"Faster! Newer!" is not a strategy.
A commonly taught definition of strategy is that it consists of the alignment of a firm's internal strengths and weaknesses with opportunities and threats presented by the firm's external environment. Strategy involves the efforts of top managers to guide the various parts and functions of a firm so that the whole company moves in a coordinated fashion toward agreed-upon goals. Not many years ago, many business writers and consultants held that market share was the key to business success, and thus growth was the most desirable strategy. A company should be organized and run with growth as its primary coordinating goal.
Fortune recently quoted Andrew Grove, the CEO of Intel, as saying that "speed has become everything in the world of business ..."|1~ There has been a good deal written in the last few years about speed as an important or essential feature of a successful business, particularly if that business is in the manufacturing sector. Thus, a company should be organized and run with speed as its primary coordinating goal. But is speed a strategy?|2~
First, speed in doing what? Most executives would agree that speed is not the primary goal in closing the books at the end of a quarter. While undue delay can make it harder to run a business, very few financial or accounting officers are judged primarily on how fast they can deliver a complete set of financial statements at quarter-end. Accuracy is generally accepted as the main goal for this task. In theory, the payroll function could be speeded up to the point where each employee would be paid each day (or to push the limit, each hour). However, in practice, the costs would far outweigh the benefits. Again, a late delivery of paychecks is a significant problem, but speed is not the primary goal of the payroll department. Speed is often judged a virtue in accounts receivable, but less so in accounts payable.
Most of the writing about speed as a corporate strategy concerns speed-to-market.|3~ This involves the time between the beginning of development of a product and the beginning of sales. Although the concept can be applied in the service sector as well, it is usually discussed in the context of designing and manufacturing a physical product, particularly new products or new versions of products. There is an underlying assumption that innovation is good and, in terms of bringing innovations to market, that faster is better and first is best.|4~
Sony was on the market with an early version of the VCR before most of its competitors were off the drawing boards. Unfortunately, their VCR used the Beta technology, and it turned out that consumers preferred VHS. Sony is not a major factor in the VCR market today. Universal life insurance was the first really new product in the life insurance industry in over 20 years. Yet the first firms to introduce it in the early 1980s did not do as well in terms of performance as firms that waited more than two years and introduced it after regulatory questions were cleared up. Northwestern Mutual Life never introduced this product at all, yet they continue to achieve admirable financial performance and to rank very high on Fortune's list of most admired companies. On the other hand, Merrill Lynch came up with a relatively minor innovation by combining the features of several existing products into the Cash Management Account. While other investment firms watched and wondered what was so special about combined account, Merrill Lynch began to manage the assets of many of their former customers, who were willing to switch companies to obtain what they saw as a desirable product. Microsoft was first to produce an operating system that met IBM's requirements for its new P.C. More than 10 years later, MS-DOS still provides a significant portion of Microsoft's revenues and profits. Bill Gates, who founded Microsoft with a friend, is now one of the richest individuals in the United States and his co-founder, Paul Allen, has also become a multi-billionaire through the appreciation of his Microsoft stock. Clearly, then, speed-to-market sometimes helps and sometimes hinders a company's subsequent performance. To better understand this phenomenon, we need to return to the concept of strategy. Two of the major issues involved in determining a firm's strategy are what products to offer and what markets to offer them in. These issues, to a large extent, determine in which business or industry a firm actually competes. In some high-velocity industries, speed-to-market with new products or services is critically important. If a company designs and manufactures personal computers or women's fashions, the life-cycle of a product is often measured in months. A three-month delay in bringing a product to market can mean that it is obsolete on arrival. On the other hand, if a company designs and manufactures commercial airliners or refrigerators, product cycles are measured in decades, and a delay of three months in bringing a product to market is likely to have no effect on how well the firm competes. The examples cited are extremes; most firms will fall somewhere toward the shorter-end of the range of product life cycles. Obviously, in industries where new products or services which replace prior ones become available in a short span of time, speed-to-market is more important than in industries where replacement products do not appear for many years after the original ones come to market. So clarifying the strategy issues of products or services offered and markets served helps with deciding how important speed is. Note that speed is here cast in an instrumental role. It is one way of implementing a strategy. This perspective is different from the view that speed is a strategy, but as noted, there are problems with an across-the-board view of speed as strategy. Importance of Industry and Location
In some industries, most or all competitors are quick in providing new products or services to the markets served, and innovation is the rule rather than the exception. The personal computer industry certainly fits this description, as do fashion clothing and entertainment. Many other industries have a slower pace of innovation. Newspaper publishing, trucking, and supermarkets are examples of businesses where change comes relatively slowly. The range of possibilities is best thought of as a continuum rather than two widely separated points. Another factor sometimes overlooked in discussions of speed and innovation is location. In many industries, competition is entirely local, even if sales outlets number in the thousands and are spread across the country or the world. If you run the only pizza parlor in Panguitch, Utah it doesn't matter what pizza parlors are doing to compete in Salt Lake City or Las Vegas. On the other hand, if you run one of eight pizza parlors in a two-mile radius near a major college campus, it matters considerably what innovations your competitors are offering and how quickly new offerings become available.
