Disentangling pioneering cost advantages and disadvantages

Existing literature discusses a number of possible pioneering cost advantages and disadvantages. In this paper, we empirically test three different sources of long-term pioneering cost advantage - experience curve effects, preemption of input factors, and preemption of ideal market space - and three different sources of pioneering cost disadvantage - imitation, vintage effects, and demand orientation. We disentangle these sources by breaking total cost of a business unit into three different components - purchasing, production, and selling, general, and administrative (SG&A) costs - and identifying conditions that intensify or reduce the effect of the proposed source. Using two samples of business units, one for consumer goods and one for industrial goods, we find support for five of the six sources of pioneering cost advantage and disadvantage in both samples, while the advantage due to preemption of ideal market space is limited to the consumer goods sample. The unconditional analysis shows a pioneering purchasing cost advantage but even larger pioneering production and SG&A cost disadvantages. The complexity of our obtained findings suggests that managers need to think carefully about their particular conditions before making assumptions about the cost and, therefore, profit implications of a pioneering strategy. © 2008 INFORMS.

Duke Scholars

Author William F. Boulding Fuqua School of Business