Sunday MBA provides ideas on running better businesses and succeeding in the modern workplace, this week from MIT Sloan Management Review .
Companies that launch innovative products in new industries need to understand the dynamics of new product categories. One of the elements of new categories is the name by which new product categories are known. Time it right, and you’re selling a “smartphone.” Time it wrong, and you’re trying to move a “PDA phone” or an “all-in-one device.”
Research by Fernando F. Suarez and Stine Grodal, both of Boston University’s Questrom School of Business, shows that names are no small matter. Their multiyear research finds that “a company’s labeling strategy can have important performance implications for products in nascent markets.”
“New industries are characterized by an early period of confusion and uncertainty about use and meaning, which brings about a proliferation of category labels that attempt to describe the new products,” write Suarez and Grodal in “Mastering the ‘Name Your Product Category’ Game,” in the Winter 2015 issue of MIT Sloan Management Review. “As an industry matures, the struggle between different category labels quiets down as one label gradually becomes dominant.”
Ideally, companies want to time their entry into a new industry to when a dominant category label emerges. The authors call companies that manage this “Tempo Movers.”
But it’s not always possible to have perfect timing. A company might be pressured by investors to enter the market early. Or R&D might be taking longer than anticipated, leaving a company, as Suarez and Grodal put it, “one beat behind the industry’s tempo.”
Depending on when a company enters a new industry, the authors’ research suggests three strategies to optimize performance:
Early Movers should hedge their bets. The strategy here is to give products several category labels at the same time. While it might seem advantageous to commit to only one category label and to communicate that choice clearly, companies that enter a market early can better manage the uncertainty by associating with several category labels simultaneously. For example, one company positioned itself variously as “nanotechnology,” “micro-fluidics,” or “nano-biology” depending on what its partner was most interested in. Only after ‘nanotechnology’ became the dominant category label in the industry did the chief executive commit to that label.
Late Movers should conform to the dominant category label. Entering the market after one dominant category label has taken hold invites a strategy that should be obvious: Adopt the front-runner category label. Hewlett-Packard Co. for example, has talked about reentering the phone market with a “smartphone.” HP called its 2002 smartphone a “communicator” and its 2004 smartphone an “all-in-one device.” HP did not use a hedging strategy in the early years of the industry, but now it is conforming to the dominant label.
Tempo Movers get to shape the industry. Companies that introduce their products during the optimal window of opportunity get to create or identify the dominant category label. These companies have the highest chances of success in an emerging industry, although this window of opportunity often is characterized by a steep rise in the number of companies entering the market. To succeed, these companies’ labeling strategies have to be sharp and effective because the ideal window of opportunity does not stay open long. Burton Snowboards introduced the label “snowboard” and ended up with more than 40 percent of the market share.
Coming up with a label that dominates an industry is an art. But it’s not easy.
This article draws from “Mastering the ‘Name Your Product Category’ Game,” by Fernando F. Suarez and Stine Grodal. Copyright 2015 MIT Sloan Management Review. All Rights Reserved.