Executive Summary:
How do firms in technologically driven, highly competitive markets decide to launch new products? Product development decisions made by firms in the video game and consumer electronics industries offer clues about strategic choices that firms make under conditions of fierce competition. New research by Professors Sreekumar Bhaskaran, Karthik Ramachandran of SMU Cox shows why firms need to consider what their competitors are doing when making these decisions-an often ignored but important determinant of successful innovation.
Background
One of the most important decisions made by any product manager is timing the launch of a new product. Ramachandran observes, "Managers at technology-intensive companies like TI and HP often balance the need to launch a product early with the opportunity to allow design teams to refine its performance." The primary goal in this approach is to ensure that the product roadmap of an organization matches the development capability of the firm. However, as markets become increasingly competitive, it is imperative that managers broaden the scope of this internally focused decision-making process.
The authors cite the ongoing video game console war as a case in point. In early 2005, Microsoft and Sony revealed their plans to introduce the Xbox 360 and Playstation 3 - their respective versions of seventh-generation video game consoles. While Microsoft planned to launch the new Xbox in late 2005, Sony did not intend to launch PS3 until much later in 2006 - and the two firms were also outlining advanced consoles that were different in some remarkable ways. To date, with a monopoly for about a year, Microsoft has sold 11.6 million consoles to Sony's 5 million.
"The expert consensus during the E3 expo in 2005 was that Microsoft would be the early bird, but PS3 would be the superior console," Bhaskaran recalls. "Examples like these in competitive industries beg the question: How do-and how should-firms decide to launch new products in very technologically driven, highly competitive markets. When and what do they decide to launch?" The two competitors were seemingly following very different strategies in their decisions. He continues, "There are several strategic considerations in this industry. Consumers buy Xboxes because there are games for them. Additionally, given that users frequently participate in online gaming, the network base becomes a very important asset."
Ramachandran elaborates, "Microsoft must have learned from its experience with the original Xbox. Then, Microsoft had been late to market with its Xbox console, launched in 2000," he says. "Because Sony launched first, many games were written and published for Playstation. By the time Microsoft entered the market it was already too late, as Sony had a foothold." (Incidentally, Dallas is a major hub for game developers.)
Because of the high costs involved in gaining expertise in various platforms, game publishers rarely have the resources to make the same games available for multiple consoles. So the competition to get the attention of consumers and game publishers is quite intense. Ramachandran notes that the market share for the first consoles was over two-to-one to Sony's advantage owing to an early launch.
Bhaskaran notes that such competitive scenarios are not new; they have been played out in several industries before, ranging from automotives to pharmaceuticals to personal electronics. Yet, decision-making models that can aid managers in strategically evaluating their options are rare.
Load Up or Launch
The authors have developed a model in which each firm can either develop a new product based on a proven and immediately available technology, or explore a more advanced, albeit risky, technology. For video game manufacturers, who face narrow launch windows defined by peak selling seasons, there are essentially two choices: Sony had the option of either waiting to see what Microsoft did (and respond with a newer, better Playstation), or launch a new product quickly for head-to-head combat.
"If they make the choice to wait (and continue to improve their product) based solely on internal analysis of their own development capability, this can lead to a pitfall-a suboptimal launch decision," Ramachandran says. "With Microsoft in their rear view, how does Sony incorporate Microsoft's possible moves into their own console development and launch decisions?" And, Microsoft should take into account Sony's reactions in making its own decisions: It is this interactive element that makes managerial decision-making even more challenging in competitive industries.
The authors find that in more competitive markets, it often does not matter whether you launch now or later, it only matters that you don't mimic your rival. The worst possible outcome for firms occurs when both decide to launch products at the first opportunity, and interestingly, also when both firms decide to delay product introduction. This "collision" in the competitive market space could be disastrous. The authors point to the escalating price wars in the console market as the chaos in this market is beginning to settle.
The strategic decision framework developed in this research is also challenging some commonly held notions in business. For example, managers typically fear that technological advances of a rival could result in market share losses or even outright market extinction. Bhaskaran mentions, "This is not true when you have strategic competitors and incorporate their behavior into your decision making. When your competitor can increase quality rapidly, there is a greater incentive for that rival to delay product introduction - which you can gain from!" He provides an example, "When Sony decided to improve the Playstation and launch in the following year, Microsoft had a window of a year to charge premium prices and establish a presence. Consequently, even though Sony's technology prospects improved, Microsoft benefited by Sony waiting to build the better product." Ramachandran says when you ignore your competitor's moves, "you miss the golden opportunity."
End Game
"We know that both firms are trying to use their game platforms as a stepping stone toward the home entertainment system of the future," Ramachandran says. "These technologies become crucial while they are trying to set the standard."
It's not about whether you're a pioneer or a laggard in the market, but how you are responding to your competitor. "By staggering product introduction, firms can take different positions not only on the quality dimension but also on the time dimension. When product differentiation is harder to achieve, staggering becomes even more important," Bhaskaran notes. If everyone jumps into a lucrative market, that's not optimal. "If one chooses to be the pioneer, and the other one a laggard, then both are better off," Ramachandran adds. A firm that defers introduction could also use the additional time to differentiate its product on other dimensions. Although Nintendo launched the Wii later, the console has become a sensation among certain segments that other firms have had difficulty reaching.
The research also warns managers against over-committing to product performance without strategic analysis. "If a competitor thinks you are going to corner the market with a product that is 'as good as it gets' for a while, then your rival will launch sooner to at least have a longer market presence. The resulting head-on competition could be mutually destructive," Bhaskaran mentions.
Profiting from product development is not just about launching the best product in your arsenal; it's also about trying to understand how improvements in product quality affect your competitor's reactions. Ramachandran is reminded of Intel and AMD, fierce competitors. Intel has its technology and product roadmap publicly laid out for years to come. AMD and Intel are virtually prolific in their product rollouts. He suggests they may be trying to launch too many products too often. "If they reduce the number of offerings they launch, they can vacate the marketplace for the other one for a while, and then they might both make more money," he advises.
The paper "Competitive Product Introductions in Technologically Dynamic Environments" by Sreekumar Bhaskaran and Karthik Ramachandran of SMU Cox is under review.
Written by Jennifer Warren. |
