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Lecture 7

Timing of Product Introductions and Market Changes

MGMT 738 Management of Technology

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1. Explain why forecasting demand is difficult, but important2. Define technology diffusion, describe the typical diffusion pattern, and

identify the factors that influence technology diffusion3. Understand how information and product diffusion models predict the rate

and functional form of diffusion4. Use the Bass model to estimate the rate of diffusion5. Use the Delphi method to estimate the rate of diffusion6. Explain why complementary technology has a profound effect on

technology diffusion7. Define and explain technology substitution8. Explain the importance of estimating how long it takes for technology

substitution to occur

Learning Objectives

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.

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

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.

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.

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.

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.

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.

Product Development Timing

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Firm 1

Firm 2

Time

Fast Cycle Development

Slower Cycle Development

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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

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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

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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

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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

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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

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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

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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

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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

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The Process for Using the Delphi Method

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• 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

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The Importance of Complementary Technologies

• New products based on systemic technologies employ ways to make certain that complementary technologies will develop

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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

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Time to 90 Percent Substitution

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.

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TECHNOLGY DISCONTINUITY

Time

Subtechnology II

Initial region of slow Progress for S2

S1 > S2

Subtechnology I

Per

form

ance

Par

amet

er

Performance Limit of S1

t1 t2

Performance Limit of S2

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Sibling S-Curves Time

Limit of Switching Device

Watches

Per

form

ance

Par

amet

ers

CashRegistersCalculatorsComputers

VacuumTubes

Limit of Applied Device

Transistors

SSI,MSIIntegratedCircuits

LSI,VLSIIntegratedCircuits

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Comparison of CISC and RISC Lifecycles

Time

CISC Multiprocessor

CISC SingleProcessor

Per

form

ance

Par

amet

er

Communications Bottlenecks

RISC SingleProcessor

RISC Multiprocessor

Speed of Light Limit

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A

MA

GN

ITU

DE

OF

DE

MA

ND

B

FUTURE

Present

INFLECTION POINT

F

TimeGROWTH PATTERN AND POSSIBLE FUTURE STATES OF A TECHNOLOGY

Two major inflection points• Exponential to linear

• Linear to asymptotic

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Time/Stage

EMBRYONIC

Embryonic

Per

form

ance

par

amet

er

Growth

GROWTH AGINGMATURITY

Base(Divest Selectively)

Key(Build systematically)

Pacing (Invest selectively)

Emerging(Monitor)

TIMIMG OF INVESTMENT STRATEGIES FOR NEW TECHNOLOGY

Market Regularities

Stable Patterns of Product Transfer

Transfer from Self to Other

Enduring Customer Preferences

Stable Patterns of Life Cycles

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

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Overall Technology Cycle Composed of Subtechnology Lifecycles

Time

Home Use

Portable or Car Use

Business orFactoryUse

Per

form

ance

Par

amet

erLimit of Technology

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Product Generations within Subtechnology Lifecycles

Time

Home Use

Portable or Car Use

Business orFactoryUse

Per

form

ance

Par

amet

erLimit of Technology

P1

P3

P2

P4

P1

P1

P2

P2

P3

P3

TRANSFER FROM SELF TO OTHER

• Solutions for internal problems are often useful to others

ENDURING CUSTOMER PREFERENCES

• Some customer preferences are fairly predictable space time mass (less is often better)

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