A very useful paper from the HBS Working Knowledge about The Influence of Prior Industry Affiliation on Framing in Nascent Industries explores the digital camera market to identify some useful trends in firms entering new markets:
New industries sparked by technological change are characterized by high uncertainty. In this paper we explore how a firm’s conceptualization of products in this context, as reflected by product feature choices, is influenced by prior industry affiliation. We study digital cameras introduced from 1991 to 2006 by firms from three prior industries.
The paper hypothesizes that firms entering new industries tend to continue to behave like the industry from which they originate. A unique perspective and one that can be useful for all of us to understand because the corporate mindset is critical to how products get launched.
We hypothesize and find first, that prior industry experience shapes a set of shared beliefs resulting in similar and concurrent firm behavior; second, that firms notice and imitate the behaviors of firms from the same prior industry; and third, that as firms gain experience with particular features, the influence of prior industry decreases. This study extends previous research on firm entry into new domains by examining heterogeneity in firms’ framing and feature-level entry choices.
Let us dig to see what we can learn…
R&D has to always address uncertainty when developing new products. We have to experiment with product configurations, functions and technologies. However, new industries are even more challenging:
Potential customers have little or no experience with products, and their preferences are therefore unformed and unarticulated. Even basic assumptions about what the product is and how it should be used are subject to debate. Similarly, from a technological perspective, uncertainty exists about the rate of performance improvement of the new technology, how components of a technological system will interact, and whether different technological variants will work at all. Market and technological uncertainty are often compounded by competitive uncertainty as firms grapple with shifting industry boundaries and the convergence of firms from previously distinct domains.
The paper intends to analyze and explain how different firms decide to enter new markets and what drives them to be different from each other (heterogeneity). The digital camera industry studied by the authors is quite appropriate because it was at the confluence of multiple technologies / markets:
…the emergence of consumer digital cameras was characterized by high uncertainty and the entry of firms from three prior industries, photography, computing, and consumer electronics, enabling a comparison of the influence of firm background on decisions about which features a digital camera should include.
This interesting. Digital cameras needed expertise from many different segments: Image Sensors (semiconductor), Optics, Digital Processing, Displays, User Experience (how a camera takes pictures – forte of vendors such as Nikon), film (Kodak) and consumer electronics (including mobile phones). Market entrant from each participating industry segment approached the market based on their predispositions:
We find that prior industry affiliation had a significant influence on a firm’s initial framing of the nascent product market. Qualitative data indicate that digital camera product concepts and expected uses varied systematically, ranging from an analog camera substitute (photography firms), to a video system component (consumer electronics firms), to a PC peripheral (computing firms) before converging on a product concept that included elements of all three frames.
Also, different entrants from the same industry focused on similar products (based on their prior belief). However, as participants gained more experience with a particular product, they moved away from behavior corresponding to their previous industry – following a three stage model including an era of ferment, convergence on a dominant design, and an era of incremental change:
Our results suggest that firms from the same prior industry shared similar beliefs about what consumers would value as reflected in their concurrent introduction of features — firms were significantly more likely to introduce a feature, such as optical zoom, to the extent that other firms from the same prior industry entered with the feature in the same year, whereas concurrent entry by firms from different prior industries had no influence. Firms were also likely to imitate the behavior of firms from the same prior industry, as opposed to that of firms from different prior industries in introducing some, but not all features. Finally, we find that as a firm’s experience with a particular feature increased, the influence of prior industry decreased.
The paper suggest that industry level (or at least multi-participant) beliefs are important because they tend to shape the industry and the competitive landscape. Sometimes inability to develop all product features allows new entrants in the market. For example, few firms were able to integrate digital cameras with GPS locations and provide a new user experiences. It took Apple to combine a touch screen display with a media player in a mobile phone. In new industries R&D managers lack a detailed understanding of customer preferences (they have not evolved yet) and hence the prior experience becomes even more important. May be we should focus on thematic similarities a bit more to address this competitive weakness in traditional R&D management models. An approach focused on how customer would use the product and its features would help the exploration of thematic similarity (may be we can learn from Steve Jobs) .