Return to Home Page 1997 Preannouncement: Who, What ,When, and Why by Paul Herbig Abstract of A preannouncement is a formal, deliberate, publicly-issued communication given before the actual event or product takes place. As technology continues to condense product cycles, the tactic of preannouncement is increasingly used by companies intent upon securing any small advantage they can achieve. This paper examines preannouncement, what it is, who is inclined to preannounce, when to do so, the legal implications, and provide a synopsis of the future for preannouncement activities. Introduction: What Preannouncement (sometimes called prior announcements) is a formal, deliberate communication given before a firm actually undertakes a particular marketing action such a price change, a new advertising campaign, or a product line change. A preannouncement is a detailed commitment to specific product development objectives, a list of features, and a timetable. It tells prospective customers that the supplier is committed to a given product direction and the philosophy, function,, and even performance levels months if not several years in advance. The timing of preannouncements may range from a few weeks in advance of a market introduction to many months or more (Eliashberg and Robertson, 1988). Preannouncing behavior is a form of market signaling, the purpose of which is to convey information to stakeholders in the marketplace, such as customers, competitors, shareholders or distributors. The range of functions served by signaling is wide and any given message may serve several functions simultaneously. The sender must make several decisions, whether to send the signal, when to send it, and to whom the signal should be directed. Interpreting a competitor’s message requires that one simultaneously consider the form of the message, its probable function, the forum or medium in which it is communicated and the probable veracity of the message. One major objective of preannouncing various marketing actions may be to impress shareholders. Preannouncement is perhaps the most often used form of competitive signaling because of its absolute versatility and ambiguity. During times of shortages, competitors often attempt to preempt each other from adding capacity by (pre) announcing their own plans to add capacity first. One can announce with complete truthfulness the intention to expand capacity at some future point in time and then change one’s mind at any point thereafter. In this case, the preannouncements is being used to preempt competitors, present and potential. Preannouncing the future availability of major product developments so as to postpone customer purchases of competitors’ products is another form of preemption. To the extent that it can be achieved, preemptive announcements are also used as the occasion to communicate strategic advantage to discourage less advantaged competitors from cluttering up the playing field. Preannouncing: Why: Benefits and Costs Preannouncements may have particular value in industries dependent on network externalities, that is, when consumer benefits have perceived switching costs which depend on the number of other consumers purchasing compatible products (e.g., VCRs, telephones, or personal computers). [Switching costs are one-time costs to the buyer of converting to the new product. They include not only the purchase cost of the new product, but also the related costs of changing the production or consumption system.] Under conditions of high expected customer switching costs, preannouncing would be desirable as a means of encouraging advance planning for customer change over. Thus, the likelihood of preannouncing behavior is related positively to the level of customer switching costs incurred to adopt. Porter (1980, p. 228), for example, suggests that switching costs will be influenced by the “pace of changeover.” If preannouncing can make the pace discretionary for the customer, it may reduce switching costs or distribute them over a longer investment time horizon. Preannouncements may also begin the process of educating customers about how to changeover with minimum disruption and costs. For example, AT&T often has commercials to announce to the public new services that are available to the consumer. AT&T also includes the price for switching over to AT&T in the commercial (usually it is free). This is a form of preannouncement. In network externalities, the relative attractiveness today of rival technologies is influenced by their sales history. In effect, there are ‘demand-side economics of scale’ (Katz and Shapiro, 1986, p. 824). Preannouncements may encourage standardization of specifications and operating systems—especially if a dominant firm sends the signals, as in the case of IBM announcing its new line of personal computers in the early 1980s and Microsoft Windows in 1995. Standardization in turn may reduce switching costs by ensuring the availability, for example, of programming, software, or compatible peripherals. Standardization of specification and operating system may be motivated through preannouncement especially if a dominant firm able to send the signal appropriately. Another competitive advantage of preannouncement is the perception of first to the market. A customer might postpone a purchase of a competitors product in anticipation of the future availability of its product. However, a firm must be careful not to announce prematurely: A company oftentimes does not want its competitors to know what it is doing, consequently, it may not want a premature announcement (Summer, 1992). A competitor could steal the idea before the firm has the