The same factor is important in terms of global competition. To business executives in Los Angeles or New York, a 386 portable computer with a monochrome display may be hopelessly out of date. To their counterparts in some developing country, the same computer may represent the cutting edge of available technology. Boeing's 727 commercial aircraft is considered dated by some major airlines, but its "ancient" predecessor, the 707 is still flown by many countries. The question of speed-to-market has different implications depending on the market being served. Furthermore, the same company may need to proceed at quite different speeds in different parts of the world.
We saw that some firms which were first to market with innovations seemed to prosper initially but later lost out to slower competitors. Others maintained their advantage. The presence of certain factors or conditions makes it likely that the first firm to introduce an innovative product or service will gain advantages of timing that are not available to late-introducing firms. In the absence of these first-mover advantages, firms that introduce an innovation after certain issues have been resolved tend to do better than the very first innovator or innovators.|6~
Three categories of advantages benefit first movers; they can appear alone or in combination. Proprietary technology which is built into a product can hold competitors at bay and allow the first mover to build up sales and profits. Reputation effects can make the first mover's name synonymous with the product (Kleenex, for example, his become both the name of a specific kind of facial tissue and the generic term for facial tissues, even if they are made by a competitor). Customer switching costs can make it expensive in terms of money, time, or inconvenience for the purchaser of a product to switch later to a rival. Many people will not consider learning a new word processing program, even if it has some features which are superior to the one they now use.
In situations where one or more of these first-mover advantages is present, regardless of whether the product is a manufactured good or a service, being first is important to competitive success. In these situations, being first requires speed-to-market, because a customer will rarely pay for a product that is still in the research and development stage. There are cases, in the computer hardware industry, for example, where announcements of future products are enough to slow down sales of competitors' present products. However, such announcements sometimes backfire, either by slowing down sales of the announcing company's present product or by hurting the company's reputation if product introduction is delayed beyond the announced date.|7~
When none of the three categories of first-mover advantage is present, the competitive timing advantage often goes to firms that let competitors introduce new products first. Second-mover advantages do not literally go to the next firm after the first one to introduce an innovation. Rather, this class of timing advantages benefit firms that wait until some issue or issues concerning the new product or service have been resolved.
One timing advantage sometimes available to second movers that is denied to first movers is the ability to piggy-back (or free-ride in economic terms) on the investment of first movers. Cable television was an idea with much intrinsic appeal. In its early days, the big unanswered question was whether or not a critical mass of homes wired for cable would be obtained. With few cable programs to transmit, the appeal of cable services was limited. Once enough homes had been wired, and customers had shown a willingness to pay the going rates for service, cable programming proliferated. New channels didn't have to worry about whether there would be enough subscribers to make their programming even potentially profitable.
A similar but not identical timing advantage denied to first movers but available to followers is lower research and development costs. When new technology is not proprietary or cannot be fully protected as intellectual property, followers can examine the work of timing leaders and imitate it. Personal computers that work like IMB PCs but are made by other companies are called clones for good reason. IBM decided on an open systems approach in its early personal computer development. This made it easier for software firms to write application programs that would run on the PC. It also made it easy for hardware firms to make machines that closely resembled the PC and to sell them for less because there was very little in the way of development costs to be recouped before profits began to flow.
