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Marketing Mix Reactions to Entry Author(s): William T. Robinson Source: Marketing Science, Vol. 7, No.

4, Special Issue on Competitive Marketing Strategy (Autumn, 1988), pp. 368-385 Published by: INFORMS Stable URL: http://www.jstor.org/stable/184084 . Accessed: 09/10/2013 16:26
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MARKETING SCIENCE Vol. 7, No. 4, Fall 1988 Printed in U.S.A.

MARKETING MIX REACTIONS TO ENTRY


WILLIAMT. ROBINSON University of Rochester
Initial product, distribution, marketing expenditure, and price reactions by incumbents are examined for 115 entrants into oligopolistic markets. The most common reaction pattern is either no reaction or only a single reaction. It is very unusual for entrants to face reactions across the entire marketing mix. Reactions in the first two years after entry are explained as a function of the entrant's strategy, incumbent characteristics, and industry characteristics. The explanation provides insights into why marketing mix reactions to entry are often limited. (Market Entry; Competition; Marketing Mix Reactions)

1. Introduction Are initial marketing mix reactions to entry usually aggressive, passive, or accommodating? How are these reactions influenced by the entrant's strategy, incumbent characteristics, and industry characteristics?These issues are important because aggressive reactions can catch an entrant in a vulnerable position and damage an otherwise successful strategy. A frequently cited example is Tylenol's reaction to Datril. Tylenol slashed prices, dramatically increased the advertising budget, formed a sales force, and legally charged Datril with unfair and misleading advertising (AdvertisingAge 1975 and Wall Street Journal 1982). These reactions seriously damaged Datril's entry strategy and helped Tylenol maintain market leadership. Reaction insights are also important because expected reactions can alter the entrant's strategy. Scherer (1980) points out that, "potential entrants . . . devote a good

deal of thought to finding an entry strategy that strikes the best compromise between securing scale economies and minimizing the risk of price warfare" (p. 248). Thus, if aggressive and damaging reactions are expected, the entrant can be frightened off or can choose to enter on a less ambitious scale. For example, American Express has introduced a new credit card, Optima (Advertising Age 1987b), but is downplaying it because of fear that banks offering Visa and MasterCard will react. Finally, incumbents benefit when typical reactions provide a starting point for developing their defensive strategies. In economics, theoretical research on reactions to entry has spanned literally decades and Caves and Porter (1977, p. 244) have termed the subject a "classical problem". The research has progressed from the ad hoc assumption by Bain (1956) and Sylos-Labini (1962) of a defending brand maintaining unit sales, to more sophisticated arguments addressing issues such as developing a reputation for toughness (Milgrom and Roberts
368 0732-2399/88/0703/0368$01.25
Copyright ? 1988, The Institute of Management Sciences/Operations Research Society of America

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1982)and the fearof pricewarfare (Brockand Scheinkman1985).Clearly,the marketmost importantcontributionis Hauserand Shugan's(1983) Defender ing literature's model. While exceptionsarise, this researchtypicallypredictsaggressiveratherthan passiveor accommodatingreactionsto entry.(See Nti and Shubik 1979, p. 285.) If industry-specific examplesare excluded,only two descriptivestudieshave examined initialmarketing mix reactionsto entry.In the firsttwo yearsafterentry,Biggadike mix elements,"No reactionis the most (1979) concludesthat for individualmarketing common reaction by an overwhelmingmargin"(p. 179). In addition, roughly half (46%)of the entrantsfaced no reactionson any marketingmix element. Yip (1982) providessimilardescriptiveresults.Thoughthese findingsare important,samplesizes of 37 and 36 limit their generalizability. Also, because of the restrictedsamples, a multivariateanalysiscould not be used to explain the variationin competitivereactions. Clearly,however,the findingsconflictwith the theoreticalpredictionsof aggressive reactionsfor individualmarketingmix elementsbecausethe typical reactionwas no reaction. The main factor limiting empiricalcontributionson reactionsto entry has been a lack of data. With the assistanceof the StrategicPlanningInstitute(SPI), Biggadike developed a questionnaireand gained the cooperationof a cross section of start-up businesses.The PIMS (ProfitImpactof MarketStrategies) data at SPI are well known and havebeen analyzedby manyacademicresearchers, but SPI'sstart-up businessdata have been largelyoverlooked.The oversightis especiallyimportantnow becauseSPI has expanded the sample and it is five times largerthan it was in Biggadike'sinitial study. The relativelylargesampleis used to describemarketing mix reactionsto entryinto oligopolisticmarkets.The reactionscover the first two years of commercialization. Consistentwith Biggadikeand Yip's results,the typicalfindingfor individualmarketing mix elementsis no reaction.In a regression analysis,the reactionsare found to be influencedby certainaspectsof the entrant'sstrategy,incumbentcharacteristics, and industrycharacteristics.
2. Data The Strategic Planning Institute's (SPI) start-up business data provide detailed infor-

conditions."As discussedbelow,the marketing mix reactionscoverperceivedproduct, and pricechanges. distribution, marketingexpenditure,


specific entrant. Thus, the data miss reactions that arise 3 or more years after entry. Other potentially important reactions not examined include reactions prior to entry,

In Start-Up Data Form 3, competitive reactions assess, "any changes . . . of the three leading competitors which were a direct response to the entry of this business during its first two years of commercialization, not resulting from fluctuating market In designing the questionnaire, Biggadike (p. 169) assumed any reactions more than

mation on reactionsto entry.Briefly,a start-upbusinessis a new businessventureand is typically 7 years old or less (Start-UpData Manual 1978). A start-upbusiness is considereda new source of supply by its customersand a new entrantby its competitors. The Start-Up Data Manual (1978) recommends that a data-gatheringteam be formedof managers in marketing,finance,manufacturing, and R & D. As most of the datausedherearelikelyto havebeengathered the by one or more marketing managers, data suppliedby the entrant. studyis based on self-reported, single-informant

two yearsout would be influencedby many forcesand could not be tied accurately to a

reactionsoutside the marketingmix such as lawsuits,reactionsaimed at a group of entrantssuch as IBM's widespreadresponseto personalcomputer clones (Business