ability to market the product. Preannouncement also helps customers accept radical innovations or discontinuous movements. The timing of a new incompatible product can critically determine whether the new product supersedes the existing technology. Because of the externalities arising from the installed base, a preannouncement can sometimes secure the success of a new technology that is socially not worth adopting and that would not have been adopted absent the preannouncement. With a preannouncement, two effects favor the new technology. First if some users decide to wait for it, the network benefits when the new technology is introduced (and adopted by those users) will be larger than otherwise. Second, the installed base on the old technology will be reduced by the number who wait. In some cases, without such a preannouncement, the new technology is not adopted while with it, it is (Farrell and Saloner, 1986). The adoption of well informed arbiters of the products’ quality affects both the users in the installed base and later adopters who might have preferred the old technology to the new. Preannouncement can halt the bandwagon effect by making otherwise users wait. Preannouncing also can help the firm develop initial levels of opinion leader support and favorable word of mouth needed to accelerate the infusion of the innovative product (Kalish and Lilien, 1986). By preannouncing its own plans for entry into profitable markets, research has indicated the second firm can expect 60 to 70 percent of the leader’s share (in relation to the pioneering brands). Competitive advantage can be achieved through preannouncement. The incentive to preannounce may probably be minimal if a preannouncement is likely to be matched. Also, the firm is required to have knowledge of its competitors regarding the new product preannouncement from past behavior. For product that requires customer learning and application before adoption process take place, preannouncing a new product would be very beneficial. Other advantages to preannouncement include accessibility to efficient distribution systems, the creation of barriers to entry for other firms by leaving them the unprofitable segments or segments that are too small, better positioning of the new product compared to later entrants, early market feedback, forestalling customer purchases of rival products, and signaling the firm’s commitment to new technology. A cost is involved in all signaling behavior, in this case there exist considerable risk involved in preannouncing. A firm's reputation may be damaged in the event of failure to deliver as promised. Competitors could be prompt to reacting more strongly and aggressively than they would ordinarily do to other competitively oriented moves, since the time frame for response is shortened (Gatignon and Bansal, 1987). Consumers may postpone purchases, leading to cannibalization of current products if the new product is a substitute rather than complementary Cannibalism can also result if the firm is slow in the development of the product (premature announcement). Benefits to be gained from any signaling activity must outweigh the costs incurred. For the preannouncing of a new product or service, a cost benefit analysis must be conducted by the firm. Preannouncing: Who Preannouncing firms stress the benefits of preannouncing, particularly in demand stimulation and preemption advantages. Why do Non-Preannouncing firms not preannounce? : cannibalization, competitive reaction, inability to deliver and antitrust concerns. Non-preannouncing firms stress the risks, particular that of consumer and competitive disadvantages. Larger firms are able to highlight the benefits of gaining both the consumer and competitive advantages. In contrast, small firms seem to be less focus on market overhanging and as a result they have greater opportunity for preannouncing. It is in a company’s best interest to strike preemptively if competitive retaliation is unlikely. The firm must have knowledge of its competitors and extrapolate their likely reactions from past behaviors. If R&D /technology advantages are limited, competitive response can be rapid and the advantages to be gained from preannouncements minimized. This is how packaged goods industry is going. However, if barriers to entry exist, than preannouncement can be a favorable strategy. Preannouncement seems most likely to benefit firms with lower market dominance due to lower cannibalization risks. These firms have little to lose and everything to gain. Cannibalization is increased for a firm with a strong portfolio of products as preannouncing may encourage present customers to postpone purchases until the new product is available. The dominant firm, therefore, encounters considerably greater risks in preannouncement. Why do companies preannounce? 