1. ©2009 Prentice Hall 3-1 Lecture 7 Timing of Product Introductions and Market Changes MGMT 738 Management of Technology

2. ©2009 Prentice Hall 3-2 1.Explain why forecasting demand is difficult, but important 2.Define technology diffusion, describe the typical diffusion pattern, and identify the factors that influence technology diffusion 3.Understand how information and product diffusion models predict the rate and functional form of diffusion 4.Use the Bass model to estimate the rate of diffusion 5.Use the Delphi method to estimate the rate of diffusion 6.Explain why complementary technology has a profound effect on technology diffusion 7.Define and explain technology substitution 8.Explain the importance of estimating how long it takes for technology substitution to occur Learning Objectives

3. Overview The presence of products with increasing returns suggests that timing of entry can be very important. There are a number of advantages and disadvantages to being a first mover, early follower or late entrant. These categories are defined as follows:  First movers are the first entrants to sell in a new product or service category (“pioneers”)  Early followers are early to market but not first.  Late entrants do not enter the market until the product begins to penetrate the mass market or later.

4. First-Mover Advantages and Disadvantages Being a first mover can confer the advantages of:  Brand loyalty and technological leadership  Preemption of scarce assets  Exploiting buyer switching costs  Reaping increasing returns advantages. However, first movers often bear disadvantages also:  High research and development expenses  Undeveloped supply and distribution channels  Immature enabling technologies and complements  Uncertainty of customer requirements

5. First-Mover Advantages and Disadvantages  The market may often perceive first movers as having advantages because it has misperceived who the first mover really was.

6. Factors Influencing Optimal Timing of Entry 1. How certain are customer preferences? If customer needs are well understood, it is more feasible to enter the market earlier. 2. How much improvement does the innovation provide over previous solutions? An innovation that offers a dramatic improvement over previous generations will accrue more rapid customer acceptance. 3. Does the innovation require enabling technologies, and are these technologies sufficiently mature? If the innovation requires enabling technologies (such as long- lasting batteries for cell phones), the maturity of these technologies will influence optimal timing of entry.

7. Factors Influencing Optimal Timing of Entry (cont.) 4. Do complementary goods influence the value of the innovation, and are they sufficiently available? Not all innovations require complementary goods, but for those that do (e.g., games for video consoles), availability of complements will influence customer acceptance. 5. How high is the threat of competitive entry? If there are significant entry barriers, the may be less need to rush to market to build increasing returns ahead of others. 6. Are there increasing returns to adoption? If so, allowing competitors to get a head start can be very risky.

8. Factors Influencing Optimal Timing of Entry 7. Can the firm withstand early losses? The first mover bears the bulk of R&D expenses and may endure a significant period without revenues; the earlier a firm enters, the more capital resources it may need. 8. Does the firm have resources to accelerate market acceptance? Firms with significant capital resources can invest in aggressive marketing and supplier and distributor development, increasing the rate of early adoption. 9. Is the firm’s reputation likely to reduce the uncertainty of customers, suppliers, and distributors? Innovations from well-respected firms may be adopted more rapidly, enabling earlier successful entry.

9. Strategies to Improve Timing Options To have more choices in its timing of entry, a firm needs to be able to develop the innovation early or quickly. A firm with fast-cycle development processes can be both an early entrant, and can quickly refine its innovation in response to customer feedback. In essence, a firm with very fast-cycle development processes can reap both first- and second-mover advantages.

10. Product Development Timing ©2009 Prentice Hall 3-10 Firm 1 Firm 2 Time Fast Cycle Development Slower Cycle Development

11. ©2009 Prentice Hall 3-11 Demand Forecasts 1.Determine how much to produce 2.Projects future costs in businesses based on economies of scale 3.Determines the payback on your investment in product development 4.Makes pricing and advertising decisions 5.Determines the competitiveness of the market

12. ©2009 Prentice Hall 3-12 Forecasting Demand Can’t estimate future demand solely on the basis of the current market size Depends on the timing of customer adoption Depends on the accuracy of information about the factors that influence diffusion patterns

13. ©2009 Prentice Hall 3-13 Information Diffusion Models The functional form of diffusion is primarily a function of the distribution of innovators and imitators When there are few innovators and many imitators, diffusion follows an S-shaped pattern

14. ©2009 Prentice Hall 3-14 How Not To Do It The number representing a similar market should not be used as the estimated size of the target market:  May be a substitute for more than one existing product  May be a complement for one or more products

15. ©2009 Prentice Hall 3-15 The Bass Model A quantitative tool for forecasting the diffusion of new technology products that many companies use Based on the size of the market, the rate of adoption by innovators and imitators, and the proportion of adopters in the previous time period Can be modified to include a variety of factors that affect the diffusion of new technology products Most accurate at predicting the diffusion of consumer durables