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WILLIAM T. ROBINSON

Week 1986b), reactions in other markets in which the entrant competes, and reactions by competitors who are not among the top 3 market leaders. Still, initial marketing mix reactions by the leading competitors measure very important reactions to entry. The reaction measures undoubtedly are influenced by perceptual, entrant strategy, and SPI self-selection problems. First, entrants may not perceive reactions because detection can be difficult, especially in growing markets where strategic change is relatively frequent, the environment is "noisy", and the entrant may not have a welldeveloped competitive intelligence system. Also, when multiple factors motivate strategic change, it is difficult to know whether or not the change would have been made in the absence of entry. Second, as discussed in the introduction, expected reactions can alter the entrant's strategy. These first two factors bias the results toward finding infrequent reactions to entry. The SPI self-selection problem should help offset this bias. The entrants are clients of the Strategic Planning Institute and typically represent diversification efforts of Fortune 500 firms. Because Fortune 500 firms have relatively strong skills and resources, they pose a greater threat to incumbents than typical entrants and therefore should incite greater reactions. Finally, the data only include survivors. When strong reactions push entrants out of the market, important reactions are missed and average reactions are biased downward. Entrants that leave the market because they are not serving the customer effectively would not threaten incumbents and consequently probably faced infrequent reactions. Excluding these observations biases average reactions upward. Hence, it is not clear how the survivor issue influences average reactions. Descriptive Statistics The STR2 data cover 199 entrants. Because the sample is 5 times larger than that in Biggadike's initial study, 80% represent new observations. The sample used here is restricted to manufacturing businesses that faced one or more established competitors when they entered their market. Thus, observations are excluded for market pioneers who entered their market first and for markets without any competitors in the year prior to entry. Observations are also excluded for fragmented or perfectly competitive markets. In fragmented markets, each competitor is too small for competitive interdependencies to be recognized. Consequently, reactions to entry should be negligible.' The 115observations retained meet the preceding criteria and also have a full set of independent variables for the regression analysis. Roughly 75% of the entrants compete in industrial markets and 25%compete in consumer markets. The markets are typically growing because 20% of the businesses entered during the introductory stage of the product life cycle, 56% during growth, 21% during maturity, and only 3% during decline. Also, the average annual percentage market growth rate in dollars for the three years prior to entry is 35%, which is not surprising because researchers such as Hause and Du Rietz (1984) have found more entry in growing markets. Incumbent reactions are classified by the author in three categories. Aggressive reactions make entry more difficult, passive reactions reflect no competitive change, and accommodating reactions make entry easier. The classification follows theoretical research that examines the direction and not the magnitude of response (e.g., see Hauser and Shugan 1983).

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

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In the data, an aggressiveproductreaction covers any product change that either matches or places the entrant'sproductat a disadvantage. Check-Up,the pump-dispensed toothpaste introducedby Minnetonka,faced an aggressiveproduct reaction becauseit was quickly imitatedby Procter& Gamble, Colgate-Palmolive, and Lever Bros.(Advertising Age 1987a).The dentifriceleadersalso spentmorethan $100 million in advertising and promotionson theirentries.This action easilyqualifiesas an aggressive marketingexpenditureresponse because it representsa significantexpenditure
increase. One major factor inciting these reactions was that the dentifrice leaders ". . were

not going to let a newcomertake awaytheirvaluableretailshelfspacewithouta fight." (p. 33). Hence, it is reasonableto assume that distributionreactionsdamagedCheckIf so, this would be recordedas an aggressive distribuUp's distributioneffectiveness. tion reaction.Pricingreactionswere passiveas thereis no evidencethat averagedentifrice prices were cut by at least 1%.Because of these reactions, Minnetonka sold Check-Upand has left the dentifricemarket. Accommodatingreactionscover any productchangesthat strengthenthe entrant, significantdecreasesin marketingexpenditures,and price increases.(No categoryis distribution providedfor accommodating reactions.)The authorlocatedtwo examples of accommodating reactions.In an attemptto reducetheirmarketdevelopmentcosts, RCA used licensing to encourageentry into the color television market (Biggadike them with attempt1979,pp. 174-175). When du Pont facedan antitrustsuit charging ing to monopolize the cellophaneindustry,they startedan advertisingcampaignto locatecompetitors(Waldham1980).Eventhoughthese two examplesboth aroseprior to entry,they signalan accommodatingintention. For the 115 entrantsin the study,Table 1 showsthe frequencyof aggressive, passive, and accommodatingreactions.In the firstyear, aggressive reactionsoccurredonly 4% of the time for the product,3%for distribution,10%for marketingexpenditures, and 15% for price.Passivereactionsdominatefirstyearreactionsbecausethey arose95%of the time for the product,97%for distribution,89%for marketingexpenditures,and 83%for price.Almost no accommodating moves aroseforthe product(1%), marketing expenditures(1%),and price (2%).Thus, when first year reactionsarose, they were dominated by price cuts and increasedmarketingexpenditures.This finding is not becausethose changesgenerally can be mademuch fasterthanchangesin the surprising productand distribution (Kotler 1984, p. 69). In year 2, aggressivereactionsuniformlyincreasedacrossthe marketingmix, with each increasebeing statistically at the 10% level or higher.The largestpoint significant
TABLE 1 Frequency of Marketing Mix Reactions to Entry Year 1 Incumbent Reactionsa Aggressive Passive Accommodating Aggressive Year 2 Passive Accommodating