1) Image enhancement: enhance image, reputation, shareholders, build image; 2) distribution advantage; and 3) demand stimulation: new customers, build customer awareness, encourage word of mouth, start building advertising impact. Significant predictors of preannouncing behaviors are market dominance and company size, attractiveness of the competitive environment, customer switching costs(Eliashberg and Robertson, 1988). Prior to the release of the RISC/6000-based router, IBM made a preannouncement in late 1992. The apparent motive behind the preannouncement was to get potential buyers to wait. Preannouncement appears to hold some risks for large firms due to potential antitrust action for :market overhanging” preannouncing a product far in advance with the deliberate intent of injuring competitors sales. Small firms tend not to have this problem and therefore have greater opportunity and far less risks in preannouncements. Preannouncement: When Preannouncement should be consistent with the purchase decision of customers, if decisions are normally made over a six month timetable, a six-month preannouncement timeframe would be most appropriate. Preannouncing a product would be advantageous if the product requires substantial customer learning and application before adoption and when product trial is not necessary. This is most prevalent for technology based products and least for consumer packaged goods where learning requirements are generally minimal. Under conditions of high expected customer switching costs, preannouncing would be desirable as a means of encouraging advance planning for changeover. It would also aid in education customers on changeover with minimum disruption and costs. A particular value in industries with network externalities, when consumer benefits and perceived switching costs depend on the number of other consumers purchasing compatible products. Preannouncements may also encourage standardization of specifications and operating systems--especially if the dominant firms sends the signals. Standardization may reduce switching costs by ensuring the availability of compatible products. Ressler, a consultant and former Economic Development Manager for the Greater Shreveport Economic Development Foundation makes these comments concerning the challenge of preannouncement media coverage. "A company doesn't want its competitors to know what it is doing, consequently, they do not want a premature announcement. Premature announcements invite more economic development organizations to get into competition for the project. It might lose existing plants, thinking they might lose their jobs. Absolutists claim the media should print all the news they now. But Situationists say it depends on the circumstances-- how powerful will be the impact and the source of the information. Since the information came from a press release, there was little hope of keeping it secret; therefore it was right to print it". (Summer, 1992). In Ressler's opinion, it serves a detrimental purpose in industry recruiting. Preannouncement: Legal Concerns Preannouncement has been alleged in antitrust litigation—announcement of future availability of a new product (Fisher, McGowan and Greenwood 1983). Defendants have been charged with making a premature announcement or a predatory preannouncement in order to discourage existing customers from switching to another supplier and to encourage those intending to buy soon to wait and thus not become part of the installed base (Farrell 1986) [Predatory pricing behavior]. When done by a firm alleged to have a large market share, the practice is often been attacked as non-competitive under the rubric of premature announcement. Dominant firms engage in this practice to discourage customers from switching to their competitors during the period before the new product becomes available. The firms under attack reply that such information enables consumers to plan their acquisition of major purchases and leads to better informed consumer decisions. The new product does become available according to the announcement versus the firm repeatedly misforecasts (intentionally or not) the availability of new products. The welfare of consumers can be increased only by having additional correct information that is relevant to their purchasing decisions. If competitors lose sales because consumers prefer to postpone their purchases until new product becomes available, lost sales are the result of competition and the appropriate response by the competitor is to offer better products or lower prices to induce consumers to buy. No entry barriers because it imposes no differential costs on would-be entrants (Landis and Rolfe, 1985). In the second case where the producer repeatedly fails to make good on the availability dates forecasts, both competitors and customers are injured by the mistaken forecasts. After the first forecast, intelligent consumers will view future product announcements by that firm with skepticism and those announcements given less weight in their purchasing decision. This may be a one-time impact of a mistaken forecast. Such actions would lead to loss of credibility and sales for the incumbent firm making the misrepresentation and thus increase the opportunity for potential entrants. In the IBM antitrust case, U.S. vs. IBM, IBM was accused of predatory preannouncement. Preannouncement serves many of same functions as cost reduction as switching. The preannouncement is likely to be most effective where the current technology could otherwise greatly increase its network values in a short time between announcement time and introduction. The preemptive effect of the preannouncement than becomes crucial. So especially when targeted against a fledgling technology, the preannouncement may well be non-competitive(Farrell 1986). During the IBM preannouncements of Series 360 line and numerous products the Government contended: “IBM Model 90 series’ primary function was to stop Control Data and eliminate the potential competitive threat that the company posed to IBM”s monopolization of the marketplace.” This was also claimed for model 360/44 was aimed at forestalling the entry of competitor companies into the general purpose marketplace by undermining their potential resources bases. The 360/67 portrays another example. Announced in April 1965 for delivery in 1966 while in reality it was delivered in 1967 and not fully operational until nearly 1969. The 360/90,67,44 and entire 360 line were