Timing of Market Entry

Timing of Entry

Why is timing of market entry so crucial?

• First mover advantages/disadvantages
• Switching costs/lock-in
• Factors influencing optimal timing of entry
• Incumbent inertia
  • What is it?
  • Why does it happen?

PDA Industry Example (1990-2003)

• 1990-1993: Many companies developed PDAs.
  • Analysts predicted millions of sales by 2004.
  • Market confusion and underdeveloped technologies slowed adoption.
  • Many companies ran out of money by 1994.
• Palm Computing: Entered relatively late and produced a streamlined PDA.
• 2003: Arrival of smartphones and larger competitors (Nokia, Ericsson, Samsung).

E-book Market

• Timing can be crucial.
• Early adoption may enjoy self-reinforcing advantages:
  • More funds
  • Availability of complementary goods
  • Less uncertainty
• Few users may lead to failure.
• First-mover advantages/disadvantages shape the relationship between timing and success.

Categories of Entrants

• First movers (pioneers): First to sell in a new product or service category.
• Early followers (early leaders): Early to market, but not first.
• Late entrants: Enter when the product penetrates the mass market or later.

Early vs. Late Entrants

• Which is better?
• Conflicting research conclusions.
• Optimal timing depends on several factors.

First Movers and Followers: Who Wins? (Examples)

First Mover Advantages

• Brand loyalty and technological leadership
  • Long-lasting reputation as a leader
  • Sustain company image
  • Shape customer expectations
• Preemption of scarce assets
  • Capture scarce resources (key locations, government permits, distribution channels, supplier relationships)

More First Mover Advantages

• Exploiting buyer switching costs
  • Examples: Initial purchasing costs, cost of complements, cost of learning
  • QWERTY keyboard, SABRE
• Reaping increasing returns advantages
  • Market power through self-reinforcing positive feedback mechanisms
  • Intel’s 8088 family architecture

Switching Costs/Lock-In

• Costs involved in switching from one brand to another.
• Examples: Learning a new technology, disruption in operations.
• Can be significant.
• Lock-in: When switching costs are substantial.
  • Source of headaches for buyers, profits for vendors.

QWERTY Keyboard

• Early typewriters faced key jamming.
• Purpose:
  • Reduce key jamming
  • Scattering commonly used letters
  • Disproportionate burden on the left hand
• Inefficient and tiring, but remained due to switching costs.

First-Mover Disadvantages

• High failure rate (47%) with approximately 10% market share (Tellis & Golder).
• Early followers averaged almost three times the market share of pioneers.
• First movers may earn greater revenues but face higher costs (R&D, distribution, immature technologies).
• Lower profits in the long run.
• Market often misperceives who the first mover was (e.g., P&G’s “Pampers”).

R&D Expenses

• Significant R&D expenses for developing a new technology.
  • Costs of exploring unsuccessful technological paths.
• Later entrants often do not invest in exploratory research.
• Later entrants observe market response and focus development efforts.

Undeveloped Channels

• First movers may develop their own supplies and distribution or assist in developing supplier and developer markets.
• Immature enabling technologies and complements
  • PDAs, smart phones, e-book service, hydrogen fuel cell cars.
  • Important complements may not be fully developed, hindering adoption.

First-Mover Disadvantages (cont.)

• Uncertainty of customer requirements
  • Considerable uncertainty about product features and willingness to pay.
  • Risk of trials and errors (expensive).
• Customer education
  • Opportunity to shape customer preferences via customer education, but it can be too expensive.

Factors Influencing Optimal Timing of Entry

• Early market stage: Technology underdeveloped, customer needs unknown.
• Late market stage: Technology well understood, competitors have captured market share.
• How does a firm decide when to enter the market?
• Answer depends on several factors.

Factors Influencing Optimal Timing of Entry (cont.)

• How certain are customer preferences?
  • If well understood, earlier entry is more feasible.
  • Exciting graphics on early websites became an annoyance.
  • DVD feature of PS2 spoiled Sony’s strategy.
  • Not all pioneers face customer uncertainty (Tagamet).
  • Ceteris paribus, less customer uncertainty favors earlier entry.

Factors Influencing Optimal Timing of Entry (cont.)

