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Do temporary events lead to permanent changes in market positions? For example, will the confrontation with Greenpeace at the Brent Spar oil rig in the summer of 1995 permanently damage Royal Dutch Shell’s image and market standing? Do market share positions gradually build over time or are they conquered in short spurts?
Hysteresis is a phenomenon in which a temporary change in one factor causes a permanent change in another. In hysteresis, which means “remaining” in Greek, an effect remains after its cause has disappeared. In 1881, physicist J.A. Ewing introduced the term into science.1 The most notable example of hysteresis in physics is magnetism. When the strength of a magnetic field (magnetizing force) is increased, the magnetic induction (magnetization) of a ferromagnetic material increases until it reaches saturation. If the magnetic field is reduced or turned off, the magnetic induction does not fall back to zero; part of it, the so-called remanence, stays. Ewing described the concept of hysteresis: “The world should be sufficiently wide to include not only the phenomenon of magnetic retentiveness but other manifestations of what seems to be essentially the same thing.”2 He proved to be right.
As early as 1934, economists looked at hysteresis as a business phenomenon.3 Brown equated hysteresis with persistent habits.4 Georgescu-Roegen emphasized its wide applicability: “Virtually the whole of social behavior cannot be satisfactorily explained without hysteresis.”5 Economists predominantly applied the concept to two problems: unemployment and foreign trade. They found that, after the stimuli that initially lead to a rise in unemployment have disappeared, unemployment does not fall to its former level but stays at the higher level.6 The adjustment is not symmetrical; friction and ratchet effects in the system (e.g., labor contracts, changes in production systems, and costs of hiring and firing) prevent unemployment from falling to its former level.
In foreign trade, after temporary, strong exchange rate fluctuations, a country’s trade position may not return to its former level.7 After the appreciation of the U.S. dollar in the mid-eighties and its subsequent devaluation, the U.S. trade balance recovered only very slowly and not completely. This may have been caused by the strong dollar-induced exits of U.S. companies from foreign markets and entries of foreign companies (for example, Japanese) into the U.S. market.
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1. J.A. Ewing, “On the Production of Transient Electric Currents in Iron and Steel Conducters by Twisting Them When Magnetised or by Magnetising Them When Twisted” (London: Proceedings of the Royal Society of London, volume 33, 1881), pp. 21–23.
2. J.A. Ewing, Magnetic Induction in Iron and Other Metals (London: D. Van Nostrand, 1893), p. 62.
3. J.A. Schumpeter, The Theory of Economic Development (Cambridge, Massachusetts: Harvard University Press, 1934), p. 64.
4. T.M. Brown, “Habit Persistence and Lags in Consumer Behaviour,” Econometrica, volume 20, July 1952, pp. 355–371.
5. N. Georgescu-Roegen, The Entropy Law and the Economic Process (Cambridge, Massachusetts: Harvard University Press, 1971), p. 125.
6. R. Cross and H. Hutchinson, “Hysteresis and Unemployment: An Outline,” in R. Cross, ed., Unemployment, Hysteresis and the Natural Rate Hypothesis (Oxford, England: Blackwell, 1988), pp. 3–7; and
W. Franz, “Das Hysteresis-Phänomen,” Wirtschaftswissenschaftliches Studium (WIST), volume 18, February 1989, pp. 77–80.
7. R. Baldwin, “Hysteresis in Import Prices: The Beachhead Effect,” American Economic Review, volume 78, September 1988, pp. 773–785; and
P. Welzel, “Hysterese im Außenhandel,” Wirtschaftswissenschaftliches Studium (WIST), volume 21, March 1992, pp. 131–134.
8. J.D.C. Little, “Aggregate Advertising Models: The State of the Art,” Operations Research, volume 29, 1979, pp. 629–667;
M.W. Sasieni, “Optimal Advertising Strategies,” Marketing Science, volume 8, Fall 1989, pp. 358–370;
D.M. Hanssens, L.J. Parsons, and R.L. Schultz, Market Response Models: Econometric and Time Series Analysis (Amsterdam, The Netherlands: Kluerer Academic Publishers, 1990);
T.A. Oliva, R.L. Oliver, and I. MacMillan, “A Catastrophe Model for Developing Service Strategies,” Journal of Marketing, volume 56, July 1992, pp. 83–95;
D.M. Hanssens and L.J. Parsons, “Econometric and Time-Series Market Response Models,” in J. Elrashberg and G.L. Lilien, eds., Handbooks in Operative Research and Management Science: Marketing(Amsterdam, The Netherlands: Elsevier Science Publishers, 1993), pp. 409–464; and
M.G. Dekimpe and D.M. Hanssens, “The Persistence of Marketing Effects on Sales” (Los Angeles, California: University of California, Anderson Graduate School of Management, working paper 234, 1994).
9. Little (1979); and
10. See, for example:
M. Nerlove and K.J. Arrow, “Optimal Advertising Policy under Dynamic Conditions,” Econometrica, volume 29, 1962, pp. 129–142;
D.G. Clarke, “Econometric Measurement of the Duration of Advertising Effect on Sales,” Journal of Marketing Research, volume 13, November 1976, pp. 345–357; and
Hanssens and Parsons (1993).
11. Little (1979).
13. C.H. Lovelock, “Southwest Airlines” (Boston: Harvard Business School, case 575–060, 1975).
14. Sasieni (1989).
15. G.J. Tellis, “The Price Elasticity of Demand: A Meta-Analysis of Econometric Models of Sales,” Journal of Marketing Research, volume 25, November 1988, pp. 331–341; and
R.J. Dolan and H. Simon, Power Pricing (New York: Free Press, 1996).
16. Baldwin (1988).
17. For limitations, see:
P.N. Golder and G.J. Tellis, “Pioneer Advantage: Marketing Logic or Legend?,” Journal of Marketing Research, volume 30, May 1993, pp. 158–170.
18. M. Möhrle, “Prämarketing” (Mainz, Germany: Universität Mainz, unpublished dissertation, 1994).
19. Inertia is a neglected phenomenon in the marketing literature and may be highly important for hysteresis in marketing.
20. S.P. Schnaars, Marketing Strategy: A Customer-Driven Approach (New York: Free Press, 1992).
21. Personal communication, 1995.
22. O. Heil and T.S. Robertson, “Toward a Theory of Competitive Market Signaling: A Research Agenda,” Strategic Management Journal, volume 12, September 1991, pp. 403–418;
O.P. Heil and R.G. Walters, “Explaining Competitive Reactions to New Products: An Empirical Study,” Journal of Product Innovation Management, volume 10, January 1993, pp. 53–65.
23. Reemtsma, the manufacturer of West, had been taken over by the Herz brothers, the owners of Tchibo, an aggressive coffee brand. Rumors abounded that they were behind the unusual price move. I frequently observed similar behavioral patterns in my study on the “hidden champions,” i.e, small and medium-sized world market leaders. See:
H. Simon, “Lessons from Germany’s Midsize Giants,” Harvard Business Review, volume 70, March–April 1992, pp. 115–123; and
H. Simon, Hidden Champions: Lessons from 500 of the World’s Best Unknown Companies (Boston: Harvard Business School Press, 1996).
24. Oliva et al. (1992).