Schilling Ch 5- Timing of Entry

Strategic Management of
Technological Innovation
Melissa Schilling
Chapter 5
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.
• Increasing returns suggests that timing of entry
can be very important. First movers don’t always
have the advantage.
• There are a number of advantages and
disadvantages to being a first mover, early follower
or late entrant. These categories are defined as
– 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.
First-Mover Advantages and
• 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
– 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
First-Mover Advantages and
• 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 3x 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
• A later entrant can capitalize on all the groundwork done by the first
mover and improve upon it at less expense
First-Mover Advantages and
– The market often perceives first movers as having
advantages because it has misperceived who was first.
First-Mover Advantages and
– 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.
First-Mover Advantages and
– 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
– In the late 80s Kodak introduced the 8mm 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
– By the early 1990s, consumers were ready for the product and
other competitors has entered the market
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
– 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
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
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.
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
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
Factors Influencing Optimal
Timing of Entry
8. Does the firm have resources to accelerate market
– 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
– 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
• 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
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.
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.