Dominant design Timing of entry Dr Marianna Sigala

Why dominant designs exist The more a product is adopted, the more valuable it becomes The more products are used, the more they are improved The more a product is used, the more complementary assets are developed

Two sources of increasing returns of products Learning effects – learning curve Performance increases, or costs decrease, with the number of units of production Absorptive capacity: as firms accumulate knowledge, they also increase their future ability to assimilate information Network externalities The benefit of using a good increases with the number of other users of the same good, e.g. telephone, internet, itunes, motorways Installed base: the number of users of a good

Complementary goods and network externalities A good installed base attracts producers of complementary goods Availability of complementary goods attracts users, increasing installed base, which in turn increases complementary goods etc etc etc

When a firm is able to lock its good as a dominant design, then not only it gains monopoly rents in the short term, but it is also able to shape the evolution of the industry influencing the future generations of products / goods

Companies can also shape users’ expectations of the future installed base and availability of complements through announcements of pre-orders, licensing agreements and distribution arrangements

Use of vaporware Goods that are not actually in the market and may not even exist but are advertised in order to: Prompt rapid adoption of the good when is actually is available To buy valuable time in bringing a good to the market User vaporware to persuade customers to delay purchase of a competing product until the firm’s good is out in the market

Timing of entry

Type of entrants First movers: first to sell a good Early followers: early to sell a good but not the first Late entrants: which enter the market after the good begins to penetrate the mass market

First mover advantage Brand loyalty and technological leadership: increase image, leadership and shape customer expectations Preemption of scarce assets such as key locations, government permit, access to distribution channels and relationships with suppliers Exploiting buyer switching costs : changing good as well as complements Self-reinforcing positive feedback mechanisms

First mover dis-advantages Research and development expenses : a later entrant can save development expenses as well as make a good that has a closer fit with market preferences (i.e. learn from mistakes of first mover and first adopters) Undeveloped supply and distribution channels Immature enabling technologies and complements Uncertainty of customer requirements

Factors influencing optimal timing of entry How certain are customer preferences ? How much improvement does the innovation provide over previous solutions? It affects customer adoption Does the innovation require enabling technologies (or complementaries) and are these technologies sufficiently mature? Maybe develop complementary goods as well

Factors influencing optimal timing of entry Can the firm withstand the early loses? Does the firm have the resources to accelerate market acceptance ? Is the firm’s reputation able to reduce the uncertainty of customers, suppliers and distributors ? Is the industry likely to experience increasing returns of adoption?

Thank you ! Any questions ? Dr Marianna Sigala