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
Automobile
1
0.8
Index
Firms
0.6
0.4
Sales
0.2
0
0
10
20
Years Since Commercialization
30
Resolution of Technology and
Demand Uncertainty
Technological
Uncertainty
Resolved
Demand
Uncertainty
Resolved
time
Invention
Commercialization
Firm
Take-Off
Sales
Take-Off
When should firms enter?
?
?
?
time
Invention
Commercialization
Firm
Take-Off
Sales
Take-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.


Advantages of second movers





BankOne (Internet banking); New Balance (athletic shoe industry)
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
PRODUCT
Jet Airliners
Float glass
X-Ray Scanner
Office P.C.
VCRs
Diet Cola
Instant Cameras
Pocket Calculator
Microwave Oven
Plain Paper Copiers
Fiber Optic Cable
Video Games Players
Disposable Diapers
Web browser
PDA
MP3 music players
INNOVATOR
De Havilland (Comet)
Pilkington
EMI
Xerox
Ampex/Sony
R.C. Cola
Polaroid
Bowmar
Raytheon
Xerox
Corning
Atari
Proctor & Gamble
Netscape
Psion, Apple
Diamond Multimedia
FOLLOWER
Boeing (707)
Corning
General Electric
IBM
Matsushita
Coca Cola
Kodak
Texas Instruments
Samsung
Canon
many companies
Nintendo/Sega/Sony
Kimberly-Clark
Microsoft
Palm
Sony (&others)
WINNER
Follower
Leader
Follower
Follower
Follower
Follower
Leader
Follower
Follower
Not clear
Leader
Followers
Leader
Follower
Follower
Followers
The Rise of Microsoft

In 1980, Microsoft didn’t even have a personal computer
(PC) operating system


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 dominant operating system was CP/M.
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?

2.
3.
4.
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?
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




Common in industries that are physically networked


Linkages between users
Complementary products
Switching costs
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)
How should companies compete in
standards-based industries?
Maximize
market
acceptance
VHS
Betamax
LOOSE
Maximize
value
appropriation
TIGHT
IBM-PC
Mac
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