Strategic Management of Technological Innovation Melissa Schilling Chapter

Strategic Management of Technological Innovation Melissa Schilling Chapter 5 TIMING OF ENTRY

The Personal Digital Assistant Industry • From 1990 -1993, a flurry of companies began developing PDAs and analysts predicted millions would be sold by 2004. • However, market confusion and under-developed enabling technologies slowed PDA adoption. Many PDA companies ran out of money by 1994. • The surviving companies included those that specialized in industrial devices, and Palm Computing, which had entered relatively late and produced a streamlined PDA. • By 2003, another storm was on the horizon for the PDA industry: the arrival of smartphones, and much larger competitors such as Nokia, Ericsson, and Samsung. • By 2006, over 13 million smartphones had been shipped, and PDA sales had virtually ground to a halt. 5 -2

Overview • Increasing returns suggests that timing of entry can be very important. First movers don’t always have the advantage. • There a number of advantages and disadvantages to being a first mover, early follower or late entrant. These categories are defined as follows: – First movers are the first entrants to sell in a new product or service category (“pioneers”) – Early followers are early to market but not first. – Late entrants do not enter the market until the product begins to penetrate the mass market or later. 5 -3

First-Mover Advantages and Disadvantages • Being a first mover can confer the advantages of: – Brand loyalty and technological leadership • First movers can build a reputation as a leader in that area of technology which can help it maintain a lead even after competition enters the arena – Preemption of scarce assets • Radio frequency allocation by the FCC for wireless communication services can cause a scarcity of resources for late comers – Exploiting buyer switching costs • Inertia to change increases the longer a product is around – QWERTY keyboard developed to prevent keys from jamming, even though not a problem today other keyboards have not been successful – Reaping increasing returns advantages. • First mover may rise in market power through increased returns and eventually make it the dominant design • Intel become dominant design due to Gate’s BASIC, complementary products and adoption of the 8088 by IBM 5 -4

First-Mover Advantages and Disadvantages • However, first movers often bear disadvantages also: – Study of 50 product categories showed that market pioneers have a 47% rate of failure and a mean market share of 10% • Early followers averaged almost 3 x the market share of the pioneers • The market may often perceive the first movers as having the advantage but that is because of misperceptions – The first mover in the disposable diaper market was Chux. P&G didn't come on the scene until 30 years later but because Chux disappeared history was reinterpreted and P&G were thought of as the first mover. – Other studies show first movers earn greater revenues but lower profits because of the higher R&D expenses, development of supplier and distribution channels and marketing costs that they incur • A later entrant can capitalize on all the groundwork done by the first mover and improve upon it at less expense 5 -5

First-Mover Advantages and Disadvantages – The market often perceives first movers as having advantages because it has misperceived who was first. 5 -6

First-Mover Advantages and Disadvantages – High research and development expenses • First mover spends money on exploratory research that results in failure before achieving success as well as developing complementary goods and a market – Undeveloped supply and distribution channels • A new-to-the-world technology often has no appropriate suppliers or distributors. The first mover has to develop and produce on their own or assist others in the development and production of the needed supplies – DEKA need a ball bearing no one else produced. They developed the machine to produce the ball bearing. 5 -7

First-Mover Advantages and Disadvantages – Immature enabling technologies and complements • PDA developers had created useful palm-size devices but the battery and modem technologies needed to support the PDAs was not developed enough – Uncertainty of customer requirements • Since there is no way to know what features customers will want from a new technology and how much they will pay for them, first movers may have to revise their offerings when they get customer feedback – In the late 80 s Kodak introduced the 8 mm video camera expecting a large number of customers due to its design and quality. They were too expensive and consumers had not recognized a need for them so Kodak withdrew them from the market. – By the early 1990 s, consumers were ready for the product and other competitors has entered the market 5 -8

Factors Influencing Optimal Timing of Entry 1. How certain are customer preferences? – When new-to-the-world technologies are first developed, customers may have difficulty understanding the technology and its role in their life • Which features are important and which unnecessary are unclear to producers and customers – Early e-commerce sights included exciting graphics and sounds to make themselves competitive. Due to lack of high-speed internet and powerful PCs by most customers, these features annoyed customers 5 -9

