Many industries feature repeated replacement of one generation of product or service with another. In the cellphone industry, for example, the early analogue handsets and networks achieved some penetration of the potential market, but were then replaced by the early digital services, which in turn were replaced by today’s 3G offerings. It is helpful to understand how rivalry is affected by this phenomenon.
For every generation of product or service after the first, the existing population of customers or users becomes a major part of the potential customer base for the next generation. In addition, because the new product generation offers significant increases in functionality or value over the previous one, it can accelerate both the development and capture of new potential customers (see Figure 1).
Figure 1: The development and capture of customers with new-generation products. (Click image to view larger)
This succession of product generations brings new opportunities and challenges, by reinitializing the basis for type-1 rivalry. All of the previous generation’s active and potential customers become available for capture with the new product or service, and strategy needs to be conscious of which new customer flows will start and at what rate. It may be easiest, for example, to ensure the business captures all of its existing first-generation customers or users with its second-generation offer. This focus, however, creates the risk that the business may cannibalize sales and profits from those existing customers. It may therefore prefer to focus on stealing competitors’ first-generation customers with its superior second-generation offer, or perhaps target potential customers who have not yet found the first-generation sufficiently appealing or affordable to become active customers.
Until next time…
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Milking each opportunity
An especially challenging strategic issue arising in cases of successive product generations concerns the choice of when to switch effort from one generation to the next. Products that are late in their lives enjoy the benefits of experience-curve and scale-based cost reductions, and from past cumulative marketing efforts. They can therefore generate very strong cash-flows. It is very tempting, then, to keep pushing the current product generation for as long as possible to sustain those cash flows. New competitors, though, have no such cash flows to lose, so have a much larger incentive to drive the launch and growth of a new generation product.
This briefing summarises material from chapter 7 of Strategic Management Dynamics, pages 448-449.
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