• Are enabling technologies sufficiently mature?
  • If innovation requires enabling technologies (e.g., long-lasting batteries), their maturity influences timing.
  • More mature technologies allow earlier entry.
• Are complementary goods sufficiently available?
  • If innovation requires unavailable complementary goods, successful early entry is unlikely (unless the firm can develop them).

Factors Influencing Optimal Timing of Entry (cont.)

• How much improvement does the innovation provide?
  • Dramatic improvements gain rapid customer acceptance.
• How high is the threat of competitive entry?
  • If entry barriers are significant or few competitors exist, waiting is an option.
  • If the threat is high, earlier entry may be needed to establish brand image and secure resources.

Factors Influencing Optimal Timing of Entry (cont.)

• Is the industry likely to experience increasing returns to adoption?
  • If so, competitors getting a head start can be risky.
• Can the firm withstand early losses?
  • First mover bears R&D and may endure a period without revenues.
  • Earlier entry requires more capital (early PDA developers could not withstand losses).
  • Firms with resources may catch up (Nestle, MS Explorer).

Factors Influencing Optimal Timing of Entry (cont.)

• Does the firm have resources to accelerate market acceptance?
  • Significant capital allows aggressive marketing and supplier development.
• Is the firm’s reputation likely to reduce uncertainty?
  • Innovations from respected firms may be adopted more rapidly.
  • Customers use the firm’s reputation as a signal of the innovation’s quality.
  • MS entry into the videogame console industry is an example.

Incumbent Inertia

• Incumbents are often slow to enter new technological fields.
  • May intentionally wait or be slowed by incumbent inertia.
• Inertia: Tendency to be slow to respond to changes due to size, routines, and strategic commitments.
• Oxford Dictionary: "A tendency to do nothing or to remain unchanged"

Risk of Core Rigidities

• Firms can become rigid and overcommitted, especially when they excel at an activity.
• Incentives and culture may reinforce existing strengths while inhibiting the development of new competencies.
• Emphasis on core discipline (e.g., computer science) can make the firm less attractive to individuals from other disciplines.
• Rewards can discourage exploratory activities (limited flexibility)
• Icarus syndrome: firms can get drunk by their own success

The Rise & Fall of BlackBerry

• Used to be a darling of enterprise.
• Focused on corporate customers.
  • "It became necessary…you had to have one in order to live in business."
• A status symbol.
• Nicknamed “CrackBerry” “Digital Heroin”.
• Became a hit with consumers (Oprah Winfrey, teenagers).
• In 2009, had 20% market share, more than iOS (14%) and Android (4%) combined.

BlackBerry Downfall

• Struggled to keep up with demand and changing consumer tastes.
• Company got bigger:
  • 2,000 → 12,000 people in 4 years.
  • Politics, bureaucracy, and pointless processes emerged.
  • No more R&D, innovative spirits.
• When everybody wanted big screens, touchscreens, and candy bar styles, they came up with strange designs.

BlackBerry: Mistakes

• When the first iPhone hit the stores, RIM executives said, "The Blackberry solution is secure…iPhone is a music player and a consumer toy.”
• No advertisement, no attempt to communicate with consumers.
• Just trying to be close to carriers and enterprises.
• Rejected Justin Bieber as a brand representative.
• No apps.
• In 2016, its market share fell below 0.05%.

How to Overcome Incumbent Inertia (I-I)

• While strengthening the core business, create a new division focused solely on new technology opportunities.
• Creating a separate and completely independent organization is necessary when the new technology has a lower profit margin than the mainstream biz and must serve the unique needs of new customers
• Keep the new division independent.
• Because the future of new technology is uncertain, it is very difficult to allocate resource to the field of new technology while it is with the incumbent biz in a single organization

Strategies to Improve Timing Options

• A firm with very fast-cycle development processes has more options in timing and can reap both first- and second-mover advantages.
• A fast-cycle developer introducing innovations earlier and quickly introducing refined versions of its own technology.
• Development time can be greatly shortened by using strategic alliance, cross-licensing, outsourcing, cross-functional new product development teams, parallel development processes, and so on
• Parallel development process: multiple stages of the new product development process occur simultaneously