Factors Influencing Optimal Timing of Entry – In fact, because video game consoles are sold at cost or less to build an installed base, with profits coming from game sales, the CD/DVD feature was so desirable that it was bought more for that feature than to play games. • Sony lost money because few customers bought games. Their strategy backfired • Microsoft learned from this mistake and disabled the DVD playback feature on the Xbox unless consumers purchased an add-on DVD playback kit – If customer needs are well understood, it is more feasible to enter the market earlier. • Some innovations are developed in response to well-understood customer needs – The developers of Tagament (medication for chronic heartburn or ulcers) faced little uncertainty. Customers wanted an affordable, easy-to-use solution to their discomfort. Once developed and approved, the developers raced the product to market in hopes of patenting it and securing market share 5 -10

Factors Influencing Optimal Timing of Entry 2. How much improvement does the innovation provide over previous solutions? – An innovation that offers a dramatic improvement over previous generations will accrue more rapid customer acceptance as its value will be appreciated by the consumer 3. Does the innovation require enabling technologies, and are these technologies sufficiently mature? – If the innovation requires enabling technologies (such as long-lasting batteries for cell phones), the maturity of these technologies will influence optimal timing of entry. 5 -11

Factors Influencing Optimal Timing of Entry 4. Do complementary goods influence the value of the innovation, and are they sufficiently available? – Not all innovations require complementary goods, but for those that do (e. g. , games for video consoles), availability of complements will influence customer acceptance. 5. How high is the threat of competitive entry? – If there are significant entry barriers, there may be less need to rush to market to build increasing returns ahead of others. – If the threat of competitive entry is high, the firm may need to enter earlier to establish brand image, capture market share and secure relationships with suppliers and distributors 5 -12

Factors Influencing Optimal Timing of Entry 6. Are there increasing returns to adoption? – If so, allowing competitors to get a head start can be very risky as it becomes more difficult to catch up 7. Can the firm withstand early losses? – The first mover bears the bulk of R&D expenses and may endure a significant period without revenues at the beginning of the s-curve – The earlier a firm enters, the more capital resources it may need. • GO and Momenta developed technologically advanced PDAs but couldn’t withstand the long market confusion about PDAs and ran out of capital • IBM and Compaq survived because they were large and diversified • Palm was a late entry so it did not have a long takeoff period but even so it was forced to seek outside capital – Firms with significant resources may be able to more easily catch up to earlier entrants • Nestle was a very late entry to the freeze-dried coffee market but used its substantial resources to develop a superior products and rapidly build market awareness. This enabled it to quickly overtake the lead from GFs Maxim 5 -13

Factors Influencing Optimal Timing of Entry 8. Does the firm have resources to accelerate market acceptance? – Firms with significant capital resources can invest in aggressive marketing and supplier and distributor development, increasing the rate of early adoption. 9. Is the firm’s reputation likely to reduce the uncertainty of customers, suppliers, and distributors? – Innovations from well-respected firms may be adopted more rapidly, enabling earlier successful entry. – Customers, suppliers and distributors will use the firm’s track record to assess its technological expertise and market prowess • When Microsoft announced that they were entering the PDA market, many distributors decided to MS’s product since MS’s track record suggested they might dominate the market 5 -14

Research Brief Whether and When to Enter? – Will Mitchell studied 30 years of data on whether and when an incumbent in one subfield of the medical diagnostic imaging industry would enter another subfield. He found: • If only one firm can produce an inimitable good, it can enter if and when it wants. If several firms could produce a good that will subsequently be inimitable, they race to capture the market. • If good is highly imitable, firms prefer to wait while others invest in developing the market. • Firms were more likely to enter if they had specialized assets (e. g. , well established distribution system) that would be useful in the new subfield or if their current products were threatened by the new subfield. • Firms entered earlier when their core products were threatened and there were several potential rivals. 5 -15

Strategies to Improve Timing Options • To have more choices in its timing of entry, a firm needs to be able to develop the innovation early or quickly. • A firm with fast-cycle development processes can be both an early entrant, and can quickly refine its innovation in response to customer feedback. • In essence, a firm with very fast-cycle development processes can reap both first- and second-mover advantages. 5 -16