16. ©2009 Prentice Hall 3-16 Bass Model Limitations Cannot use to estimate diffusion in the first year of a product’s life Accuracy of predictions depends on the accuracy of assessments of size of the potential market Assumes that the diffusion of a technology product depends only demand-side factors Accuracy is much lower when competing technologies are being introduced Further away in time from the initial adoption point the accuracy declines

17. ©2009 Prentice Hall 3-17 The Delphi Technique An important tool to use to identify potential technological trends that might impact the development of new products and services  Experts are selected and asked anonymously for their estimates of the likelihood of particular outcomes occurring  Participants return their estimates to a coordinator, who compiles them  Summary data outlining the mean and range of viewpoints is then returned to the respondents who are asked again for new estimates in light of the information presented by the other experts

18. ©2009 Prentice Hall 3-18 The Delphi Technique Major Weaknesses 1.Sensitive to the precision of the questions asked 2.Sensitive to variance in the expertise of the respondents 3.Validity of the technique is limited by the intervention of unexpected events that the experts do not incorporate into their analyses

19. ©2009 Prentice Hall 3-19 The Process for Using the Delphi Method

20. ©2009 Prentice Hall 3-20 Look at product characteristics to explain their rate of diffusion 1. The greater the benefit and the lower its cost, the faster it will diffuse 2. The provision of information about a new product and the opportunity to test it enhance the rate of diffusion 3. Perceived risk of a new product lowers its rate of diffusion 4. The characteristics of adopters affect the rate of diffusion 5. Aspects of the environment affect the rate of diffusion 6. Social and political factors affect the diffusion of a new product Product Diffusion Models

21. ©2009 Prentice Hall 3-21 The Importance of Complementary Technologies New products based on systemic technologies employ ways to make certain that complementary technologies will develop

22. ©2009 Prentice Hall 3-22 Substitution The achievement of the same objective by the replacement of one technology for another It influences the competition between incumbent firms and new entrants Implementation of a substitution strategy is difficult because substitution can be multi-level, face political opposition, be partial, and take a long or a short time Companies take risks by deliberately developing new products to substitute for old ones

23. ©2009 Prentice Hall 3-23 Time to 90 Percent Substitution

24. USE OF SIBLING S CURVES A possible solution to the shortcoming of the S curve is the use of ‘sibling’ S curves. The rationale behind use of sibling S curves is that the core technology of a product or industry often underpins other products or industries. S curves should be determined for these other products or industries to gain a better understanding of where a technology is in its life cycle.

25. 11 - 25 TECHNOLGY DISCONTINUITY Time Subtechnology II Initial region of slow Progress for S 2 S 1 > S 2 Subtechnology I Performance Parameter Performance Limit of S 1 t1t1 t2t2 Performance Limit of S 2

26. 11 - 26 Sibling S-Curves Time Limit of Switching Device Watches Performance Parameters Cash Registers CalculatorsComputers Vacuum Tubes Limit of Applied Device Transistors SSI,MSI Integrated Circuits LSI,VLSI Integrated Circuits

27. 11 - 27 Comparison of CISC and RISC Lifecycles Time CISC Multiprocessor CISC Single Processor Performance Parameter Communications Bottlenecks RISC Single Processor RISC Multiprocessor Speed of Light Limit

28. 11 - 28 A MAGNITUDE OF DEMAND B FUTURE Present INFLECTION POINT F Time GROWTH PATTERN AND POSSIBLE FUTURE STATES OF A TECHNOLOGY

29. Two major inflection points Exponential to linear Linear to asymptotic

30. 11 - 30 Time/Stage EMBRYONIC Embryonic Performance parameter Growth GROWTHAGING MATURITY Base (Divest Selectively) Key (Build systematically) Pacing (Invest selectively) Emerging (Monitor) TIMIMG OF INVESTMENT STRATEGIES FOR NEW TECHNOLOGY

31. Market Regularities Stable Patterns of Product Transfer Transfer from Self to Other Enduring Customer Preferences Stable Patterns of Life Cycles

32. STABLE PATERNS OF PRODUCT TRANSFER Many of today’s products have gone through several, similar product life cycles  business use  home use  car and or portable use

33. 11 - 33 Overall Technology Cycle Composed of Subtechnology Lifecycles Time Home Use Portable or Car Use Business or Factory Use Performance Parameter Limit of Technology

34. 11 - 34 Product Generations within Subtechnology Lifecycles Time Home Use Portable or Car Use Business or Factory Use Performance Parameter Limit of Technology P1 P3 P2 P4 P1 P2 P3

35. TRANSFER FROM SELF TO OTHER Solutions for internal problems are often useful to others

36. ENDURING CUSTOMER PREFERENCES Some customer preferences are fairly predictable  space  time  mass (less is often better)

37. Innovation Strategy The type of innovation strategy adopted can also be used to effect uncertainty  an offensive strategy introduces a lot of uncertainty for a firm but pushes progress up the S curve and provides a firm with first-mover advantages  a defensive strategy’s wait-and-see approach reduces uncertainty but also doesn’t allow for taking advantage of being the first-mover