Another second-mover advantage is the knowledge of how technological or regulatory issues will be resolved. Obviously, Sony did not foresee how the choice between VHS and Beta technologies would come out. Companies that waited for the choice to be clear outperformed Sony in the VCR market. Universal life insurance was a new type of product. When it was first introduced, it was not clear whether it would be approved by the state insurance departments or whether it would receive favorable federal tax treatment. A negative decision on either issue would have doomed the product. Companies that waited until both issues were resolved favorably and then introduced universal life did better than those that rushed to be first to market.
Implications for Practice
There are several implications of first-and second-mover theory for business practice. If first-mover advantages are present, and if only the first company (or companies) to introduce an innovation it will gain these advantages, then speed-to-market is obviously important. Using a racing metaphor, which seems appropriate, it can be said that in the case of first-mover advantages timing decides winners and losers. There is a prize for being first and maybe for being a close second or third, but there are no prizes for competitors who are not fast enough to finish among the top group. The prizes discussed here are timing advantages. There may be other kinds of advantage to a firm that is late in introducing an innovation, but timing advantages are not gained by such a firm. In the absence of first-mover advantages, there is usually a best time to introduce an innovation. It is not simply any time after the first introducer; rather, identifying the best time depends on determining what key regulatory or technological question needs resolution, or when first movers will have laid sufficient groundwork for the second mover to proceed at less cost and with more certainty. Companies that perceive a situation where second-mover advantages prevail must determine at what point these advantages become available. They must also have the new product or service ready to sell when the opportune moment arrives. Speed-to-market still plays a part, but it is controlled speed deliberately applied. In the case of second-mover advantages, it is possible to be too early to market with a new product or service, but it is also possible to be too late. As with first-mover advantages, the first firm or firms to introduce after the critical point has been reached will win timing advantages. Firms that introduce much later than the critical point will not gain such advantages.
Thus, even in the case of second-mover advantages, speed-to-market matters. But, it is not all that matters. Success in gaining the benefits of innovation requires analysis of customers and competitors as well as speed. In practice, such analysis can be loaded with uncertainty and can lead to major differences of opinion within a firm's management. When universal life insurance was first introduced by a small life insurance company, it was so different from "normal" industry products that many in the industry believed it had no future and should not be developed or introduced by their companies. Others argued that it addressed critical problems brought on by historically high interest rates and new forms of alternate investments and should be developed and introduced immediately. At one major company, the executive who led the group advocating quick adoption replaced the retiring president. The other major candidate for the job, who opposed the new product, was transferred to an essentially meaningless position. Innovation issues have real effects on real people. How to Hurry
Development costs for universal life insurance were relatively small. In some cases, however, whether in the manufacturing or service sectors, development costs for a new product are large enough to require a major strategic decision. Obviously, the first step in bringing a product or service to market is deciding to develop it. The original idea for a new product or service can come from within the company or be copied from a competitor. In either case, the decision to spend money developing the product or idea can be made almost instantly or it can take weeks or months of review.
Once the decision has been made to develop an innovation, the costs and elapsed time required to bring the product or service to market can vary tremendously. Airlines can decide to offer half-fare tickets today and begin selling them tomorrow. Pharmaceutical companies can decide to begin work on a new kind of drug for hypertension or diabetes today and wait 10 years before the first commercial sale.
Speed-to-market usually refers to the two steps just described (although each can have many sub-steps). Speed in deciding and speed in developing are both required if a firm is to be first to market with a new product or service.|8~ They are also required, although not to the same degree, if a firm is to gain second-mover advantages by withholding introduction of a new product or service until an opportune moment in terms of timing advantages.
If the advantage lies in reducing technical or regulatory uncertainty, the first mover runs the risk of failure, but the second mover who decides and develops just as fast runs the same risk. The second mover in this case is actually at greater risk. If the first mover guesses correctly about the way uncertainties will be resolved, it gains the timing advantage, e.g., suppose Sony had introduced a VCR using VHS technology. Thus the second mover must be able to control its speed and in some cases deliberately hold back to gain second-mover advantages. This is a more complex approach than pure unadulterated speed-to-market.
