Chapter 5
Timing of Entry
SYNOPSIS OF CHAPTER
This chapter examines the timing factors that influence a technology’s likelihood of success. The
chapter discusses first mover advantages (e.g. building brand loyalty and technological
leadership, preemption of scarce resources, exploiting switching costs) and disadvantages (e.g.
higher spending on R&D, supplier development, distribution channels creation, enabling
technology development, complementary goods production, and learning customer
requirements), along with the corresponding advantages and disadvantages of entering as an
early follower or as a late entrant.
Entry timing is a function of many factors including the 1) certainty of customer preferences, 2)
the new technology’s margin of improvement over the incumbent technology, 3) availability of
enabling technologies, 4) availability of complementary products, 5) threat of competitive entry,
6) likelihood that the industry will experience increasing returns to adoption, 7) firms’ ability
suffer large losses, 8) availability of resources to accelerate consumer adoption of the product
and 9) ability of the firm’s reputation to decrease consumer, supplier and distributor uncertainty.
The chapter concludes by considering whether entry timing is really a choice that a firm makes.
It is only a choice if the firm is able to produce a technology at any point in the relevant
timeframe and/or the firm has a fast-cycle development process that enables the firm to enter or
catch up much more quickly than any of its competitors.
TEACHING OBJECTIVES
1. Explore the trade-offs between early and late entry into an industry.
2. Reinforce the effects increasing returns to adoption has on product diffusion and specify
the effects of increasing returns on entry timing.
3. Identify the characteristics of firms that enable them to choose when to enter an industry.
LECTURE OUTLINE
I. Overview
a. Early entry can be crucial to the successful adoption of a new technology. This
is especially true when the technology benefits from increasing returns to adoption. But
the same characteristics that make early entry desirable can often make the technology
unattractive. For example, there may only be a few users early on and the firm may have to
develop or support the development of needed complementary products if it is a
new-to-the-world innovation.
b. Entrants are often divided into three categories― “First movers“, “early
followers” and “late entrants.” The research studying when it is best to enter is
inconclusive. There are a number of factors that influence how timing of entry affects firm
survival and profits including 1) market related factors such as availability of
complementary goods, development of enabling technologies, degree of customer certainty;
and 2) firm specific factors such as capital resources, prior experience and reputation.
II. First Mover Advantages
a. First mover advantages include the ability to build brand loyalty and technological
leadership, and the ability to access resources that may become scarce. If the industry is
characterized by increasing returns two more advantages that a firm may benefit from are
learning about the technology and customer requirements before their competitors do and
network externalities.
i. Brand Loyalty and Technological Leadership can result from early entry.
Consumers may consider the first firm to enter a new technological domain to be
the technological leader. This reputation for technological leadership can
enhance a company’s ability to shape customer expectations (e.g. features,
pricing, etc.) and can be sustained if the technology is difficult to imitate or is
protected by patent or copyright.
ii. Preemption of Scarce Assets by the first mover can prevent later entrants from
accessing key locations and important distribution channels, gaining government
permits (e.g. broadcast rights), and can make the development of relationships
with suppliers more difficult.
1. For example, late entrants that want to provide a wireless communication
service face the problem that the government has already auctioned off most
of the radio frequencies needed to provide the service. A new firm faces the
situation of having to buy or lease (if the government permits these
transactions) the needed frequencies from its competitors or not entering.
iii. Exploiting Buyer Switching Costs can enable early movers to keep their
customers even if a later entrant offers a superior technology. These switching
cost include the cost of the product and the costs associated with learning how
to use the product (Qwerty is the oft used example to demonstrate this point).
iv. Increasing Returns Advantages are self-reinforcing and can be gained in an
industry that experiences pressure to adopt a dominant design (as discussed in
Chapter 4). These advantages often culminate in the technology’s entrenchment
as a dominant design (Intel’s invention of the first microprocessor in 1971 and
Microsoft’s introduction of BASIC in 1975 are good examples of these effects).
III. First Mover Disadvantages
a. Tellis & Golder contrasted the experience of first movers and early followers and found that
first movers have higher failure rates (47%) and lower market shares than the early
followers (10% vs. 30%).
b. First movers earn greater revenues but also have higher costs, with the result that they earn
significantly lower profits over time. The costs incurred by first movers that are nonexistent
or greatly reduced for followers include expenditures on R&D, development of supply and
distribution channels, development of enabling technologies, development of
complementary goods and services and product trials to determine what features
consumers actually prefer. Later entrants can also adopt newer and more efficient production
processes.
i. Research and Development Expenses for the first mover are higher than those for
later entrants because 1) their exploration costs are higher (they have to pay for
research that did not result in a commercially viable product) and 2) they bear the
cost of developing production processes and complementary goods later entrants
can leverage without the usually very large upfront investment made by the first
mover.
ii. Undeveloped Supply and Distribution Channels often characterize the situation
faced by a first mover. A new-to-the-world technology often doesn’t have
ready-made suppliers or distributors. The first mover then must either develop and
produce its own supplies and distribution service, or assist in the development of
supplier and developer markets (e.g. DEKA’s development of the IBOT wheelchair
required the firm to invent new ball bearings and develop a machine to produce the
bearings).
iii. Immature Enabling Technologies and Complements also often characterize the
situation faced by first movers. For example, PDA developers were reliant on the
development of batteries and modems by other firms. Similarly, when
complementary products are not readily available the adoption rate of a
technology is slowed (see Chapter 4).
