Friday, January 11, 2013

Strategic Planning Analogy #484: Adoption Curves

I knew someone who lived in Latin America back in the days when inflation was regularly 2,000 to 3,000% per year.  He told me that back then a popular occupation was to be a profession line-stander.  What these people did was stand in line outside of a store before it opened.  Then, once the store opened, they quickly bought a bunch of goods for the person who paid them to stand in line for them.

Why were so many people willing to pay others to shop for them?  The extremely high inflation rates made it a great economic investment.  When inflation is over 3000%, you want to convert your money into goods as soon as possible, because every moment you waited made your money far less valuable.  Even waiting a day or two to shop would significantly diminish how much you could buy with that money.

Therefore, if you were too busy to shop immediately after getting paid, it was worthwhile to pay someone to shop for you, because the cost of paying the line-stander was less than the value loss in the currency by waiting until you could get around to shopping for yourself.

So being at the front of the line was important when paying cash in that society.  However, what if you were paying credit in a hyper inflation environment?  Well, then you’d want to be last in line, because the longer you waited to pay, the less valuable was the money used to pay off the earlier debt.

As the story illustrates, sometimes there can be great benefits to being first in line to get something.  Other times the benefits may flow to those at the back of the line.  This same idea applies to business strategy.  Under some circumstances it makes strategic sense to be a leader in adopting new ideas, new technologies, and new business models.  Under other circumstances, it makes sense to be closer to the back of the line.  And being in the middle tends not to get much of any advantage at all.

At first this may seem counter-intuitive.  After all, the normal consumer adoption curve typically looks like a bell-shaped curve.  There are a few early adopters, a few late adopters, and most people adopt somewhere in-between.

However, when it comes to strategic adoption rates for businesses, I think the preferred curve may look more like the inverted bell curve seen in the world of hyperinflation, with most of the advantages coming at either end, and little to be gained by adopting in the middle.

The principle here is that the timing of when you make a strategic move may be almost as important as what the move is.  In most cases, early adoption is best.  In many cases later adoption makes sense.  Being in the middle rarely is the best strategic move.

When Early Adoption Makes Sense
There are three times when it makes strategic sense to be at the front of the line.  These are each discussed below.

1) Establishing a Strategic Position
A strategic position is the benefit where you want to win in the marketplace.  And almost without exception, there is value to being one of the first to stake out that position.  Why?  If you are the first, you are going after uncontested territory.  There is nobody there who already owns the position, so you can just claim it for yourself...unchallenged.  You can defines the rules in that space to be in your favor.  You become the first to come to mind when the position is thought of.  You are the “expert.”

Consider the opposite, where you try to win at a position which someone else has already claimed and won. The only way you can win is to unseat the current winner.  That effort can be extremely difficult, costly and time consuming…and usually still fails.  The early leader in grabbing a strategic position has so many advantages that they can enjoy success for a long time, even if they do not have the best offering.

That’s why Al Ries and Jack Trout, the experts in positioning, made their first law of marketing the Law of Leadership, which says “It’s better to be first than it is to be better.”

2) Gaining a Temporary Edge
There is a lot of imitation in business.  If someone comes up with an idea that gives them an advantage, others will copy it.  As a result, most advantages are temporary.  Therefore, you have two choices:  You can be at the front of the line on that innovation and get the temporary advantage until others catch up; OR you can wait to do the innovation later. 

If you wait, you get no advantage in the marketplace when you invest in the innovation, since the early adopters already took it.  All you are doing is erasing your market disadvantage so that you can regain parity with the early adopters. 

If it costs roughly the same to adopt an innovation early or late, then all the advantage goes to the early adopter.  This is because every firm will eventually have to make about the same investment in order to stay relevant, so the costs are the same.  But only the early investor gets the advantage in the marketplace.  The rest have a disadvantage at first and only parity later.  So be at the front of the line if it is an advantage which pretty much everyone will have to adopt eventually.

