Entry Timing, Standards Battles and Design Dominance Rajshree 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 Sales Firms

Resolution of Technology and Demand Uncertainty timeInventionCommercializationFirmTake-OffSalesTake-Off Technological Uncertainty Resolved Demand Uncertainty Resolved

When should firms enter? timeInventionCommercializationFirmTake-OffSalesTake-Off ???

In-Class Activity Synthes 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 followers PRODUCTINNOVATORFOLLOWERWINNER Jet AirlinersDe Havilland (Comet)Boeing (707)Follower Float glassPilkingtonCorningLeader X-Ray ScannerEMIGeneral ElectricFollower Office P.C.XeroxIBMFollower VCRsAmpex/SonyMatsushitaFollower Diet ColaR.C. ColaCoca ColaFollower Instant CamerasPolaroidKodakLeader Pocket CalculatorBowmarTexas InstrumentsFollower Microwave OvenRaytheonSamsungFollower Plain Paper CopiersXeroxCanonNot clear Fiber Optic CableCorningmany companiesLeader Video Games PlayersAtariNintendo/Sega/SonyFollowers Disposable DiapersProctor & GambleKimberly-ClarkLeader Web browserNetscapeMicrosoftFollower PDAPsion, ApplePalmFollower MP3 music playersDiamond MultimediaSony (&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 technology  Suggests 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 LOOSETIGHT 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