Core Competencies Differentiation between Innovation Strategies - Research Paper Example

The Paper: Explain in what ways the core-competences and resource requirements differ between a "first-to-market", "second-to-market" and "late-to-market" innovation strategy. Illustrate your answers using innovation cases. 1. Introduction In this paper, we look at how different the innovation strategies have in terms of core competencies and resource requirements. The industry used for illustration is the digital portable media player industry. The examples of technology firms used for illustrations are Creative and Apple for first-to-market and second-to-market innovation firms respectively. Dell belongs to late-to-market innovation firm. 2. Core Competencies 2.1 Research & Development (R & D) and patents It is known widely that R & D is much valued in technological firm which increases value of the firm. Patents are looked upon as an offensive and a defensive asset. Offensively, it aids a technological company to earn licensing royalties and/or seeking an injunction to halt a competitor from shipping a product. Defensively, patent portfolio provides leverage to negotiate for a more favorable settlement. Hence, according to Coombs (1996), it is important for innovation firms to have their patent portfolio in line with their corporate strategies. For a first-to-market innovation strategy, patents act as an offensive role in the early stage to achieve market monopoly. However, this is not true for a recent example. Creative's core competency in the portable media player industry lies in its innovative capability to create value through innovations. It was reported that Creative was the first to market its first generation of portable media player in 2000. However, Creative neither achieves market monopoly nor dominates the market currently. After the patent was awarded to Creative in 2005, Creative sought an injunction that stop Apple from selling the iPod. The outcome was that Apple would pay US$100 million licensing royalties to use Creative's "Zen patent" for an MP3 player interface. Creative Technology's profits were then raised a record 11 times due to the lump sum payment from Apple. (News of the profit can be found at http://www.marketwatch.com/news/story/apple-profit-rises-78ipod/story.aspxguid=%7BCCF6CF6B-D2C6-435B-A5B2-E6D92872F777%7D) In this case, "Zen patent" helped to increase Creative's profits in the year of 2006, enhancing its roles. This agrees well with Robinson (1988) where pioneer firms benefit from patents to a greater extent than second-to-market and last-to-market firms. However, Creative Zen's market share is surprisingly lower than Apple iPod. Even though Apple lost to Creative in the court, Apple continued their patent filling for another invention: iPhone. More than 300 patents were applied for iPhone, proving that second-to-market firms do find ways to improve their technologies. On the other hand, last-to-market firms exit earlier than the first-to-market and second-to-market firms in the industry. Late-to-market firms might also have to pay licensing fees to first-to-market or second-to-market firms for the usage of their patents. For them to stay in the industry, they need to have more innovative products with new features which are able to define themselves. One example is Dell who entered the industry in 2003 and made the exit in year 2006. (The news was found in http://www.pocketlint.co.uk/news/news.phtml/) Unlike Apple, Dell was not able to come up with new products. 2.2 Marketing strategy Marketing strategy allows an organization to pool its resources on opportunities to achieve a sustainable competitive advantage. Creative Zen was outshadowed by Ipod in the market even though Creative Zen was the first portable media player in the market. It was reported that Apple dominated the MP3 player market in 2007 with 72.3 % market share. Creative Labs was 2.7 % market share while Dell was not even in the top 5. (News of the market share is found in http://www.bloomberg.com/apps/newspid=conewsstory&refer=conews&tkr=AAPL:US &sid=aggTRzHFt1Do) The market share results are surprising. This is because Zen player was the first-to-market player, thus consumers should have a formed perception and preference of the player; but it was not to be. In addition is that the Zen player is at a lower price level than Ipod player which means that the buyer switching costs is higher. This does not agree well with Lieberman who mentioned that when the buyer switching costs is lower, buyers would switch to the products of second-to-market firms. This is because consumers were willing to spend on the more expensive iPod player than the Creative Zen player. This could be attributed to more successful marketing strategy and its prior stronger brand image by Apple. As a late-to-market firm, it is tough to capture the market share. This is because according to Lieberman, it suggested that the first product leaves the most impression in the consumers' mind and therefore difficult to change their preferences. One example is Dell which entered the portable media player industry in 2003 and made the exit in year 2006. (The news was found in http://www.pocketlint.co.uk/news/news.phtml/) Unlike Apple, Dell was not able to come up with a brilliant marketing strategy, thus consumers were not willing to switch preferences. With Lieberman (1988), this concludes that late-to-market firms must have a better product in terms of innovation or a better marketing strategy than the first-to-market and second-to-market firms to have an impact in the industry. 