Case Study on "Technology and Innovation Market Position Value"

Case Study 6 pages (1707 words) Sources: 6

[EXCERPT] . . . .

Technology and Innovation -- Market Position Value

Despite being the second or third to market in an industry based on increasing returns, it is possible to catch up to the first mover in terms of installed base. Of the many factors that go into this strategic decision to attempt and catch a first mover in terms of installed base, the most significant is the extent to which the expertise and knowledge the later entrant can scale and capture customers at a faster pace than the first mover (Shane, 2008, pp. 297 -- 298). In conjunction with the depth of expertise and knowledge the alter entrants to a market with increasing returns have, the ability to monetize intelligence and insight quicker than the first mover is also a strategic advantage (Shane, 2008). The intent of this analysis is to evaluate how a later entrant into an industry with increasing returns, for example e-commerce, can catch up and potentially surpass the installed base of the first mover who was instrumental in defining the market.

Strategies for Attaining Installed Base Parity with a First Mover

There are many benefits to being a second mover in an industry or market with increasing returns which can be used as the foundation or catalyst for relatively quickly catching a first mover in terms of installed base capture. The widely-held belief that first movers create high barriers to entry and force vendor lock-in is only partially correct. The reality is that in industries with increasing returns the valuation of expertise, insight, and knowledge is very high as customers seek to capitalize on new and unique ways of solving complex problems or attaining their objectives at a pace far faster than had been the case with previous technologies or solutions (Lieberman and Montgomery 1988). The reality is that the more agile and applicable the knowledge base of a company is, the more capable they are of competing with a first mover and overtaking them on a customer-by-customer base by offering more value based on their unique intellectual property and potentially more recent intelligence and knowledge (Robinson and Fornell, 1985).

A first mover into a segment of e-commerce for example may have superior insight, intelligence and knowledge about how to streamline the online purchasing, payment verification, transaction security and cross-sell or recommendation engines. A second mover would easily expand on these areas by investing heavily in Research & Development (R&D) and also concentrating on how to increase transaction accuracy, traceability and velocities so all three factors combine to deliver an exceptoio9nal online and purchasing experience (Lieberman and Montgomery 1988). The first mover in an e-commerce market may have done all they could to just get transactional systems coordinated with suppliers and established the necessary integration links to ensure transactions. This fundamental form of knowledge often accompanies successful first movers into markets with increasing returns, as the first mover attempt to create a network effect to further increase their customer base (Lieberman and Montgomery 1988). Theorists and strategists who write about first-mover advantage often point to the structural and foundational aspects first movers deliberately attempt to put in place to nurture and create a faster network effect (p. 238) throughout their installed base (Shane, 2008). Again e-commerce serves as a relevant example to this dynamic. The initial efforts of Amazon.com to create a network effect with suppliers and the critically important order management, pricing and logistics suppliers crated a highly effective first mover advantage the resulted in a rapid network effect occurring. This succeeded as a first mover strategy because it concentrated on creating a network effect around accuracy, traceability and velocity of transactions first. This allowed Amazon.com to in turn create a very effective network effect with consumers, as they could use the accumulated experience to continually increase the performance of their back office of their e-commerce systems. The result was a first mover advantage in e-commerce for books and other items that could be shipped that didn't require special handling.

The first-mover advantage of Amazon.com into a market with rapidly increasing returns also served as the catalyst for the eventual productization of their back office technology expertise and virtualization technologies into Amazon Web Services (AWS) which is predicted to be a $500M business by 2013 (Isckia, 2009). The continual investment in R&D and the translation of insight, intelligence, intellectual property and knowledge into first mover advantage in adjacent markets is how Amazon.com continues to expand its business model and revenue streams. In doing so, network effects are also accomplished that set the foundation for subsequent innovation and first mover advantage in markets with increasing returns. Second movers into e-commerce for example would need to define unique insight, intellectual property, accentuated navigation, and a streamlined user experience that would provide the catalyst for capturing increasing returns in emerging or growth markets relative to first-movers. For second-movers in this type of market scenario, the critical success factors of their market entrance strategy include capitalizing on the mistakes and lessons of the first mover, while also finding products or services that defy commoditization and can sustain premium prices. These economic factors of pricing and high elasticity of markets are critical for not only attaining higher gross margins to attain profitability faster, but to successively differentiate on service and experience over just competing on price. The fatal error many companies initially make is attempting to compete purely on price in inelastic markets first movers have redefined by experiential and trust-based factors (Shane, 2008). This is the fatal error Border's Books and Barnes & Noble made in attempting to compete online with Amazon.com. Instead of seeking out insight, intellectual property and innovating the online experience, both competitors rushed to emulate the recommendation engine and catalog of their largest competitor and didn't approach the installed base of Amazon.com despite competing in a market with increasing returns. The trajectory of Zappo's however is entirely different, and shows how a second mover that seeks to expand upon intelligence and knowledge of the industry by both learning from the first movers' mistakes while personalizing the online shopping experience can approach first mover installed base levels. Combining the lessons learned from Amazon.com's many years of trial and error in creating highly scalable, virtualized distributed order management systems, Zappos created a customized Enterprise Resource Planning (ERP) system that had the first order state engine of its kind in e-commerce globally (Napolitano, 2009). The result was that Zappos actually eclipsed Amazon.com in its core market of shoes and women's accessories. Zappos was so successful with this approach to mining the insights and intellectual property of Amazon.com and then streamlining it that Amazon.com eventually purchased them for $800M (Hsieh, 2010).

Zappos was able to capitalize on where Amazon.com had gaps in their back-office functionality, specifically in the area of real-time inventory management and updates on logistics and order status (Napolitano, 2009). These aspects of the back-office of any e-commerce website are crucial for the creation of a network effect. In an industry marked by increasing returns, the need for creating interactive, highly responsive features accelerates the development of a network effect. The ability of any customer at any time to query about the location of their shoes, accessories or products and get a map of the U.S. completed with precise positioning of their order in the fulfillment chain was so revolutionary it went viral as a feature (Napolitano, 2009). In this example of second mover overtaking first-over in increasing returns-based markets and capturing large segments of an installed base, there are several key lessons learned.

First, second-movers who look not to the consumer or user transaction but to the critical links in the value chain inevitably find greater insight, intelligence and an opportunity to differentiate based on knowledge vs. price. This focus on defensible intellectual property and knowledge in markets with increasing returns continues to be proven as an effective strategy for second-movers to quickly gain a customer base (p. 238) and differentiate their value proposition (Shane, 2008). This also sets the foundation for user-driven innovation that is orders of magnitude more effective and agile to create than those approaches to disruptive innovation that happen purely at the user transaction level. An example of this is the ability of Zappos to present users with a map of the U.S. And explain down to the fulfillment center where their order is in real-time (Napolitano, 2009).

Second, the ability to nurture and quickly create a knowledge-sharing network by a second mover is directly proportional to their ability to translate intelligence insight and knowledge within their company into a knowledge sharing network (Dyer, Nobeoka, 2000). The network effects are a critical foundation or framework that second movers can rely on to capture installed base at a faster rate than their first mover competitors. The accelerated network effects of sharing more insight and intelligence, knowledge and status from within their logistics system was pivotal in Zappos entering and gaining a customer base in an industry with increasing returns.

Conclusion

It is possible for a second… READ MORE

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