This is “Barriers to Entry, Technology, and Timing”, section 2.3 from the book Getting the Most Out of Information Systems (v. 2.0).
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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 seven-fold, 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 $96 million in 2010, but eBay earned over $1.8 billion. Barnes & Noble waited seventeen months to respond to Amazon.com. Amazon now has 32 times the profits of its offline rival, and its market cap is roughly 140 times greater.FY 2010 net income and March 26, 2011, market cap figures for both firms. Rival Borders has already declared bankruptcy. 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
|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 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.
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 fallen so far behind rivals that it has become virtually irrelevant today.