An example could be something like free on-line delivery.  The first to offer it get the advantage, become known for it, and build a loyal sales advantage.  The latecomers are eventually forced into offering free on-line delivery to stem their sales losses to the early movers.  But it does not result in huge market share gains for the latecomers, because those lured by free delivery are already satisfied by the early adopters of the policy.  There is little incentive to switch to the latecomer’s parity offering.  I speak more about this principle in an earlier blog.

3) The Guinea Pig
Sometimes the inventor of a new process or new technology has trouble achieving the critical mass of customers needed to make their product an industry standard.  In this B2B world, it is often to the inventor’s advantage to incent some companies to become their guinea pig.  In other words, if the inventing company essentially “pays” some potential customers to be test cases for their product, then they can build the critical mass that gets others to follow.

This is why brands in the fashion world give free samples to the tastemakers and celebrities which the masses like to copy.  For if the tastemakers and celebrities wear the fashion, then others will follow, making it worthwhile to give those leaders the items for free.

This can also happen for businesses which are opinion-leaders in their industry.  If you are willing to be an early adopter for these businesses desperate to create a critical mass of demand, you may get the product for free, or get other incentives to pay for training costs or costs of conversion.  Look at the great financial deal Nokia got from Microsoft to be one of the first to adopt the Microsoft smartphone software. The latecomers would not get all of those incentives.  They would have to pay full price for the item.  Hence,the early guinea pig gains an advantage over the latecomers.

When Late Adoption Makes Sense
There are also times when it is better to be nearer the end of the line.

1) Evolving Industry Standards
When there are a variety of conflicting technologies fighting to become the industry standard, it may make sense to wait until one better understands which technology will become the industry standard.  That way, you are less likely to invest in the wrong technology and then need to make a second investment in whichever technology ultimately became the standard.  This is especially important if you are a small player who does not have enough clout to influence which technology wins and not enough money to make the investment twice.

If the technology impacts your interaction with all the players in your supply chain, there may be little advantage to being first if the rest of the people you deal with in the supply chain are waiting until they see which technology wins.  The real advantage only comes when everyone is on the same page.  It may be better to wait to see what your key partners adopt before making your choice.

2) Price Deflation 
Some technologies and business systems are very expensive when they first come out and have their prices drop dramatically over time.  This would be a sort of high price deflation, the opposite of the high inflation in the Latin America story.  In the case of high deflation, there can be high incentives to wait.  If you wait long enough, you can get the same thing as the early adopters, but much cheaper.  That cost gap may be more than enough to compensate for entering the business a little later.

Not only might the later product version be cheaper to buy, but cheaper to operate.  The technology might go from difficult installation to “plug and play.”  So purchase cost, installation cost and ongoing maintenance/operating costs could benefit from waiting.

3) Avoiding Mistakes
Not all innovations turn out as originally promised.  They may bomb in the marketplace or need significant tweaking.  Sometimes, it pays to let others do all the difficult and expensive work of experimenting and testing.  Then, only once the formula for success is figured out, pounce on the marketplace with the winning formula.

This type of waiting is especially useful to market leaders who have significant influence on their supply chain.  For example, Coca Cola has rarely ever been the first with any innovations in their industry.  They were not the first to put soda in cans.  They were not the first to create a diet soda.  They were not the first with energy drinks.  What Coke likes to do is let others waste their time, money and effort on experimenting.  Then, once the right answer is known, Coke jumps in.  And because of Coke’s marketplace clout, they usually overcome the later start and overtake the innovator…and save all the innovation expense.

Strategy is more than just knowing what to do…it is knowing when to do it.  Often the best strategic moves come to early adopters.  However, sometimes it makes more sense to wait.  The proper timing depends on issues like the riskiness of the innovation, expected price changes over time (up or down) and your relative market position.  There is no obvious answer for everyone in every situation.  So you have to figure it out, just like most other strategic issues.

Before getting in line, decide where in the line you want to be.

No comments:

Post a Comment