(%)
1) 2) 3) 4) Product Distribution Marketing Exp. Price Average 4 3 10 15 8

(%)
95 97 89 83 91

(%)
1
n.a.b

(%)
20 7 18 24 17

(%)
78 93 82 73 82

(%)
2 n.a. 0 3 1

1 2 1

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

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372
TABLE 2

WILLIAM T. ROBINSON

Distribution of the ReactionIndex


REACTION INDEXa Distribution Value Year 1 (%) 4.0 (Most Aggressive) 3.0 2.0 1.0 0.0 (Passive) -1.0 -2.0 -3.0 -4.0 (Most Accommodating) 1 1 2 21 72 3 0 0 0 100 Year 2 (%) 2 3 11 27 54 3 0 0 0 100

a For each element of the marketing mix, aggressive reactions equal 1.0, passive 0.0, and accommodating -1.0. The reaction index is the sum of these four values.

increase is for product reactions, from 4% to 20%, and the smallest is for distribution reactions, from 3% to 7%. Aggressive product, marketing expenditure, and price reactions all occurred at roughly the same frequency. Even with the increase in aggressive reactions, a passive response occurred 78% of the time for the product, 93% for distribution, 82% for marketing expenditures, and 73% for price. Again, accommodating reactions were very infrequent. Though data are not available for year 3, year 2 reactions are substantially more frequent than year I reactions. At least one reaction was faced in year 1 by 28% of the entrants and in year 2 by 46% of the entrants. If reactions continued to increase by 64% (46%/28%),then 76% of the entrants faced at least one reaction in year 3. While these can be important reactions, they are beyond this study's domain, which is to examine initial reactions to entry. A reaction index is formed to describe reactions on an entrant-by-entrant basis. For the four individual marketing mix elements, aggressive reactions are set equal to 1.0, passive 0.0, and accommodating -1.0. Thus, the index can reach a maximum value of 4.0 if aggressive reactions occur across the entire marketing mix and a minimum value of -4.0 if every reaction is accommodating.2 Table 2 provides the reaction index's frequency distribution. For both years, the actual range is from 4.0 to - 1.0. In year 1, only 4%of the entrants have a value of 2.0 or higher. Because 21% have a reaction index value of 1.0, when first year reactions arose, they tended to arise along a single dimension. In year 2, 16%of the entrants faced net reactions of 2.0 or higher. If these reactions are considered aggressive and damaging, such reactions arose for roughly 1 in 6 entrants. Table 3 is a cross-tabulation of year 1 versus year 2 reactions. The large percentages down the diagonal, which range from 34%to 100%,show that year 1 reactions typically carried over to year 2. When reactions changed in year 2, they tended to be more aggressive. For example, for the 83 entrants that faced no reactions in the first year, by
As discussed subsequently, some information is available for the magnitude of aggressive reactions. Though information is lost by examining only frequencies, an effective method of incorporating these magnitudes into a single index was not found. Still, measuring only frequencies has an advantage because the index is easy to interpret. It is very useful in evaluating economic significance in the regression analysis.
2

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MARKETING MIX REACTIONS TO ENTRY TABLE 3 Reaction Index for Year 1 versus Year 2 Distribution of Year 2 Reaction Index Given Year 1 Reactions Year 1 Reaction Index Value 4.0 3.0 2.0 1.0 0.0 -1.0 n 1 1 2 25 83 3 115 4.0 100% -100% 1% 3.0 2.0 1.0 8% 1% 100% 20% 6% 33% 0.0 8% 72%

373

-1.0 -

64% 17% 33%

3% 34%

the second year25%facedone or more aggressive reactionsand only 3%facedaccommodatingreactions. Some informationon magnitudesis providedin the STR2 data for aggressive, but not for accommodatingreactions. Aggressiveproduct, marketingexpenditure,and distributionreactionstended to match ratherthan place the entrant at a significant For the 17 entrantsfacingprice cuts in the firstyear, 12 cuts are in the disadvantage. 1%-10% range,four are in the 11%-15% range,and only one is in the 16%-25% range. For the 28 entrantsfacingprice cuts in the second year, 20 are in the 1%-10% range, sevenarein the 11%-15% range,and only one is in the 16%-25% range.To summarize, the nonprice reactionswere typically defensive because they imitated the entrant's and the price cuts were usuallyless than 10%. strategy resultsare verysimilarto the reactionsreported Overall,the descriptive by Biggadike and (1979) Yip (1982). They are also consistentwith reactionsto entry in the wine cooler market.3 By 1984 there were roughly 110 wine coolers.Certainlysome important reactionsto entryhaveoccurred,suchas California Coolerimitatingthe successful Wine Group.However,only 8 to orangeflavorintroducedby the San Francisco-based 10 brandswith majorspendingpotentialwere treatedseriouslyby incumbents.Thus, the vast majorityof entrantsfaced no incumbent reactions.Since entry can trigger reactions,the followinganalysisexamines factorsthat can limit and incite aggressive reactions to entry. aggressive 3. Hypotheses Initial marketingmix reactionsshould be influencedby the entrant'sstrategy,incumbentcharacteristics, and industrycharacteristics. The reactionindex is the dependent variable because,with the limitedsamplesize and infrequent reactions,individual mix reactionscannotbe explainedsuccessfully. The variables are definedin marketing Table 4.
Entry Strategy

The entrystrategy is evaluatedin termsof the scaleof entry,innovativeness, and the mode of entry.The scaleof entryis definedas the averagevalueof the entrant'smarket share and share of manufacturing capacity.4Market share is one key aspect of the
3 The wine cooler example is based on Advertising Age (1985) and a telephone conversation with Mr. Howard Jacobson, Director of Marketing, Canandaigua Wine Co. 4 Market share is provided in the STR2 data, but share of manufacturing capacity must be estimated. The estimate is based on combining the entrant's market share and capacity utilization along with the competitor's market share and capacity utilization. The latter value must be estimated and is set equal to 74%, the average capacity utilization for established businesses in the PIMS data in the introductory and growth stages of the product life cycle.

