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Article Excerpt
The ability to keep up with changing technology is critical for a company's long-term survival. However, companies have to balance the risk of rushing into new areas and potentially cannibalizing their existing business against the risk of missing the emerging market. This paper investigates when incumbents enter into new market niches created by technological innovation. We argue that market conditions and company-specific characteristics do not suffice to explain incumbents' entry timing, but that entry is a contagious process. Our results demonstrate that incumbents are more likely to respond to innovations in their industry when their counterparts do so. In particular, we show that incumbents are affected by the entry of firms that are similar in size and resources. When a highly similar company enters the new market, it raises the probability that the company enters itself beyond levels based solely on the attractiveness of the market.
Key words: market entry; competition; new product research
History: This paper was received December 26, 2001, and was with the authors 13 months for 3 revisions; processed by Gary Lilien.
1. Introduction
Retail brokers confronted with online brokerage, integrated mills confronted with minimills, offset press manufacturers confronted with digital printing... examples abound of incumbents encountering new technologies into their markets. Technological change can transform a market, often creating great turmoil in an industry and enabling successful entry of new firms (Han et al. 2001). Accordingly, it poses a significant challenge for established firms. When confronted with competitors' new products, companies need to decide how long they can remain passive. Innovations provide opportunities for growth but may also undermine existing competitive advantages and investments and distract from current operations. This paper presents a conceptual and empirical model to explain the timing of an incumbent's response to disruptive technology.
The research questions this paper addresses include: What factors determine when incumbents enter into a new market niche created by disruptive innovation, and how can we explain the variety in timing of incumbents' responses? Specifically, this study investigates whether the entry time of different incumbents is interdependent. An argument can be made that as a competitor enters the market, it makes it less attractive to all subsequent entrants. We discover a positive effect resulting from other companies' entry, suggesting a contagion effect within market entry.
The structure of this paper is as follows. In the next section, we define the context of this paper. We then present our empirical setting in [section]3. The fourth and fifth sections discuss the concept of contagion and integrate it within an empirical model of market entry. Next, we discuss the data, estimation, and empirical results. We conclude by exploring the implications of this analysis for a firm's potential reaction to disruptive innovation.
2. Definitions
Recent research has focused attention on the competitive effect of disruptive niche innovation (Adner 2002, King and Tucci 2002). Niche innovation occurs when a new technology creates a new market opportunity within an existing industry. As introduced by Christensen (1997), an innovation can be termed disruptive if it introduces new performance dimensions. Compared to existing technology on standard performance attributes, disruptive innovations actually perform worse (Christensen 1997). The concept of disruptive innovation therefore deviates from the default notion of technological change as the embodiment of progress on existing performance dimensions. Disruptive innovation infringes upon the existing market by appealing to lower-end customers who value their lower price points (see Adner 2002 for a breakdown of the demandside foundations of disruptive innovations). This paper adds to the existing literature on the timing of incumbents' entry in emerging technology-created niches (King and Tucci 2002, Mitchell 1989). Throughout this paper, when we refer to "incumbent entry" or "market entry," we mean the entry of incumbents (1) into a new market area that results from disruptive niche innovation.
3. Empirical Setting
The empirical setting of this study is the retail brokerage industry. In the mid-1990s, this industry faced the emergence of online brokerage, which has been recognized as a disruptive innovation (Christensen and Oberdorf 2000). Online brokerage possesses key characteristics of a disruptive innovation: (1) It introduces a new technology and new performance dimensions to the industry (e.g., website ease of use, online stock quotes, speed of processing); (2) it is inferior to the established offering on the key performance dimensions of this market segment (e.g., quality of advice, personalized relationship, etc.); (3) it operates at a lower price point than the existing market; (4) it invades the established market at the low end; and (5) some customers from the existing market switch to the new market.
Central characteristics of online brokerage provide the context for this empirical study. First of all, entry barriers are low. Typically, strategic reasons motivate a company's entry into the online brokerage area. Amidst the e-commerce frenzy of the nineties, the emergence of online brokerage has attracted many new entrants to the industry. By January 2001, more than 150 companies had entered the online brokerage area, including retail brokerage incumbents, start-ups, banks, and technology providers. Market uncertainties have, however, been high, as highly diverging market projections testify. Thus, incumbents have faced significant uncertainty about the impact of online brokerage, although their entries have generally not been obstructed by technological limitations.
Since its inception, online brokerage has made significant inroads in the retail brokerage market. Figure 1 shows the development of the online brokerage market from 1996 to the end of 2000.
[FIGURE 1 OMITTED]
Within our five-year observation period, the market grew to more than 20 million brokerage accounts. Online accounts held about $1 trillion in assets, which accounted for over 5% of household's liquid financial assets, and 12% of the assets held in equities. Industry reports claim that by the end of the year 2000, more than one-third of retail brokerage trades were done online. The growth of the market coincided with a gradual influx of incumbent companies into the online market. Charles Schwab was the first major incumbent to take the plunge in May 1996. Many others followed, as shown in Figure 1.
In this paper, we introduce the idea that, aside from idiosyncratic company characteristics and the attractiveness of the market, the actions of other incumbents play a role in a company's decision to enter. Anecdotal evidence suggests such a contagion effect. For example, the entry of Fidelity Brokerage came right on the heels of Schwab's entry into online brokerage. Similarly, after denying any plans just a couple of months earlier, Piper Jaffray entered the online brokerage area right after major competitors Merrill Lynch and Paine Webber had done so. These examples suggest that entry may be a contagious process: The entry of competitors increases the likelihood that a company enters as well. In the next section we explore this idea further by discussing existing research on organizational contagion. Additionally, we lay out arguments to establish that the actions of similar competitors are most conducive to contagion.
4. Organizational Contagion
4.1. Literature Review
In the process of contagion, each adoption of a new practice or product makes the subsequent adoption from a potential adopter more likely (Burt 1987). It does not presuppose a decision-making process that causes the phenomenon (Greve 1998). Contagion has been documented extensively as a dynamic behind the diffusion of new products (Bass 1969, Rogers 1983). When it concerns the behavior of organizations, this phenomenon has also been labeled herd behavior, bandwagon effect, demonstration effect, or organizational imitation (Kennedy 2002). The hypothesis...
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