Chapter 5 is strategy
- 1. CHAPTER 5 IS STRATEGY AHMAD JAINI INFORMATION SYSTEM E-mail: ahmadjainisif@gmail.com
- 3. OVERVIEW 12/26/2018 3 The previous chapter pointed out that some industries are characterized by increasing returns to adoption, meaning that the more a technology is adopted, the more valuable it becomes. In such industries, timing can be crucial—a technology that is adopted earlier than others may reap self-reinforcing advantages such as greater funds to invest in improving the technology, greater availability of complementary goods, and less customer uncertainty. On the other hand, the same factors that cause increasing returns to adoption may make very early technologies unattractive: If there are few users of the technology or availability of complementary goods is poor, the technology may fail to attract customers. A number of other first-mover advantages, and disadvantages, canshape how timing of entry is related to likelihood of success. Entrants are often divided into three categories: first movers (or pioneers), which are the first to sell in a new product or service category; early followers (also called early leaders), which are early to the market but not first; and late entrants, which enter the market when or after the product begins to penetrate the mass market.
- 4. 1. FIRST-MOVER ADVANTAGES 12/26/2018 4 a. Brand Loyalty and Technological Leadership The company that introduces a new technology may earn a long-lasting reputation as a leader in that technology domain. Such a reputation can help sustain the company’s image, brand loyalty, and market share even after competitors have introduced comparable Products b. monopoly rents. Even if the technology characteristics are imitable, the first mover has an opportunity to build brand loyalty before the entry of other competitors. c. Preemption of Scarce Assets Firms that enter the market early can preemptively capture scarce resources such as key locations, government permits, patents, access to distribution channels, and relationships with suppliers d. Exploiting Buyer Switching Costs Once buyers have adopted a good, they often face costs to switch to another good. For example, the initial cost of the good is itself a switching cost, as is the cost of complements purchased for the good. e. Reaping Increasing Returns Advantages In an industry with pressures encouraging adoption of a dominant design, the timing of a firm’s investment in new technology development may be particularly critical to its likelihood of success. For example, in an industry characterized by increasing returns to adoption, there can be powerful advantages to being an early provider; a technology that is adopted early may rise in market power through self-reinforcing positive feedback mechanisms, culminating in its entrenchment as a dominant design. Intel is
- 5. 12/26/2018 5 a. Research and Development Expenses Developing a new technology often entails significant research and development expenses, and the first to develop and introduce a technology typically bears the brunt of this expense. b. Undeveloped Supply and Distribution Channels When a firm introduces a new-to-the-world technology, often no appropriate suppliers or distributors exist. The firm may face the daunting task of developing and producing its own supplies and distribution service, or assisting in the development of supplier and developer markets. For example, when DEKA Research began developing its selfbalancing IBOT wheelchair, it needed a type of ball bearing for which there were no suppliers. c. Immature Enabling Technologies and Complements When firms develop technologies, they often rely on other producers of enabling technologies. For instance, the opening vignette demonstrated that even though producers of personal digital assistants (PDAs) had created palm-size devices with significant computing power, the potential of these devices would be delivered only if battery and modem technologies were further developed. 1. FIRST-MOVER DISADVANTAGES
- 6. 12/26/2018 6 d. Uncertainty of Customer Requirements A first mover to the market may face considerable uncertainty about what product features customers will ultimately desire and how much they will be willing to pay for them. For a very new product technology, market research may be of little help. FACTORS INFLUENCING OPTIMAL TIMING OF ENTRY 1. How certain are customer preferences? 2. How much improvement does the innovation provide over previous solutions? 3. Does the innovation require enabling technologies, and are these technologies sufficiently mature? 4. Do complementary goods influence the value of the innovation, and are they sufficiently available? 5. How high is the threat of competitive entry? 6. Is the industry likely to experience increasing returns to adoption? 7. Can the firm withstand early losses? 8. Does the firm have resources to accelerate market acceptance? 9. Is the firm’s reputation likely to reduce the uncertainty of customers, suppliers, and distributors?
- 7. STRATEGIES TO IMPROVE TIMING OPTIONS 12/26/2018 7 As should now be clear, managing the timing of entry into the market is a complex matter. If the technology has a clear advantage to consumers, entering the market early may give the entrant a path-dependent advantage that is nearly impossible for competitors to overcome. If, on the other hand, a firm enters a market very early and the advantages of the technology are not very clear to consumers, there is a strong possibility that the technology will receive a tepid welcome. Confounding this risk is the fact that watchful competitors may be able to use the firm’s failure to their advantage, refining the technology the firm has introduced to the market and making any corrections necessary to improve the technology’s market acceptance. The later entrant may be able to enter at a lower cost because it can capitalize on the research and development of the early firm, and use knowledge of the market gained from observing the early entrant’s experience.
- 8. Summary of Chapter 12/26/2018 8 1. A first mover may be able to build brand loyalty and a reputation for technological leadership, preemptively capture scarce resources, and exploit buyer switching costs. 2. First movers may also benefit from increasing returns to adoption due to learning curve effects and network externalities 3. Some studies, however, argue that first movers may have higher failure rates. First movers have to bear the brunt of R&D expenses and may face considerable consumer ambiguity. Second movers can capitalize on the R&D and marketing efforts of the first mover, producing a technology that costs less to develop and that corrects for any of the first mover’s mistakes. 4. First movers may also face poorly developed supplier markets, distribution channels, and availability of complementary goods, all of which can increase the challenge of successfully launching their new product or service. Enabling technologies may also be immature, hindering the new technology’s performance. 5. The biggest disadvantage many first movers face is uncertainty over customer requirements. Customers themselves may be uncertain about what features or form they desire in a new innovation. A firm may have to withstand significant losses before customer preferences become more certain.
- 9. 12/26/2018 9 6. The optimal timing of entry is thus a function of several factors, including the margin of advantage offered by the new innovation, the state of enabling technologies and complements, the state of customer expectations, the threat of competitive entry, whether the industry faces increasing returns, and a firm’s resources. 7. Firms that have fast-cycle development processes have more options when it comes to timing. Not only does a fast-cycle developer have an advantage in introducing innovations earlier, but it also can be its own fast follower by quickly introducing refined versions of its own technology