Barriers to Entry, Technology, and Timing

2.3 Barriers to Entry, Technology, and Timing

Learning Objectives

Understand the relationship between timing, technology, and the creation of resources for competitive advantage.
Argue effectively when faced with broad generalizations about the importance (or lack of importance) of technology and timing to competitive advantage.
Recognize the difference between low barriers to entry and the prospects for the sustainability of new entrant’s efforts.

Some have correctly argued that the barriers to entry for many tech-centric businesses are low. This argument is particularly true for the Internet where rivals can put up a competing Web site or deploy a rival app seemingly overnight. But it’s absolutely critical to understand that market entry is not the same as building a sustainable business and just showing up doesn’t guarantee survival.

Platitudes like “follow, don’t lead”N. Carr, “IT Doesn’t Matter,” Harvard Business Review 81, no. 5 (May 2003): 41—49. can put firms dangerously at risk, and statements about low entry barriers ignore the difficulty many firms will have in matching the competitive advantages of successful tech pioneers. Should Blockbuster have waited while Netflix pioneered? In a year where Netflix profits were up sevenfold, Blockbuster lost more than $1 billion, and today Blockbuster is bankrupt.“Movies to Go,” Economist, July 9, 2005. Should Sotheby’s have dismissed seemingly inferior eBay? Sotheby’s made $171 million in 2011, but eBay earned over $3.2 billion. Barnes & Noble waited seventeen months to respond to Amazon.com. 2011 was a down year for Amazon due to investments in the Kindle and other new businesses, but the firm still earned $630 million in profits, while Barnes & Noble lost over $73 million. Today Amazon sports a market cap roughly 100 times greater than its one-time rival, and it has expanded far beyond being just a books and media business.FY 2011 net income and May 30, 2012, market cap figures for both firms. During that same year, Borders—once the nation’s number two book chain—declared bankruptcy and closed all of its stores. Today’s Internet giants are winners because in most cases, they were the first to move with a profitable model and they were able to quickly establish resources for competitive advantage. With few exceptions, established offline firms have failed to catch up to today’s Internet leaders.

Table 2.1 A Tale of Two Firms

	2007	2008	2009	2010
Amazon	$476 million	$645 million	$902 million	$1,152 million
Barnes & Noble	$150 million	$135 million	$75 million	$36 million

Barnes & Noble saw net income cut in half from 2007 to 2009 then fall half again in 2010. Over the same period Amazon’s profits are up nearly threefold—in a recession.

Timing and technology alone will not yield sustainable competitive advantage. Yet both of these can be enablers for competitive advantage. Put simply, it’s not the time lead or the technology; it’s what a firm does with its time lead and technology. True strategic positioning means that a firm has created differences that cannot be easily matched by rivals. Moving first pays off when the time lead is used to create critical resources that are valuable, rare, tough to imitate, and lack substitutes. Anything less risks the arms race of operational effectiveness. Build resources like brand, scale, network effects, switching costs, or other key assets and your firm may have a shot. But guess wrong about the market or screw up execution and failure or direct competition awaits. It is true that most tech can be copied—there’s little magic in eBay’s servers, Intel’s processors, Oracle’s database software, or Microsoft’s operating systems that past rivals have not at one point improved upon. But the lead that each of these tech-enabled firms had was leveraged to create network effects, switching costs, data assets, and helped build solid and well-respected brands.

But Google Arrived Late! Why Incumbents Must Constantly Consider Rivals

Although its share is slowly eroding, Yahoo! has been able to hold onto its lead in e-mail for so long because the firm quickly matched and nullified Gmail’s most significant tech-based innovations before Google could inflict real damage. Perhaps Yahoo! had learned from prior errors. The firm’s earlier failure to respond to Google’s emergence as a credible threat in search advertising gave Sergey Brin and Larry Page the time they needed to build the planet’s most profitable Internet firm.

Yahoo! (and many Wall Street analysts) saw search as a commodity—a service the firm had subcontracted out to other firms including Alta Vista and Inktomi. Yahoo! saw no conflict in taking an early investment stake in Google or in using the firm for its search results. But Yahoo! failed to pay attention to Google’s advance. As Google’s innovations in technology and interface remained unmatched over time, this allowed the firm to build its brand, scale, and advertising network (distribution channel) that grew from network effects because content providers and advertisers attract one another. These are all competitive resources that rivals have never been able to match.

Now Google (and Apple, too) are once again running from this playbook—turning the smartphone software market into what increasingly looks like a two-horse race. Many rivals, including Microsoft, had been trying to create a mobile standard for years, but their technical innovations offered little durable strategic value. It wasn’t until app stores flourished, offered with a high-quality user experience, that dominant smartphone platforms emerged. Yes, Google and Apple arrived late, but nothing before them had created defensible strategic assets, and that left an opening.

Google’s ability to succeed after being late to the search and mobile party isn’t a sign of the power of the late mover; it’s a story about the failure of incumbents to monitor their competitive landscape, recognize new rivals, and react to challenging offerings. That doesn’t mean that incumbents need to respond to every potential threat. Indeed, figuring out which threats are worthy of response is the real skill here. Video rental chain Hollywood Video wasted over $300 million in an Internet streaming business years before high-speed broadband was available to make the effort work.N. Wingfield, “Netflix vs. the Naysayers,” Wall Street Journal, March 21, 2007. But while Blockbuster avoided the balance sheet–cratering gaffes of Hollywood Video, the firm also failed to respond to Netflix—a new threat that had timed market entry perfectly (see Chapter 4 "Netflix in Two Acts: The Making of an E-commerce Giant and the Uncertain Future of Atoms to Bits").

Firms that quickly get to market with the “right” model can dominate, but it’s equally critical for leading firms to pay close attention to competition and innovate in ways that customers value. Take your eye off the ball and rivals may use time and technology to create strategic resources. Just look at Friendster—a firm that was once known as the largest social network in the United States but has become virtually irrelevant today.

Key Takeaways

It doesn’t matter if it’s easy for new firms to enter a market if these newcomers can’t create and leverage the assets needed to challenge incumbents.
Beware of those who say, “IT doesn’t matter” or refer to the “myth” of the first mover. This thinking is overly simplistic. It’s not a time or technology lead that provides sustainable competitive advantage; it’s what a firm does with its time and technology lead. If a firm can use a time and technology lead to create valuable assets that others cannot match, it may be able to sustain its advantage. But if the work done in this time and technology lead can be easily matched, then no advantage can be achieved, and a firm may be threatened by new entrants

Questions and Exercises

Does technology lower barriers to entry or raise them? Do low entry barriers necessarily mean that a firm is threatened?
Is there such a thing as the first-mover advantage? Why or why not?
Why did Google beat Yahoo! in search?
A former editor of the Harvard Business Review, Nick Carr, once published an article in that same magazine with the title “IT Doesn’t Matter.” In the article he also offered firms the advice: “Follow, Don’t Lead.” What would you tell Carr to help him improve the way he thinks about the relationship between time, technology, and competitive advantage?
Name an early mover that has successfully defended its position. Name another that had been superseded by the competition. What factors contributed to its success or failure?
You have just written a word processing package far superior in features to Microsoft Word. You now wish to form a company to market it. List and discuss the barriers your start-up faces.
What kinds of strategic assets are Google’s Android and Apple’s iOS seeking to create and exploit? Do you think these firms will be more successful than rivals? Why or why not?