Based on research by Amit Pazgal and Yuanfang Lin

• Consumers need a range of information when they consider a product that’s just been introduced into the market.
• Timing plays a key role in determining the right kind of information firms should provide consumers.
• Marketers of a truly new product should tout its attributes and innovation. Marketers of similar products that come later should, if they’re high quality, educate consumers on what quality looks like ­— then let them decide which product is best. For marketers of late-appearing, lower quality products, honesty is the best policy.

From smart phones to video games to virtual reality toys, new products roll forward as relentlessly as the tides. So what, and how, should you tell consumers about your product to avoid being swept away in a sea of similar wares?

To answer this question, Rice Business professor Amit Pazgal and colleague Yuanfang Lin of Conestoga College dove into the particulars of how companies differentiate their products by informing consumers about a new product’s quality.

The rush of new products, they note, is particularly intense in technology, where innovations are constant — which means consumers constantly need information about them. Traditionally, tech companies make the case for their products using advertising, free sample, product trials and splashy product demonstrations. (See your local Apple Store).

But how does a consumer’s wish for information interact with their ultimate buying decision?

Timing, Pazgal and Lin found, plays a powerful role in the type of information that best influences consumers. Suppose, for example, Firm 1 offers a new product, say a smartphone with innovative features. This makes Firm 1 a pioneer. For a certain golden period, Firm 1 might hold a monopoly in the market, since there’s simply no other smartphone like theirs. This is the moment, the researchers say, to offer consumers information that reveals the product’s true quality and uniqueness. Because no similar product is out there, Firm 1 has the power to establish the parameters for judging its invention.  

Inevitably, of course, another company (call it Firm 2) will come up with something comparable. Thanks to the heavy lifting in innovation by Firm 1, Firm 2 has the luxury to create a phone of equal or greater quality. And this is when the tide starts to turn. One might assume Firm 2 would just inform consumers of the superior quality of its product. But, surprisingly, Pazgal and Lin found that in most cases Firm 2 will instead focus on educating consumers about their preference for quality — in effect, leaving it up to the buyer to decide which of the two phones they really wants.  

However, if another firm emerges with a similar product of lesser quality, its marketing will likely take yet another turn. Instead of trying to claim better quality, late entry companies offering an inferior product typically admit outright that their product isn’t as well made as other versions.

That’s because such firms calculate that if customers discover this themselves, they’ll react badly. By telling the truth and pricing appropriately, a firm can find a calm stretch of water elsewhere in the market, someplace where it’s not clashing directly with the earlier, higher quality products.

Whether it’s Alexa, a smart TV or a virtual reality game, Pazgal and Lin explain, when a product enters the market for the first time, consumers need to be shown how it works. When a second product in the same line is introduced by a different company, the marketing task changes: It’s now more important to show consumers how to identify a quality product, and then let them choose for themselves.

Any time a company launches a device or service into the world, in other words, it needs to trust consumers’ ability to learn — and not drown them with too much information. Informed what good quality looks like, Pazgal and Lin conclude, consumers will swim on their own to the item they truly want.

Amit Pazgal is Friedkin Chair in Management and Professor of Marketing and Operations Management at Jones Graduate School of Business at Rice University.

To learn more, please see: Lin, Y. & Pazgal, A. (2016). Hide supremacy or admit inferiority ­– market entry strategies in response to consumer informational needs. Customer Needs and Solutions, 3(2), 94-103.

Based on research by Prashant Kale and Phanish Puranam

• Managers are more likely to seek equity in a partner firm when they think the firm’s resources offer a competitive advantage.
• Managers are also more likely to seek equity in a partner firm when they think the partnership will lower their transaction hazard. 
• Contrary to existing theory, uncertainty in the market makes managers less likely to seek equity ownership in a partner firm.

When it comes to a company’s equity ownership structure, the decisions that managers make are important and long-lived. So naturally, years of study have been devoted to describing — in theory, at least — what managers should consider as they navigate these intricate choices.

