2.3 Barriers to Entry, Technology, and Timing

Learning Objectives

After studying this section you should be able to do the following:

  1. Understand the relationship between timing, technology, and the creation of resources for competitive advantage.
  2. Argue effectively when faced with broad generalizations about the importance (or lack of importance) of technology and timing to competitive advantage.
  3. 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 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”Nicholas 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 seven-fold, Blockbuster lost more than one billion dollars.“Movies to Go,” Economist, July 9, 2005. Should Sotheby’s have dismissed seemingly inferior eBay? Sotheby’s earned twenty-eight million dollars in profit in 2008; eBay earned $1.7 billion. Barnes & Noble waited seventeen months to respond to Amazon.com. Amazon now has over eight and a half times the profits of its offline rival and its market cap is thirty times greater.FY 2008 net income and June 2009 market cap figures for both firms: http://www.barnesandnobleinc.com/newsroom/financial_only.html and http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsOther. 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 off-line firms have failed to catch up to today’s Internet leaders.

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 databases, 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

Yahoo! was able to maintain its lead in e-mail 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 providing startup funding for Google and in using the firm for its search results as well. 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 up an advertising network (distribution channel), brand, and scale—all competitive resources that rivals have never been able to match.

Google’s ability to succeed after being late to the search 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 three hundred million dollars 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 3 "Netflix: David Becomes Goliath").

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. Take your eye off the ball and rivals may use time and technology to create strategic resources. Just ask Friendster—a firm once known as the largest social network in the United States.

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 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

  1. Does technology lower barriers to entry or raise them? Do low entry barriers necessarily mean that a firm is threatened?
  2. Is there such a thing as the first-mover advantage? Why or why not?
  3. Why did Google beat Yahoo! in search?
  4. 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?
  5. 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?
  6. 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 startup faces.