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374 TABLE 4 Variable Definitionsa Variable Reaction Index Definition

WILLIAM T. ROBINSON

Scale of Entry Scale of Entry Squared Major Product Advantage Product Patent or Trade Secret

Market Pioneer Acquisition Entry Relative Size of Largest Competitor

High Dependence on Served Market by Largest Competitor

Seller Concentration

Seller Concentration Squared Log Industry Dollar Sales Growth

Change in Number of End Users

Standardized Product

Marketing mix reactions by the three leading competitors which were a direct response to entry during each of the first two years of commercialization, not resulting from fluctuating market conditions. Reactions are summed for the product, distribution, marketing expenditures, and price. These reactions receive a value of 1 if aggressive, 0 if passive, and - 1 if accommodating. The average value of market share and share of production capacity, which is expressed as a proportion, and not as a percentage. The squared value of scale of entry. 1 if the entrant's product had a very strong relative advantage over competitive or substitute products, 0 otherwise. 1 if the entrant benefited to a significant degree from patents, trade secrets, or other proprietary methods of production or operation during its first two years of commercialization, 0 otherwise. 1 if the entrant was one of the pioneers in developing products and services in the market, but was not first to enter, 0 otherwise. 1 if the start-up business originated by acquisition, 0 otherwise. In the year prior to entry, the largest competitor in this market was a firm whose total sales, relative to this firm's total sales were 1 = Smaller 2 = About the same, and 3 = Larger. In the year prior to entry, the percentage of the largest competitor's total sales represented by its sales in this served market. If this competitor was a division of a firm, the percentage of the division's total sales. I = If 50% or more of their total sales are from this served market. 0 = Otherwise. The sum of the market share levels for the three largest competitors, where this ranking is assessed in the last year in which data were submitted. The entrant's market share is added to this sum. This total is expressed as a proportion and not as a percentage. The squared value of seller concentration. For the three previous years, the average annual percentage growth rate of the value of total shipments by suppliers in the served market or by suppliers of substitute products. This is based on current, not constant dollars. The natural logarithmic functional form is used, with the minimum growth rate set equal to 1.0. Since the year prior to entry, has the number of end users in the served market 1 = Increased by 50% or more? 0 = Remained about the same? The percentage of the entrant's sales volume accounted for by products and services assessed from the perspective of the customer as "Superior", "Equivalent", and "Inferior" to those available from the three leading competitors. The sum of these three values equals 100%. 1 = If the average level of "Equivalent" products and services in the first two years of commercialization is 95% or higher. 0 = Otherwise.

Variable definitions are derived from the Start-Up Data Manual (1978).

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entrant'sinitial success in the market. Share of manufacturing capacity provides a proxyfor expectedmarketshare.It is also an importantmeasureof commitmentto a new market because of the high sunk costs associatedwith capacity additions (see Spence 1977 and Dixit 1980). Scale of entry is expected to be importantand is classifiedconceptuallyas small, losses for large,or very large.Becausereactingusuallyinvolves tradingoff short-term shortlong-termgains, and becausesmall-scaleentrantsare generallynot threatening, term losses typically should exceed any long-termgains. Consequently,reactionsto small-scaleentry should be infrequent.Large-scale entry is a greaterthreatand therefore reactionsare expectedto increase.For very large-scale entry, Biggadike (1979, p. 177) arguesreactionsactually may become less aggressivebecause a very powerful entrant cannot be stopped or even slowed down. Hence, the high short-termcosts associatedwith fightingcan exceed any long-termgains. The inverted-U functional form is testedbelow usingboth linearand squaredscale of entryterms. With the scale-of-entry held constant,innovativeness of the entrystrategy can influence reactions.Innovativestrategiescan be a major threat and can motivate strong incumbent reactions.However,when incumbent strategiesmust be altered,reacting can be very slow and costly (Yip 1982, p. 119). Threemeasuresassesswhetheror not the entranthad a majorproductadvantage,held a productpatentor tradesecret,and was a marketpioneerbut was not firstto enterthe market.5 Acquisitionentry, wherebyan acquiredincumbentis used as a base for expansion, shouldleadto lowerreactionsthan directentryarisingfrominternaldevelopment.Yip (1982, pp. 118-119) found that reactionsto 15 acquisition entrants were virtually nonexistent.Two factorshelp explainthis result.First,becausean acquisitionprovides a base for expansion,reactionsdesignedto limit the entrant'sfoothold should be less common. Second, acquisitionentrantsare usually less threateningbecausethey can survivewith currentsaleswhereasdirectentrantsneedto expandrapidlyto breakeven. These two factors help explain Scripto'sdelayed reactions to BIC, which used an acquisitionto enter the United Kingdom'sballpointpen market(Dunn and Sorenson 1981). Incumbent Characteristics Two characteristics of the leadingcompetitorin the marketare tested, relativesize and strategicimportance.A relativelylarge incumbent with "deeper pockets" can attemptto bully an entrantout of the marketor severelylimit its foothold (Rhoades 1973). As an alternativehypothesis,relativelylargefirmsare often slowerto respond than smaller,more nimble firms.Attackinga strategically importantbusinessshould incite more aggressive reactionsbecause of the business'sflagshipposition, synergies that are linked to this key business,and the survivalinstinct (Porter 1980, p. 343). A to developa reputationfor importantbusinessmay also reactaggressively strategically toughness6(see Milgrom and Roberts 1982 and Kreps and Wilson 1982). Strategic importanceis measuredby 50%or more of the leadingincumbent'ssalesarisingfrom the servedmarket.
5 To clarify the market pioneer definition, pioneers in the start-up data are classified in two categories. The distinction is based on whether or not the pioneer was first to enter the market. As mentioned before, pioneers that were first to enter are excluded from this study. In certain situations, even though a firm is not first, it can still qualify as the pioneer. This typically occurs when one out of a number of relatively small firms is innovative and is essentially responsible for getting the market started (Brozen 1982). For example, Ford was not first, but is nevertheless considered the pioneer in automobile manufacturing. 6 IBM, for example, developed a reputation for toughness by reacting aggressively to Control Data Corporation (CDC). "CDC thus sought to avoid future direct confrontation with IBM" (McAdams 1982, p. 265).