But what role do these theories play in a real life test?

For answers, Rice Business professor Prashant Kale joined INSEAD professor Phanish Puranam in a study of 66 managers and their decision process. The study was designed to measure how the factors cited in two widely held theories of equity ownership — the “resource-based view” and the “transaction-cost economics view” — impact managers when they’re making choices about equity ownership.

The resource-based view (RBV) maintains that managers seek equity in another firm to get access to that firm’s resources and sharpen their own firm’s competitive edge. A company that sells athletic shoes, for example, may find it worthwhile to partner with a manufacturing plant in order to add its capabilities to its own. Equity ownership in a factory could give the shoe company access to manufacturing resources, to decision-making power over the plant and to seamless coordination between manufacturing and other operations.

The transaction-cost economics (TCE) view, in contrast, emphasizes how equity lowers the transaction hazards in business dealings between firms. The sports shoe company, for example, may sell a high-profile sneaker that requires a special shoelace developed by another firm. In that case, the shoe company might pursue equity ownership in the shoelace company in order to gain some control over the firm. This, in turn, would accomplish two things: lower the risk of self-interested behavior from the shoelace company and spark greater cooperation between the firms in their business dealings.

Past studies have measured how much managers consider the factors cited in these two theories when they make decisions about ownership structures. These studies, however, depended mainly on archival data, and many didn’t control for other variables that might influence managerial decisions. Ultimately, Kale and Puranam write, this previous research didn’t connect the dots between theory and real life business practice.

To establish a clear link between theory and actual managerial decision-making, Kale and Puranam asked respondents to imagine that they were seeking an inter-firm partnership in order to secure another firm’s technological resources. At the same time, the researchers controlled for non-RBV and non-TCE based factors that might influence managerial choices.

Using a methodology called policy capture, Kale and Puranam came up with 30 different scenarios that required respondents to consider various decision-making criteria. For each scenario, the respondents were asked whether they’d choose:

1. a contractual relationship
2. a minority equity stake in the firm
3. a non-majority equity stake in the firm, or
4. majority equity stake/acquisition.

The researchers took care to design some of the decision-making criteria using RBV or TCE factors, and other criteria based on control factors. This allowed them to measure exactly how much the theoretical criteria influenced managers’ choices.

What they found was that resource-based and transaction-cost factors did indeed influence the managers’ choices. Most influential were factors related to gaining a competitive edge, as proposed by RBV theory. The greater the apparent value of the RBV factors, the higher the level of ownership the managers wanted in the new partner firm.

Transaction-cost factors also shaped managers’ equity ownership choices, but not as much as the prospect of honing competitiveness. Transaction-cost advantages influenced managers’ decisions to seek an equity stake in the firm. But when those advantages grew, it didn’t increase managers’ interest in raising their levels of ownership of the partnering firm.

What about the role of demand uncertainty in these decisions? Contrary to the tenets of transaction-cost theory, Kale and Puranam discovered, uncertain demand conditions actually made respondents less interested in an equity stake in the partner firm.

In short, and just as RBV- and TCE-based theories suggest, the resources and relationships offered by inter-firm partnerships strongly swayed managers’ decisions about the kind of equity ownership agreements they wanted. In practice as in theory, these key assets are deemed worth the investment — if the market is stable. When market demand is uncertain, however, real life managers don’t react as transaction-cost theory prophesies they will. Instead, uncertain demand conditions make respondents less keen for an equity stake in a new partner firm.

Human nature, in other words, is highly predictable. But there’s still no substitute for watching what happens in the open air of real business.

Prashant Kale is an associate professor of strategic management at Jones Graduate School of Business at Rice University.

To learn more, please see: Kale, P. & Puranam, P. (2013). The design of equity ownership structure in inter-firm relationships: Do managers choose according to theory? Journal of Organization Design, 2(2), 15-30.