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An executive summary for managers and executive readers can be found at the end of this article.
1. Introduction
Fierce competition forces firms to adopt strategies that create a competitive advantage for the firm. Creating a brand name with well-established associations is one way of achieving this aim. Firms invest heavily in developing a brand. It is a very costly process but has many returns once success is achieved. However, firms do not always have the financial strength or do not want to invest so heavily in creating a new brand name each time they develop a new product. Usually a more economical strategy is used to introduce a new product. Instead of creating a new brand name for the new product category, an existing well known and successful brand name is extended into the new product category; in other words, brand extension is used. It is a well-known fact that developing a new brand requires much more investment than creating a brand extension which is what motivates firms to prefer brand extensions more than creating a new brand. For this reason the last decade shows that many firms use brand extension strategies to enter new markets.
Brand extension is defined differently by some academics. Some define it as a new product introduced within a certain product line (i.e. introducing banana flavored yogurt within the existing yogurt product line) - which is actually defined as line extension by many academics. On the other hand, brand extension may imply introducing a new product line to the firm by using an existing brand name; in other words extending an existing brand name into new product categories (i.e. developing motorcycles under an established automobile brand name). This study assumes the second definition for brand extension - using an existing brand name to enter new product categories. Another classification for brand extensions names two categories of extensions, which are horizontal and vertical. Introduction of a new product in either a related product class, or in a product category completely new to the firm is categorized as horizontal extension. On the other hand, vertical extension usually refers to the introduction of a new extension in the same product category but at a different price and quality level. In horizontal extensions,...