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Industry Characteristics The three industry characteristics examined are seller concentration, growth, and standardized products. Seller concentration influences incumbent reactions because, as mentioned before, almost no reactions arise in fragmented markets. Does concentration, though, influence reactions across oligopolistic industries? As concentration increases, reactions are expected to increase (Porter 1980, p. 343). With increased concentration it is more likely that a large incumbent will suffer a significant share loss. The injured incumbent is more likely to react because the benefits from reacting accrue more to the incumbent than to the industry as a whole. Also, as the distinction between fragmented and oligopolistic markets is crude, it is likely that a number of fragmented markets are included in the sample. This also leads to a positive relationship between concentration and reactions. With very high levels of concentration, reactions should decrease. Many incumbents with very high market shares can realistically expect their share levels to deteriorate gradually over time (e.g., see Caves, Fortunato, and Ghemawat 1984). Thus, dominant firms and other high share firms may take short-term profits instead of aggressively reacting. The resultant inverted-U functional form is similar to the form expected for scale of entry. Industry growth should lead to decreased reactions.7 Capacity constraints in growing markets (Scherer 1980, p. 248) and additional resource constraints, such as managerial and financial, can limit reactions. When sales are pushing up against these constraints, opportunity cost considerations suggest expanding critical resources rather than reacting to an entrant. For example, explosive growth helps explain California Cooler's one-year delay in copying the Wine Group's successful orange flavor (Business Week 1984, Advertising Age 1985). Finally, reactions are expected to increase in industries with standardized products (Porter 1980, p. 343). With limited brand loyalty, incumbents are expected to react rather than risk large share losses. 4. Model Specification and Estimation The following model specification is used in an attempt to explain first- and secondyear reactions to entry. * * onXn + 1, + a^iXI + qa2X2 + a* 0 R1 = ao (1)
R2 = /0 + XR1 + lIXI + 32X2 + * * * nXn + E2. (2)

R1 and R2 represent the reaction index for the entrant's first and second years of commercialization. The exogenous variables, Xi to Xn, assess the entrant's strategy, incumbent characteristics, and industry characteristics. Most of these variables have identical values in both years, but year 1 and year 2 measures are available for the scale of entry, concentration, and sales growth variables. Reactions are also influenced by the two random error terms, el and E2. Having year 1 reactions included in the second-year equation indicates that year 1 reactions are expected, at least to a degree, to carryover into year 2. If X is near 0.0, few year 1 reactions carryover into year 2. If X is near 1.0, most year 1 reactions carryover. Carryover is probably more important for product and distribution reactions because they are more costly to reverse than price and marketing expenditure reactions.8
7 Growth is measured by dollar sales growth and by the change in the number of end users. To reduce the influence of extreme outliers in the sales growth measure, the natural logarithmic functional form is used with the minimum growth rate set equal to 1.0. 8 Lagged reactions can also act as an instrumental variable to help the model correct for the omission of relevant explanatory variables that influence both year 1 and year 2 reactions. Potential candidates include executive personalities, strategic goals, and a history of industry retaliation.

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It is importantto recognizethat includingyear 1 reactionsin the R2equationfundaof the A coefficients. Whenyear 1 reactions mentallyaltersthe economic interpretation are included,the total explanatory variableimpact on second-year reactionsfor, say, a unit changein X1equalsXac+ fl. This valueis derivedby substituting the rightside of the carryover equation (1) into equation (2). Xa1represents impact and Al the incrementalimpact.When year 1 reactionsare excluded,/l represents the total ratherthan the incremental X1impact. For the hypothesistesting, estimatesof the total variableimpact are needed. Once both equationsare estimated,the total can be calculatedeasily becauseit is a linear functionof threeleast squaresestimates.A problemarisesfor testingstatisticalsignificance becausethe carryover term containsthe productof two estimates.A nonlinear test is necessary.Unfortunately,nonlineartests are difficultto calculateand are not includedin AQD, the computerpackageprovidedby the Strategic PlanningInstituteto analyzethe data. To resolvethe problem,the year 2 equationis also estimatedwith year 1 reactions deleted.Withthis specification, the A estimatesrepresent the total year2 impact.Thus, the statisticalsignificancetests are straightforward. The direct estimates are biased becausea key explanatory variableis deleted,but the bias does not seem to be a major 2 For problem. every year estimate,the total impact with year 1 reactionsincludedis within the intervalof plus or minus one standarderroraroundthe directlyestimated total. Therefore, the directestimatesare used in the hypothesistesting. Forthe model,threepotentialproblemswith ordinary leastsquares (OLS)estimation must be addressed. the does not address the First, specification simultaneitywith scale of entry,which is specifiedas an exogenousvariable.A simultaneousmodel was estimatedby both two- and three-stage least squares,but was not successfulin teasingout the impactof reactionson scaleof entry.Becausethe typicalimpactof scaleof entryon reactionsis expectedto be positive,and the reverseimpact is expectedto be negative, ignoringsimultaneityshould weaken the estimatedrelationship.Hence, if a positive impact of scale of entry on reactions is estimated,the true impact should be even stronger.9 ?(and f2 are not normally Second,becausethe reactionindex valuesare categorical, distributed.When the normalityassumptionis violated, least squaresis still the best linear unbiased estimator, but in small samples the regressioncoefficientsare not A problemarisesin testing statisticalsignificance,however,benormallydistributed. cause the tests hinge on the normalityassumption.Fortunately,in largesamples,the normal (Kmenta 1971, p. 248). As 115 is a regressioncoefficientsare approximately tests should providereasonable fairlylargesample,the statisticalsignificance approximations. arisesin cross-sectional Third,heteroskedasticity data.The Glejser(1969) frequently test confirmsthe presenceof heteroskedasticity, which is relatedto the scale of entry and marketgrowth measures.Generalizedleast squares(GLS) adjuststhe model of A modifiedversionof White's(1980) test indicatesthe GLS estimaheteroskedasticity. tion eliminatesthe problem.Also, Durbin's(1970) test shows no evidenceof autocorrelationbetweenthe first-and second-year GLSerrorterms.(Moretechnicaldetailsare the GLS resultsthat adjustfor heteroskeprovidedby Robinson 1987.)Consequently, dasticityare reported. 5. Results The GLS results are reportedin Table 5. All the significancelevels are based on two-tailedtests. In this table, two equationsexplain second-yearreactions.First-year
9A related limitation is that a regression analysis can only establish association, not causation. In-depth industry studies in future research could provide detailed causation insights.

