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The Advantages and Disadvantages of

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									                The Advantages and Disadvantages of
                  New Product Pre-Announcement




                   Topic Areas: Business Communications / Management

        Keywords: New-Product Announcement, Communication Strategy, Marketing




                              Author: Wybe T. Popma




Department of Marketing Management, Erasmus University Rotterdam
Kamer F1-68, Burgemeester Oudlaan 50, 3000 DR Rotterdam

Email: wpopma@fbk.eur.nl
Tel: + 31-10 408 1907
Fax: + 31-10 408 9011




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                  The Advantages and Disadvantages of
                    New-Product Pre-Announcement

                                          Abstract
New-product pre-announcements (NPPAs) have considerable effect on the reaction of publics in
the market. NPPAs influence for instance customers in their buying decisions and financial
analysts in their rating of firm value. However NPPAs also affect the behaviour of competitors in
the market. Several studies have also shown that threat perceived from the NPPA affects
competitive reaction. All of the before mentioned findings come from research which has taken
the “receiver” perspective to NPPAs. To better understand the process of competitive interaction
based on pre-announcements, it is necessary to also look at the “sender” side. To do this we will
perform a survey among managers responsible for the (pre-)announcement of new products. In
this survey we wish to clarify which publics are targeted with NPPAs, whether competitors play a
role in the decision to pre-announce, how (through which media and channels) products are pre-
announced and why. Results of this survey will provide a more detailed view of the reasoning
behind new-product pre-announcements, specifically from the perspective of competitive
interaction.


Announcing product ahead of market launch is common practice in many industries. Products as
diverse as automobiles, movies, software and detergents are announced before actual market
introduction. New-product pre-announcements (NPPAs) are used to inform and thereby influence
stakeholders in the market. Advantages of pre-announcing include; build up of customer base
(Moehrle, 1995), keeping potential customers from buying competitive products (Greenleaf &
Lehmann, 1995; Bayus et al., 2001), securing distribution channels (Wind & Mahajan, 1987),
securing supplier support (Robertson, 1993), and satisfying the information needs of financial
analysts (Koku et al., 1997). The successful use of product pre-announcement can be illustrated
with the case of the Microsoft Xbox gaming console.




Announcing the Microsoft Xbox

The introduction of the Microsoft XBox game console provides an example of the successful
competitive use of a new-product pre-announcement. The XBox was announced 18 months ahead
of its market introduction in 2001. This early announcement was necessary to ensure software



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support for the new console. Game consoles sales are known to be highly reliant on the
availability of popular games for a specific system. Producers of game consoles generally sell the
hardware at a loss while generating their profits from game licensing. The early announcement of
the XBox caused widespread media attention to the new product, specifically in comparison to
the Playstation 2 game console of competitor Sony. Even after Sony introduced the PS2 console
at the end of 2000, many consumers hesitated to buy one while waiting for the introduction of the
XBox one year later. A build up of customer demand for the XBox before its launch resulted in
sales of 1.5 million consoles1 during the first six weeks after introduction in the US market. In the
18 months between announcement and introduction Microsoft was able to secure various
distribution channels for its first game console product. Presales were organized on the Internet in
cooperation with Amazon. On the day of market introduction the XBox was not only available at
traditional computer retail chains such as Circuit City but also at toy store chains such as Toys-R-
Us. Nineteen games were available at the time of launch. XBox showed the highest game attach
rate ever recorded in the fist two weeks after launch of a new game system with 2.4 games
purchased per console2.
       Sources: 1Microsoft, 2NPD Group.


One of the main disadvantages of pre-announcing is that the NPPA provides competitors with
information about the new product. Based on this information rivals can prepare competitive
reactions. The new-product pre-announcement is a market signal as defined by Porter (1980): “an
action by a competitor that provides a direct or indirect indication of its intentions, motives, goals
or internal situation”. The role of NPPAs in competitive interaction has increased with the usage
of the Internet as an information medium. The inclusion of newsrooms with (archived) NPPAs on
corporate websites is becoming standard practice. For rival firms this means that collection and
analysis of product announcements is easier than ever. The possible negative effects of pre-
announcement can be illustrated with the case of the Palm m500 PDA.




Announcing the Palm m500
Announcing products before market introduction can have disastrous effects in terms of
diminished customer demand for existing products and reactions by competitors, as Palm


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experienced with the announcement of the m500 PDA. In March 2001, Handspring, Palm’s main
competitor in the Personal Digital Assistant (PDA) market, announced the Handspring Visor
Edge. Palm, as the market leader, feared for its innovative reputation and responded by
announcing (ahead of plan) the Palm m500 one week later, months before actual introduction. In
the period between the announcement of the m500 and its market introduction demand for the
existing high-end model, the Palm Vx, dropped dramatically. Consumers stopped buying the
“old” Palm Vx in anticipation of the new m500. Distributors were left with oversupplies of the
old product. Prices of the Palm Vx had to be cut. This in turn resulted in a price war with
Handspring. The early announcement of the m500 in combination with a general slowing of
demand in the PDA market had catastrophic results for Palm. Both Palm and Handspring
reported losses as a result of the price wars. Both firms lost over 80% of their stock market value
in the following six months. Palm’s (unit) market share shrank from 71% to 58% during 2001.
Market share of competitor Handspring grew from 14% to 15% in the same period1.
       Source: 1NPD Intellect.


From a managerial point of view it is important to gain more understanding about the possible
effects of new-product pre-announcements on competitive reactions from rivals. Before we can
look at the effect of NPPAs on competitive reaction it is first important to get a better insight in
the reasoning behind pre-announcement. We wish to know why firms pre-announce. Which
publics are targeted? To what extent are competitors considered an important public? How are
products pre-announced? When are products pre-announced? Is pre-announcement timing part of
a product introduction strategy plan? To what extent is pre-announcement timing related to
industry events such as major tradeshows? To what extent is the use of “press rooms” where
NPPAs are displayed and archived on corporate websites becoming standard practice?


In order to answer the above questions, we will perform a multiple-industry survey. The results of
this survey will be presented at the conference together with an overview of current academic
thinking about product pre-announcement and its effect on competitive interaction.




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Relevant Literature

Bayus, B., Jain, S., Rao, A.G., 2001. Truth or consequences: an analysis of vaporware and new
       product announcement. Journal of Marketing Research, 38, 1, 3-14.

Calantone, R.J., Schatzel, K.E., 2000. Strategic foretelling: communication-based antecedents of
       a firm’s propensity to preannounce. Journal of Marketing, 64, 17-30.

Greanleaf, E.A., Lehmann, D.R., 1995. Reasons for substantial delay in consumer decision
       making. Journal of Consumer Research, 22, 186-199.

Heil, O.P., Robertson, T.S., 1991. Competitive marketing signals: a research agenda. Strategic
       Management Journal, 12, 403-418.

Kohli, C., 1999. Signaling new product introductions: a framework explaining the timing of
       preannouncements. Journal of Business Research, 46, 45-56.

Koku, P.S., Jagpal, H.S., Viswanath, P.V., 1997. The effect of new product announcements and
       preannouncements on stock price. Journal of Market Focused Management, 2, 183-199.

Moehrle, M., 1995. Preamarketing. Gabler. Wiesbaden.

Porter, M., 1980. Competitive strategy: techniques for analyzing industries and competitors. The
        Free Press. New York.

Robertson, T.S., 1993. How to reduce market penetration cycle times. Sloan Management
       Review, 35, 87-95.

Wind, J., Mahajan, V., 1987. Marketing hype: a new perspective for new product research and
       introduction. Journal of Product Innovation Management, 4, 43-49.




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