneering firm with a broad product line strategy translates into a profit advantage by examining the cost effects of this strategy. Using the profit impact of marketing strategies data and an estimation method that controls for various unobserved factors, we find significant differences between different industry settings. From these contrasting findings, we generate an emerging theoretical framework that we subject to empirical testing. We conjecture, and empirically verify, that creating a broad product line with a versioning strategy—creating variety from a standard product in anticipating customer demand—does not increase the pioneering cost disadvantage, and thus results in a pioneering profit advantage. On the other hand, with a tailoring strategy—creating variety by customizing a product to actual customer demand—a broad product line substantially increases the pioneering cost disadvantage, thereby making a preemption strategy counterproductive

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