non-competitive due to IBM’s premature announcement. Announcements in the computer industry involve the release of relatively formal descriptions of new products, properties, prices and order taken begun. IBM, as most other firms in industry do, regularly announce products as much as a year or so before they are available to customers, while still very much under development. This is partially due to the lead time necessary to make decisions, to plan for the changeover, rearrangement of their organization, and to prepare the site for the computer. This lag between the time products are announced and are ready are supposedly to allow the customers to get ready for the product (Fisher, McGowan and Greenwood 1983). Some lag between announcement and date of first customer ship is necessary so that orders for the first part of the production run can be secured. Advanced announcement of truthful information cannot be non-competitive. The only real question is did IBM make its product announcements in good faith. In announcing products not yet fully developed, IBM was making a forecast about its ability to deliver. If those announcements were made in good faith, then it was imparting information to customers and competitors as to what it expected to do. Only deliberate falsehood could be non-competitive. If so, this would likely create tarnished reputation for later years. Other firms did likewise, CDC followed a practice of announcing machines before the development and testing was completed. Two GE models, 455 and 465 were announced but never got past the prototype stage and were never delivered. Honeywell’s model 8200, at time of announcement its development had yet to begun. RCA Spectra 70 was announced in December 1964 but the prototype was not ready until the middle of 1965 (Fisher, McGowan and Greenwood 1983). IBM often underestimated development difficulties, as common in high tech businesses. This was particularly evident in operating software. This was the inevitable price paid for benefit to customers and suppliers of announcement before development is complete. This provides a reason to suppose IBM was ever deliberately deceptive. Two criteria for identifying non-competitive conduct exists: conduct must be other than that encouraged by and consistent with the competitive process; conduct must also be substantially related to maintenance or acquisitions of monopoly power, it must have or is expected to have the effect of destroying or excluding competition (Landis and Rolfe, 1985). Management Implications Preannouncements can be considered psychological or virtual market introductions of new products before their physical availability.Preannounced products are not yet available and it is not certain that they ever will be. In technologically fast-moving industries, many preannounced products may never reach the market. The software industry calls these products “vaporware.” To many, preannounced products that won’t be available for more than three months after first being announced are merely frivolous posturings of desperate vendors trying to draw attention away from their obsolescent products. Customers must decide whether to wait for the preannounced product Channel members must decide whether to stock the product. The final decisions depend on the perceived likelihood of availability as well as the credibility of the preannouncement. The tradeoff is between waiting longer for a new product that is closer to the technological frontier and risking the consequences of the preannouncement or securing a marginally better product much sooner. Nonetheless, public disclosure implies a high level of commitment to the promises made and always carries the threat of public ridicule if the milestones or deadlines are missed. Public disclosure tends to encourage a better than goodfaith effort to deliver what is promised because of the fear of public embarrassment. The firm’s reputation instills confidence that the preannounced product will be available in the foreseeable future. Many suppliers shy away from making preannouncements out of concern they won’t be able to meet the promised delivery date. If a vendor can’t predictably manage its product development, it can be deemed to be a poor source, an inadequate business partner and future signals given less credibility by stakeholders. Vendor credibility affects acceptance of the signal by channel members and customers. The preannouncement signal will be evaluated by the receiver in relation with other signals for its consistency, its clarity, and also the credibility of the signal sender. All of these points have some effects on the encoding of the signal, the attention that needs to be paid to it, and the competitive reaction. The future of preannouncement strategies is related to those most likely to use it: companies with new products that involve customer switching costs, firms without market dominance, smaller firms, and an attractive non-combative competitive environment. It can become an equalizer for small firms and those firms not leaders in their industries or segment. In this era of technological advances where this year’s latest PC is next year’s obsolete model, preannouncements may make excellent business sense in conveying a company’s upcoming products and future plans. However, one must be aware of the risks involved, particularly that of loss of reputation and credibility. And if a firm does not satisfactorily understand its competitors, violent reactions to one’s preannouncements may occur or a competitor may use the information provided and beat one’s own firm to the market. 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