1. This effect has occurred in the development of hydrogen fuel cell powered
vehicles. Development of this alternative technology has been slowed
because there is no ready way to refuel cars using the new technology (see
the Theory in Action section in this chapter for more details).
iv. Uncertainty Regarding Customer Requirements can cause first movers to incur
great expense to learn what customers want (market research may have little value
when customers do not yet know how they will use the product) and are willing to
pay for and refine products accordingly.
1. For example, Kodak was the first to introduce the 8mm video camera in the
late eighties but withdrew from the market due to a poor response from
customers. As you know the story does not end well for Kodak. By the early
1990’s customers became more comfortable with the technology and Sony
successfully entered this market leaving Kodak to play catch up or not
reenter at all. This may have been a case where Kodak would have been
better off by spending on customer education efforts.
c. So why does the belief in first mover advantages persist? First because there have been
successful first movers and second because the market has, in many cases, misidentified the
first mover (e.g. P&G was not the first mover in the disposable diaper market but because
they are the market leader many think they were. P&G entered 30 years after Chux).
d. Figure 5.1 provides a list of first movers and their more successful early followers.
Show Figure 5.
IV. Factors Influencing Optimal Timing of Entry
a. How does a firm decide whether to pioneer a technology category or wait
until while others do? The answer depends on several factors including customer certainty,
the margin of improvement offered by the new technology, the state of enabling
technologies and complementary goods, the threat of competitive entry, the degree to
which the industry exhibits increasing returns, and the firm’s resources.
i. How certain are customer preferences? More certain customer
preferences favor early entry. Both companies and consumers learn which features
create the most value as they gain experience with the product (there are exceptions
such as drug development targeting certain diseases or symptoms where the
customer requirements are clear from the outset). Features initially thought to be
important may not be (e.g. exciting graphics and sounds were initially thought to
be needed to establish an e-commerce presence) and features initially thought to
be unnecessary or not as important turn out to be important to customers (e.g.
Sony’s Playstation2 console included the ability to play music CDs or DVDs that
Sony thought was of secondary importance to the functionality supporting game
playing. As it turned out some consumers purchased the console for the CD and
DVD functions and purchased only a few games. This was bad news for Sony
because consoles are sold at or near cost to increase adoption and profits are derived
from game sales).
ii. How much of a margin of improvement does the innovation provide
over previous technologies? The higher the improvement the more likely a firm is
going to be successful entering early because the product will more rapidly gain
customer acceptance.
iii. Does the innovation require enabling technologies, and are they sufficiently mature?
Readily available enabling technologies facilitate early entry and vice versa.
iv. Do complementary goods influence the value of the innovation, and
are they sufficiently available? If the firm’s innovation requires
complementary goods that are not available on the market and the firm is
unable to develop those complements, successful early entry is unlikely.
v. How high is the threat of competitive entry? Entry barriers and the
profit potential of the technology (i.e. high margins) both play a role in
assessing the threat of competitive entry. High entry barriers enable a firm to
delay entry. But if a firm delays entry when entry barriers are low and the
value of the technology is high they are likely to face a very competitive
situation when they do enter.
vi. Is the industry likely to experience increasing returns to adoption?
Early entry is advisable if an industry is likely to experience increasing returns
to adoption. If a competitor enters earlier and builds a large installed base it
may be very difficult to get consumers to switch products (especially if the
competitor’s technology has been established as the dominant design).
vii. Can the firm withstand early losses? To avoid the situation Momenta
experienced in the PDA industry companies must have deep pockets. Large
capital reserves enable a firm to weather long periods of market confusion and
low sales. On the other hand these same resources can also enable a firm to
enter later because they can more easily catch up (e.g. Nestle was able to
leverage its brand name and strong capital position to overtake General Food’s
Maxim as a late entrant).
viii. Does the firm have resources to accelerate market acceptance? If a
firm can invest in market education, supplier and distributor development, and
can sponsor the development of complementary goods and services then it is
more likely to be successful with early entry than a firm that cannot
underwrite these kinds of efforts.
ix. Is the firm’s reputation likely to reduce the uncertainty of customers,
suppliers, and distributors? The positive effects of a strong reputation can
improve the chances of successful early entry by reducing consumer
uncertainty with regard to the utility of the new technology and its quality. In
addition, a firm that is thought to be a technological leader is also more able to
attract suppliers and distributors (e.g. Microsoft’s announcement that it would
enter the personal digital assistant market caused many distributors to wait for
Microsoft’s product).
b. Will Mitchell asked a slightly different question in his research. He studied when incumbent
firms in an industry enter an emerging subfield. He found that firms with specialized assets
applicable to the new subfield and firms with products that were threatened by the new
products firms were likely to enter early. He also found that incumbents would enter even
earlier if core products were threatened and there were several potential rivals that could also
enter
V. Strategies To Improve Timing Options
a. Up to this point we have assumed that entry timing is a choice that a firm makes. This is only
true when the firm is capable of producing the technology at any point in the relevant
timeframe (i.e. the firm has or can quickly acquire the necessary core capabilities) and/or the
firm has a fast-cycle development processes (e.g. using strategic alliances, cross-functional
new product teams, parallel development, etc.).