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Generalized LeastSquares Results


Reaction Index Variable and Expected Sign 1) Constant 2) Reaction Index: YR 1 (+) Mean 1.00 0.29 S.D. 0.00 0.67
Year 1a

Year 2

Year 2 1.25 (1.36)

0.30 (0.47)

0.53
(0.64) 0.66 (5.1 1)***

EntryStrategy
3) Scale of Entry: YR 1 (+) 4) Scale of Entry Squared: YR 1 (-) 5) Scale of Entry: YR 2 (+) 6) Scale of Entry Squared: YR 2 (-) 7) Major Product Advantage (+/-) 8) Product Patent or Trade Secret (+/-) 9) Market Pioneer (+/-) 10) Acquisition Entry (-) 0.12 0.04 0.16 0.05 0.14 0.30 0.29 0.12 0.17 0.12 0.17 0.12 0.35 0.46 0.45 0.33 0.15 (1.02) 0.12 (1.17) 0.04 (0.35) -0.35 (-2.73)*** -0.05 (-0.99) 0.31 (3.37)*** -0.80 (-0.39) 0.20 (0.15) -2.10 (-0.83) 1.43 (0.82) 0.08 (1.75)* 0.11 (1.92)* 0.26 (1.40) -0.06 (-0.36) 0.46 0.12 (1.87)* 0.42 (2.08)** -0.02 (-0.10) 0.34 -4.01 (-1.43) 2.39 (1.23) 2.21 (2.10)** -2.68 (-1.98)** -0.12 (-0.08) 0.46 (0.20) 0.38 (1.63) 0.20 (1.52) 0.32 (2.14)** 0.15 (0.82) -0.02 (-0.30) 0.17 (1.29) 2.68 (1.74)* -3.37

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

(-0.53)
-0.06 (-0.86) 0.46 (3.41)***

Incumbent Characteristics
11) Relative Size of Largest Competitor
(+/-)

2.23 0.36

0.90 0.48

12) High Dependence on Served Market by Largest Competitor (+)

Characteristics Industry
13) Seller Concentration: YR 1 (+) 14) Seller Concentration Squared: YR I (-) 15) Seller Concentration: YR 2 (+) 16) Seller Concentration Squared: YR 2 (-) 17) Log Industry Dollar Sales Growth: YR 1 (-) 18) Log Industry Dollar Sales Growth: YR 2 (-) 19) Change in Number of End Users (-) 20) Standardized Product (+) R2 0.78 0.65 0.79 0.65 2.77 3.05 0.28 0.14 0.19 0.28 0.18 0.27 1.12 1.13 0.45 0.35 0.26 (1.93)* 0.12 (0.87) 0.26b

The values in parentheses are z-statistics. All of the tests are two-tailed with * = 10%, ** = 5%, and *** = 1%significance. b The R2 values are calculated from the raw variables and the GLS estimates. This is done by multiplying and summing these values to predict the reaction index and then squaring the correlation with the actual reaction index.

aredeletedfromthe secondequationand, as discussedbefore,this equationis reactions used in the hypothesistesting. The key findings summarizethe hypothesistesting in termsof modelspecifiresults.Thena sensitivityanalysiswhichexaminesrobustness cation changesis reported.Finally,4 implicationsare discussedbriefly.

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Key Findings In Table 5, scale of entry has the significant inverted-U functional form predicted by Biggadike. (Recall that scale of entry equals the average of market share and capacity share.) This form is based on the linear term being positive and statistically significant (z = 2.10) and the squared term being negative and also statistically significant (z = -1.98). Taking the first derivative of RI with respect to scale of entry and setting it equal to zero provides an estimate of the maximum reaction level. This level occurs when scale of entry equals 41%. Economic significance for scale of entry is derived by using the GLS estimates to predict the increase in the reaction index when the median entry scale of 6% increases to the maximum level estimated at 41%. This step provides a rough estimate of the reaction increase associated with large- versus small-scale entry. By substituting the values in the reaction equation, the increase is estimated to be 0.33. Recall that firstyear reactions are much more aggressive than accommodating and also tend to arise along a single dimension. Hence, the 0.33 estimate indicates that roughly one in three large-scale entrants face an additional reaction. Similar results arise for year 2 reactions. Because the major product advantage, product patent or trade secret, and market pioneer estimates are all positive, strategy innovativeness appears to motivate first year reactions. While none of the individual estimates are statistically significant, their sum of 0.31 is significantly greater than zero (z = 1.60). In year 2, each individual estimate for innovative strategies is statistically significant. Economic significance is also much stronger because the major product advantage coefficient more than triples from 0.15 to 0.53, the product patent or trade secret estimate increases from 0.12 to 0.29, and the market pioneer's value jumps from 0.04 to 0.36. Thus, time delays restrict first-yearreactions to innovative strategies, but by the second year important reactions occur. With acquisition entry, first-year reactions are estimated to decrease by 0.35 (z = -2.73). Second-year reactions, though, are not significantly reduced. Consequently, an acquisition seems to reduce only first-year reactions. When the leading incumbent has a high level of dependence on sales from the served market, RI is estimated to increase by 0.31 (z = 3.37). An economic interpretation of this coefficient indicates that in about one in three instances, an additional reaction arises along a single dimension of the marketing mix. The increase for second-year reactions is somewhat larger at 0.46 (z = 3.41). Without question, the biggest surprise for first-yearreactions is the result for industry growth. The log of the industry dollar growth rate has a positive rather than a negative impact and is statistically significant. Reactions are also significantly higher in markets undergoing a sharp increase in the number of end users. Economic significance for the market's growth rate is calculated by taking the average values in the upper and lower quartiles. The difference of 2.67 is multiplied by 0.08, which is the impact of the growth rate on first-year reactions. The product is 0.21. A similar result arises when the dummy variable estimate of 0.26 is used to assess economic significance for the change in the number of end users. The corresponding year 2 estimates are 0.33 and 0.42. Multicollinearity cannot explain the surprising result because the simple correlations of these two measures with RI and R2 are all positive. At least three other explanations can be provided. First, entrants in growing markets can uncover overlooked opportunities that motivate competitive imitation. For example, Uni-Charm introduced a superior disposable diaper in Japan that Procter & Gamble, the market pioneer, has struggled to imitate (Business Week 1986a). Second, Aaker and Day ( 1986, p. 411 ) point out that reactions are influenced by the difference between actual and expected sales. When

