Entry Timing, Standards Battles and Design Dominance Rajshree Agarwal.

Entry Timing, Standards Battles and

Design DominanceRajshree Agarwal

Agenda Timing of Entry

Demand and technology uncertainty First and Second mover advantages

Standards Battles and Design Dominance Learning Effects Network externalities

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

Back to Takeoff timings

Automobile

0

0.2

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0.6

0.8

1

0 10 20 30

Years Since Commercialization

Inde

x

Sales

Firms

Resolution of Technology and Demand Uncertainty

time

InventionInvention CommercializationCommercialization FirmFirmTake-OffTake-Off

SalesSalesTake-OffTake-Off

Technological Uncertainty

Resolved

Demand Uncertainty

Resolved

When should firms enter?

time

InventionInvention CommercializationCommercialization FirmFirmTake-OffTake-Off

SalesSalesTake-OffTake-Off

???

In-Class ActivitySynthes Case Discussion

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

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

Second mover Advantage (?)

A second mover is a firm that responds to a first mover’s 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 mover’s successes and shortcomings Gaining time for R&D 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

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)

Moving Second: Imitate and counter

Advantages Reduction in demand

uncertainty Market research to

improve satisfying customer needs

Learn from the first mover’s successes and shortcomings

Gaining time for R&D to develop a superior product

Don’t 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

Success of leaders and followersPRODUCT INNOVATOR FOLLOWER WINNERJet Airliners De Havilland (Comet) Boeing (707) FollowerFloat glass Pilkington Corning LeaderX-Ray Scanner EMI General Electric FollowerOffice P.C. Xerox IBM FollowerVCRs Ampex/Sony Matsushita FollowerDiet Cola R.C. Cola Coca Cola FollowerInstant Cameras Polaroid Kodak LeaderPocket Calculator Bowmar Texas Instruments FollowerMicrowave Oven Raytheon Samsung FollowerPlain Paper Copiers Xerox Canon Not clearFiber Optic Cable Corning many companies LeaderVideo Games Players Atari Nintendo/Sega/Sony FollowersDisposable Diapers Proctor & Gamble Kimberly-Clark LeaderWeb browser Netscape Microsoft FollowerPDA Psion, Apple Palm FollowerMP3 music players Diamond Multimedia Sony (&others) Followers

The Rise of Microsoft In 1980, Microsoft didn’t even have a personal computer

(PC) operating system the dominant operating system was CP/M.

IBM’s 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. Microsoft’s 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

Discussion Questions on Microsoft

1. 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?

2. How might the computing industry look different if Gary Kildall had signed with IBM?

3. Does having a dominant standard in operating systems benefit or hurt consumers?

4. Does it benefit or hurt computer hardware producers?

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

Prior Experience and Technological Base Most entrants come from related industries

A firm’s 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 technologySuggests that technologies adopted earlier than others are likely

to become better developed, making it difficult for other technologies to catch up.

Learning Effects The Learning Curve: As a technology is

used, producers learn to make it more efficient and effective.

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.

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:

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

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)

Maximize value

appropriation

Maximize market

acceptance

LOOSE TIGHT

VHS

IBM-PC Mac

Betamax

How should companies compete in standards-based industries?

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