2.3 Product Design & Brand Image Product design is a factor which influences consumers' buying choices. Apple's wholesome white colour image was applied to the iPod player and became a status symbol. White ear pieces became such a trendsetting phenomenon so much so that imitations were manufactured and sold by imitators in the market. Simply put, consumers felt that the imitation white ear pieces could mislead others to think that they are listening to an ipod player. Product design therefore becomes a core competency of Apple. The brand image is so strong that white becomes the instant impression of Apple. By constrast, the image of Creative Zen player does not have the strong prior image.. As a result, even though the ipod player was a second-to-market product, the appeal to the consumers was stronger than the Creative Zen player. In exchange for the US$100 million licensing royalties given by Apple, Creative decided to join Apple in the marketing of iPod accessories. This proves that Creative knew that the brand image of Ipod was stronger than the Zen Player. That is to say that the second-to-market firm could dominate the industry "A" if the prior brand image of a second-to-market firm is stronger than a first-to-market firm in another industry "B". This could be due to the effect of "umbrella branding". Wernerfelt mentioned that early mover firms may be able to build a reputation for quality which can be transferred to additional products through umbrella branding. In Apple's case, they were transferring the umbrella branding effect from the Mac computer to iPod players. Once again, Apple introduced iPhone for the digital phone market inducing the umbrella branding effect. With the high standard set by first-to market and second-to-market firms, in order for the last-to-market firms to stay compeitive, they would need to have products with more unique new designs which are visually stimulating. This is especially so since the impression and perception of the products from first-to market and second-to-market firms are already deeply etched in their minds. 3. Resource Requirements 3.1 Research Talents & Legal Experts Core competency of creating value through technological innovation can be attributed to its talented scientist and engineers. Creative has over 1200 engineers that are focused on innovation, design, quality and developing products. Without human capital, there would be no new innovations. Legal experts are to protect the rights of the inventions during the drafting of the patents. This is particularly important for a first-to-market firm to protect their intellectual property rights. For the second-to-market firms, improvements can be made to the first generation of products made by first-to-market firms and be applied as a new patent. This shows that a second-to-market firm also needs a group of research talents to continue improving their inventions & legal experts so as to prevent being sued for "infringement of patent" by first-to-market firm. In the Apple example, it has about 300 patents for their new product, iPhone. This also applied to late-to-market firms. If they would like to stay longer in the industry, research talents ought to be brought in to stay competitive and more research work to be done so as to exceed the standard set by the first-to-market and second-to-market firms. This is difficult for them since consumers would be most unfamiliar with their branding and products. 3.2 Investment Efforts Investment efforts of a first-to-market firm have to be bigger than second-to-market and last-to-market firms. This is because creating a new industry requires bold investment and high risks. On the other hand, second-to-market and last-to-market firms have lower risks due to the "tried-and-tested" experience. However, second-to-market and last-to-market firms might have to set their products at a lower price than first-to-market firms so as to attract buyers with lower purchasing power. It is only if indeed that they can capture these buyers that they might be able to stay in the industry. The last-to-market firm must also be prepared to invest in the industry but the risk factor for them is that the investments for other industries might not be as strong as before. As a result, before they are about to invest in the industry, they should be able to define themselves in the new industry that they ere about to enter. This is what Dell as a last-to-market firm failed to do. 3.3 Marketing Research Sufficient market research is required for any industry to understand consumer behaviours. for Creative's case, the popularity of MP3 downloads projected a future in portable media player. Creative then started with Flash players (the first generation of portable media players). Even though Creative did not dominate the industry, its foresight and contribution in the industry could not be denied. This became an advantage for Apple as a second-to-market firm who no longer need to pump in efforts for market research. There would be even higher certainty for last-to-market firms like Dell. 4. Conclusion The core competencies and resource requirements differ for the time of the entry of the firms in a market. Typically, it is disputed that most of the first-to-market firms did not dominate the markets. This is true to a certain degree. However in the long run, first-to-market firms still last longer than last-to-market firms in the market. 5. References Amber Maitland of Pocket-lint, viewed 14 November 2007, 'Dell exits the MP3 player market. Last of its flash-based players disappears.' Coombs, R. "Core Competencies and the Strategic Management of R&D", R&D Management, 26, pp. 345-355 Lieberman M.B. and Montgomery D.B. (1988) 'First-Mover Advantages', Strategic Management Journal, Vol. 9, pp. 41-58 Prince McLean of , viewed 14 November 2007, 'Creative profits soar on Apple payment' Robinson, W.T. 'Sources of market pioneer advantages in consumer goods industries', Journal of Marketing Research, (September 1988) Wernerfelt, B. 'Umbrella Branding as a signal of new product quality: an example of signaling by posting a bond.' Unpublished. Kellogg Graduate School of Management. Northwestern University, September 1987 Read More