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entry causes actual sales to fall below expected sales, reactions can arise in mature or growing markets. Finally, because growing markets are relatively young, they have greater discounted profit opportunities than mature markets. This motivates incumbents to make strategic investments to repel entry. Sensitivity Analysis How sensitive are the results to model specification changes? When a consumer dummy variable is added to the first- and second-year reaction equations, the dummy variable is not even close to being statistically or economically significant. Thus, mean reactions are not influenced by the distinction between consumer and industrial goods. For scale of entry, is an S-shaped functional form reflecting a threshold and saturation level of response more appropriate? The threshold level is justified by both fixed reaction costs and reaction detection problems for small-scale entrants that can be easily overlooked. The saturation level is justified if incumbents do not back down in the face of very large-scale entry. Naert and Leeflang (1978) describe several S-shaped functional forms, but such forms cannot be used unless major changes are made in the model specification and estimation. However, some insights can be gained from the descriptive statistics that relate scale of entry to reactions. For the threshold argument, a clear threshold does not arise. If a threshold exists, it is at a small scale of entry that is less than 4% in year 1 and less than 2%in year 2. For the saturation argument, recall that year 1 reactions are estimated to turn down when the entry scale exceeds 41%. Though this empirical result is in contrast to the saturation argument, it is still tentative because only 10 entrants have an entry scale exceeding 41%. More data are needed to establish whether or not reactions actually decrease in the face of very large-scale entry. One can conclude, though, that for the vast majority of entrants, reactions typically increase with the scale of entry. The reactions also appear to be increasing at a decreasing rate. Implications The hypothesis testing results are summarized in Table 6. The results along with the descriptive statistics provide insights into four important issues. First, why are first-year reactions so infrequent? The typical entrant seems unlikely to threaten the leading incumbents. The reason is that the median scale of entry is only 6% and the typical entrant is not particularly innovative because 14%reported a major product advantage, only 30% had a significant product patent or trade secret, and 29% were market pioneers. (The high proportion of market pioneers indicates the sample is much more innovative than a typical sample of entrants.) When an entrant is threatening, an important constraint for incumbents is that many product and distribution changes cannot be implemented in one year or less. Hence, year 1 marketing mix reactions are infrequent because most entrants are not threatening and also because product and distribution reactions are often infeasible. Second, why are year 2 reactions substantially greater than year 1 reactions? There is a high carryover of reactions from year 1 to year 2. Therefore, if an entrant faces strong reactions in year 1, it is likely to face strong year 2 reactions as well. In addition, time delays in reacting to innovative strategies limit reactions in year 1, but by year 2 important reactions arise. (This point is consistent with the conclusion that product reactions are difficult to implement in year 1, but by year 2 they are as frequent as marketing expenditure and price reactions.) Finally, the average scale of entry is about 25% higher in year 2 and the median scale is about 50% higher. Increased scale should attract more attention and more aggressive reactions.

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TABLE 6 Summary of Hypotheses and Empirical Results Variables I. Entry Strategy 1) Scale of Entry Hypotheses An increase should lead to more frequent reactions, although reactions may decline with very large scale entry. Empirical Results

The inverted-U functional form is supported.

2) Innovativeness

Innovative strategies represent a major threat and incite strong reactions. versus It is difficult and costly for incumbents to respond and this limits reactions. Acquisition rather than direct entry leads to less frequent reactions because incumbents cannot limit the entrant's foothold.

Innovative strategies have limited, positive influen year 1 reactions. These reactions increase substantially in year 2.

3) Acquisition Entry

Acquisition entry only red reactions in the first yea Second year reactions ar not influenced. No impact

II. Incumbent Characteristics 1) Relative Size

An incumbent with "deeper pockets" may try to bully the entrant out of the market. versus Large incumbents are slow and sluggish and can not respond quickly. When the market is strategically important for the leading incumbent, reactions will be more aggressive. In oligopolistic markets, as concentration increases reactions are expected to increase. These reactions should decline in very concentrated markets. Reactions should be less frequent in growing markets because of resource constraints.

2) Strategic Importance

More frequent reactions a found in both the first a second years following e No impact.

III. Industry Characteristics 1) Seller Concentration

2) Growth

Reactions tend to be more rather than less frequen

3) Standardized Products

More frequent reactions are expected with limited brand loyalty because large share losses can arise.

