Entry Timing, Standards Battles and Design Dominance

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Entry Timing, Standards Battles and Design
Dominance

• Rajshree Agarwal

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Agenda

• Timing of Entry
• Demand and technology uncertainty
• First and Second mover advantages
• Standards Battles and Design Dominance
• Learning Effects
• Network externalities

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Innovation and uncertainty

• Technological uncertainty
• Uncertainty regarding the technological features
  of the product
• Standards
• Dominant design
• Market/Demand uncertainty
• Uncertainty regarding the size and growth rates
  of the markets for new products
• Potential uses
• Substitute products
• Complementary products

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Back to Takeoff timings
Firms
Sales
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Resolution of Technology and Demand Uncertainty
Technological Uncertainty Resolved
Demand Uncertainty Resolved
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When should firms enter?
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In-Class Activity

• Synthes Case Discussion

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When to enter

• Importance of lead time (the degree to which
  innovation can be protected)
• The nature of risk and the ability of the firm to
  manage it
• The importance and availability of complementary
  resources
• The potential to establish a standard

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First mover Advantage (?)

• A first mover is a firm that takes an initial
  competitive action.
• Advantages of first movers
• If successful, the firm earns above-average
  returns until other competitors are able to
  respond effectively.
• Develop customer loyalty.
• Harley-Davidson has been able to maintain a
  competitive lead in large motorcycles due to
  intense customer loyalty.
• Disadvantages of first movers
• High risk
• High development costs
• High demand uncertainty

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Second mover Advantage (?)

• A second mover is a firm that responds to a first
  movers competitive action often through
  imitation or a move designed to counter the
  effects of the initial action.
• BankOne (Internet banking) New Balance (athletic
  shoe industry)
• Advantages of second movers
• Reduction in demand uncertainty
• Market research to improve satisfying customer
  needs
• Learn from the first movers successes and
  shortcomings
• Gaining time for RD to develop a superior
  product
• Disadvantages of second movers
• Loss of opportunity to establish brand loyalty
• If significant learning curve through moving
  first, then giving up competitive advantage

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When to enter a market First mover (dis)advantage

• Advantages
• Above-average returns until other competitors
  respond effectively
• Start down the learning curve earlier
• Opportunity to gain customer loyalty
• Opportunity to set standards

• Disadvantages
• Uncertainty about demand
• High development costs
• Risk of adopting a losing standard (Beta/VHS)

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Moving Second Imitate and counter

• Advantages
• Reduction in demand uncertainty
• Market research to improve satisfying customer
  needs
• Learn from the first movers successes and
  shortcomings
• Gaining time for RD to develop a superior
  product
• Dont have to educate consumers

• Disadvantages
• Switching costs may make taking customers
  difficult
• Brand loyalty/customer familiarity
• Standards
• Initial cost disadvantage May not survive until
  learning curve advantages have leveled out

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Success of leaders and followers
PRODUCT INNOVATOR FOLLOWER WINNER Jet
Airliners De Havilland (Comet) Boeing
(707) Follower Float glass Pilkington Corning
Leader X-Ray Scanner EMI General
Electric Follower Office P.C. Xerox IBM Foll
ower VCRs Ampex/Sony Matsushita Follower Diet
Cola R.C. Cola Coca Cola Follower Instant
Cameras Polaroid Kodak Leader Pocket
Calculator Bowmar Texas Instruments Follower Mi
crowave Oven Raytheon Samsung Follower Plain
Paper Copiers Xerox Canon Not clear Fiber
Optic Cable Corning many companies Leader Vide
o Games Players Atari Nintendo/Sega/Sony Followe
rs Disposable Diapers Proctor
Gamble Kimberly-Clark Leader Web
browser Netscape Microsoft Follower PDA Psion
, Apple Palm Follower MP3 music
players Diamond Multimedia Sony
(others) Followers
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The Rise of Microsoft

• In 1980, Microsoft didnt even have a personal
  computer (PC) operating system
• the dominant operating system was CP/M.
• IBMs rush to bring a PC to market was a golden
  opportunity
• IBM turned to Microsoft for an operating system
  and Microsoft produced a clone of CP/M called MS
  DOS.
• Open architecture standard set by IBM established
  Microsoft dominance
• The success of the IBM PCs (and clones of IBM
  PCs) resulted in the rapid spread of MS DOS
• even more rapid proliferation of software
  applications designed to run on MS DOS.
• Microsofts Windows was later bundled with (and
  eventually replaced) MS DOS.
• Software industry might look very different
  today!
• Had Gary Kildall signed with IBM, or had other
  companies not been able to clone the IBM PC

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Discussion Questions on Microsoft

• What factors led to Microsoft's emergence as the
  dominant personal computer operating system
  provider?
• Is Microsoft's dominance due to luck, skill, or
  some combination of both?
• How might the computing industry look different
  if Gary Kildall had signed with IBM?
• Does having a dominant standard in operating
  systems benefit or hurt consumers?
• Does it benefit or hurt computer hardware
  producers?

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Why Dominant Designs Are Selected

• Increasing returns to adoption occurs when a
  technology becomes more valuable the more it is
  adopted.
• Primary sources
• Prior Experience and Technology Base
• Learning Effects
• Network Externalities

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Prior Experience and Technological Base

• Most entrants come from related industries
• A firms prior experience influences its ability
  to recognize and utilize new information
• Their product introductions tend to be similar to
  their other operations
• E.g. digital cameras from Sony resemble
  camcorders, while Kodak s offerings look like
  traditional cameras
• Technological base of new industries
• Use of a particular technology builds knowledge
  base about that technology.
• The knowledge base helps firms use and improve
  the technology
• ?Suggests that technologies adopted earlier than
  others are likely to become better developed,
  making it difficult for other technologies to
  catch up.

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Learning Effects

• The Learning Curve As a technology is used,
  producers learn to make it more efficient and
  effective.

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Network Externalities

• The value of a product to an individual increases
  with the number of other users of the same
  product
• Linkages between users
• Complementary products
• Switching costs
• Common in industries that are physically
  networked
• E.g., railroads, telecommunications
• Also arise when compatibility or complementary
  goods are important
• E.g., use of Windows maximizes the number of
  people their files are compatible with, and the
  range of software applications they can use.

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Why Dominant Designs Are Selected

• A technology with a large installed base attracts
  developers of complementary goods a technology
  with a wide range of complementary goods attracts
  users, increasing the installed base.
• A self-reinforcing cycle ensues

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Standards and Dominant Design

• Standards set by
• Government
• Non-governmental voluntary groups
• Companies
• The market place
• Standards can be
• Open, e.g., Linux
• Closed, e.g., Windows

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Competing with standards

• Open standards decrease profit appropriation
• Rival imitate easily
• Increases buyer power and supplier power due to
  lower switching costs
• Possible loss of control (Java and Microsoft)
• They also increase market acceptance
• Low switching costs for buyers increases demand
• Less uncertainty for suppliers regarding design
  elements leads to more suppliers and lower costs
• Can encourage innovation in your standards as
  opposed to rivals
• Network externalities (requires critical mass)

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How should companies compete in standards-based
industries?
Maximize value appropriation
Maximize market acceptance
Betamax
VHS
LOOSE
TIGHT
Mac
IBM-PC
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Key Take-aways

• Timing of Entry
• Comparing first and second mover advantages
• Demand and technological uncertainty is key to
  decision making
• Entering early may give better potential to set
  standards in industry
• Standards and Dominant design
• Some markets are winner takes all
• Determined by prior experience, learning effects
  and network externalities
• Tension between open and close standards affected
  by market acceptance vs. value appropriation