Does all of this theory about speed and timing advantages have any practical application? Indeed it does. The following steps describe a pattern of decision and action intended to identify and take advantage of timing advantages in a more sophisticated way than simply hurrying as fast as possible. 1. Identify what business you are in -- not in broad terms, but in terms of the unit that produces and sells the item or service in question. 2. Identify your actual and potential competitors for the situation under analysis.
3. Identify the product or service that constitutes the innovation.
4. Analyze whether one or more of the first-mover advantages is present for this product or service in this competitive setting at this time.
5. If one or more first-mover advantages is present, estimate your chances of introducing the innovation first or close enough to first to profit from the timing advantage.
6. Decide whether to go for first or skip this particular race.
7. If none of the first-mover advantages is present for this product or service in this market at this time, analyze whether one or more of the second-mover advantages applies.
8. If one or more of the second-mover advantages does apply, estimate the best speed for decision making and for development and decide on a course of action. Speed-to-market is important in conducting business. However, the reality is more complex than the pure speed advocates recognize. Firms hoping to take advantage of innovations to outperform their competitors must be both fast and smart. Some races cannot be won. There is no benefit in hurrying toward a loss. Some races must be won, because the number of prizes is limited. Some business competition is not well described by the race metaphor, because the firms that perform best are those that gain the timing advantages available only after the innovative product or service has been introduced, uncertain issues have become clear, or groundwork has been laid. Firms that are smart and fast are most apt to succeed by correctly deciding which competitions to enter and when. In summary, strategy is the matching of a firm's strengths and weaknesses with opportunities and threats presented by its environment -- picking the contests where the firm is strong, using speed in a controlled way to seize timing opportunities, and avoiding situations where risks exceed opportunities.
1. Deutschman, Alan, "If They're Gaining on you, Innovate," Fortune, November 2, 1992, p. 86.
2. See: Bhide, Amar. "Hustle as Strategy," Harvard Business Review, September-October, 1986.
3. See for example: Vesey, Joseph T. "The New Competitors Think in Terms of 'Speed-to-Market'," SAM Advanced Management Journal, Autumn 1991.
4. On the subject of innovation bias, see: Rogers, Everett M. Diffusion of Innovations, 3rd Edition, New York: The Free Press, 1983.
5. Fortune, September 7, 1992.
6. Lieberman, Marvin and David Montgomery. "First Mover Advantages," Strategic Management Journal, Vol. 9, 1988.
7. For more on the topic of market signals, see: Porter, Michael, Competitive Strategy, Chapter 4. New York: Free Press, 1980.
8. On how firms can organize to emphasize time as a key factor, see: Bower, Joseph and Thomas Hour. "Fast-Cycle Capability for Competitive Power," Harvard Business Review, November-December 1988.
Davis, Stanley M. Future Perfect. Reading, MA.: Addison-Wesley, 1987.
Dumaine, Brian. "How Managers Can Succeed Through Speed," Fortune, February 13, 1989.
Eisenhardt, Kathleen. "Making Fast Strategic Decisions in High-Velocity Environments," Academy of Management Journal, September 1989.
Lambkin, Mary. "Order of Entry and Performance in New Markets," Strategic Management Journal, 1988.
Mascarenhas, Briance. "First-Mover Effects in Multiple Dynamic Markets," Strategic Management Journal, March 1992.
Robinson, W. T. and C. Fornell. "The Sources of Market Pioneer Advantages in "Consumer Good Industries," Journal of Marketing Research, 1985.
Stalk, George and Thomas Hour. Competing Against Time: How Time-Based Competition is Re-Shaping Global Markets. New York: Free Press, 1990.
Uttal, Bro. "Speeding New Ideas to Market," Fortune, March 2, 1989.
Joseph T. Gilbert, Ph.D. (University of Southern California) is Assistant Professor of Management in the College of Business and Economics at the University of Nevada, Las Vegas. He recently completed his dissertation research in the area of innovation strategy. Before joining the academic world, he spent sixteen years in various management positions in the financial services industry.
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|Author:||Gilbert, Joseph T.|
|Publication:||SAM Advanced Management Journal|
|Date:||Sep 22, 1993|
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