No impact

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Third, the results help explain Scherer's (1980) observation, "When entry does occur at a substantial scale, the reactions to it by leading established firms appear to vary widely in ways predictable only if one has rich information on demand and cost conditions, industry traditions, and perhaps even personalities, if indeed confident predictions are possible at all." (p. 248). Let us assume that large-scale entrants have an entry scale of at least 15%by year 2 and that innovative entrants satisfy at least one of the three strategy innovation measures used here. For the large-scale entrants that are not innovative, only two out of eight or 25% faced one or more year 2 reactions. For the innovative large-scale entrants, 20 of 29 or 69% faced year 2 reactions.10While these are small samples, strategy innovativeness appears to play an important role in explaining reactions to large-scale entry. A final implication pertains to the substantial market share advantages pioneers typically maintain in relation to later entrants (See Robinson 1988, Robinson and Fornell 1985, and Urban et al. 1986.) Because initial marketing mix reactions are typically limited, aggressive and damaging reactions play only a minor role in explaining later entrant share disadvantages. 6. Summary and Conclusions The study addresses two major questions. First, are initial marketing mix reactions to entry typically aggressive, passive, or accommodating? Product, distribution, marketing expenditure, and price reactions by the three leading incumbents are examined in oligopolistic industries. For the individual marketing mix elements, the typical reported reaction in year one is no reaction. Only one in five entrants faced an aggressive reaction along a single marketing mix element and only one in 25 faced two or more aggressive reactions. Year 2 reactions are more aggressive because roughly one in four entrants faced a single reaction and roughly one in six faced multiple reactions. Still, by year 2, roughly half of the entrants reported a passive response across the entire marketing mix. (In both years, accommodating reactions that make entry easier are very infrequent.) The infrequent reactions are consistent with the descriptive results reported by Biggadike and Yip. The reported reactions may be too low, however. Reaction detection can be difficult in growing, "noisy" markets and entrants often develop strategies to avoid aggressive reactions. The biases should be offset, at least to a degree, because the entrants tend to represent diversification efforts of Fortune 500 firms, and therefore are a greater threat to incumbents than typical entrants. The second major question addressed is how the entrant's strategy, incumbent characteristics, and industry characteristics influence reactions. In year 1, an increase in the scale of entry typically leads to increased reactions. Positive but small reactions are found in response to innovative strategies. Greater reactions are found when the leading incumbent is highly dependent on sales from the entered market and, surprisingly, in growing markets as well. Acquisition entry is associated with lower reactions. For second-year reactions, there is a strong carryover effect from first year reactions. If an entrant is attacked in year 1, the attack typically continues into year 2. Innovative strategies face substantially higher reactions in year 2, probably because incumbents have had adequate time to implement product and other strategic changes. Also, the typically larger scale of entry in year 2 should motivate stronger reactions. The results help explain why reactions to entry are often limited. First, because most entry is on a small scale and is not very innovative, typical entrants do not represent a
10The difference between these two percentages is 44% and is statistically significant at the 5% level (z = 2.24). Unfortunately, the test is based on the assumption that each sample is large, which is certainly not true for sample sizes of 8 and 29.

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serious threat to the leading incumbents. Second, in terms of profit, aggressive marketing mix reactions can be very costly. The costs of reacting to a small-scale entrant that blends in with many other small share firms often exceeds any expected revenue gain. These findings yield the counterintuitive conclusion that, when facing the typical entrant, an incumbent's best defense is usually no defense or only a limited defense. Because this study is the first to explain reactions to entry in a multivariate setting, several important limitations should be recognized. The reactions reported may not be optimal. If they are not, the theoretical models that recommend aggressive and damaging reactions could dramatically improve managerial decisions. Still, the markets studied are all in the private sector and consequently the firms must maintain a certain degree of competence for economic survival. Nonoptimal reactions do arise in the private sector, however. By essentially ignoring Komatsu's entry into the United States earthmoving industry, Caterpillar helped Komatsu gain a foothold (Sims 1986). Over time Komatsu grew and Caterpillareventually was forced to make dramatic changes. This example shows it is often difficult to recognize a long-term threat. Also, when incumbents have a relatively short time horizon, it can limit initial reactions to entry. If long-term threats are systematically underestimated or if incumbent time horizons are too short, many reactions to entry should be more aggressive. A second study limitation is that only the direction and not the importance or even the magnitude of incumbent reactions is examined. The latter factors can be very important because a single reaction, such as California Cooler imitating the Wine Group's orange flavor, can damage an otherwise successful strategy. Even so, many reaction magnitudes are limited, with the majority of the price cuts being in the 1%to 10%range. Third, the impact of expected reactions on the entry strategy cannot be assessed. Sophisticated entrants, such as Strategic Planning Institute clients, often devise entry strategies that help them avoid aggressive reactions. This fact helps explain the limited reactions, but the major factor seems to be that the typical firm enters on a small scale and is not very innovative. Though the fear of aggressive reactions can motivate entrants to develop reaction-avoidance strategies, it is unlikely that expected reactions motivate most small-scale and noninnovative entry. This is because such strategies usually hold limited promise. Fourth, only initial marketing mix reactions are examined. Reactions prior to entry and reactions more than two years out are excluded. The latter factor is probably most important for product and distribution reactions, which can take years to implement. Important reactions outside the marketing mix, such as lawsuits and capacity changes, are also excluded. Despite the limitations, the results indicate that the most common initial marketing mix reaction is either no reaction or only a single reaction. This information is valuable for potential entrants because conventional wisdom points to more aggressive and damaging reactions. For example, Porter (1985, p. 498) says, "As a general rule, quick and vigorous retaliation is necessary to limit an attack." Though a "quick and vigorous retaliation" can arise, the results indicate it is more the exception than the rule."'
Acknowledgements. The author thanks Richard Caves, Manu Kalwani, George Yip, his University of Rochester colleagues, and three anonymous reviewers for their helpful comments. The Strategic Planning Institute is also thanked for providing access to the start-up business data. The conclusions and any remaining errors are the author's responsibility.

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

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