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Sustainable pioneering advantage? Profit implications of the entry timing decision (RV of 2001/03/MKT)

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The question of whether firms gain a sustainable advantage from being first to market has captured the attention of academic researchers and managers alike. A long list of theoretical arguments indicates the existence of a sustainable consumer-based pioneering advantage. The veracity of such an advantage is supported by numerous empirical studies that show a significant and enduring effect of entry timing on market share or sales. Yet, it is unclear whether a market share effect is sufficient to support the existence of a first-mover profit advantage. In fact, reviews of the entry timing literature repeatedly point to profit implications as one of the key unanswered questions in this area of research. The main objective of this paper is to empirically examine the effect of ‘first-to-market’ on profitability, i.e., profit differences between pioneers and followers that are strictly attributable to the entry timing decision. To do so, the authors control for differences between pioneers and followers due to other characteristics (e.g., resources) that could also influence performance. Specifically, they test and control for the potential endogeneity of the entry timing decision. Since entry timing is itself a fixed effect, existing methods in the marketing literature to control for unobserved factors cannot be applied. Thus, they utilize the instrumental variable approach developed by Hausman and Taylor (1981), which allows them to control for the potential biasing effect of unobserved fixed effects and obtain a consistent estimate of the fixed entry timing effect. Surprisingly, their results for two different samples of business units from the PIMS database – a sample of consumer goods and a sample of industrial goods competing in mature and declining markets – indicate that being ‘first-to-market’ leads to a long-term profit disadvantage relative to later entry. In a more detailed analysis, they find, consistent with the existing literature, the typical demand-side (i.e., consumer-based) pioneering advantage. However, the authors find an even greater average cost disadvantage. This pattern of long-term pioneering effects is quite insensitive to the choice of the profitability measure, the functional form of their empirical model, and the instruments used for estimation. Furthermore, they find that in an overwhelming number of cases the assumption that entry timing is exogenous is rejected, thereby supporting the theoretical argument that this decision should be treated as endogenous in empirical estimation. To gain further insights about the effect of the entry timing decision on profitability, the authors examine how the effects of pioneering change over time. This analysis shows that pioneering leads to an initial profit advantage. This advantage declines over time and turns into a disadvantage after about 11 to 15 years. In addition to this time-path analysis, they explore three different factors – likelihood of customer learning, market share position and patent protection – that they hypothesize should moderate the "average" long-term entry timing effect. This conditional analysis shows that pioneering leads to a sustained profit advantage in the consumer goods sample when either one of the following three conditions holds: (1) consumer learning is limited, (2) the pioneering firm maintains a dominant market share position, and (3) the pioneering firm continues to be protected by product patents. In the industrial goods sample the authors find that pioneering leads to a sustained profit advantage when the pioneering firm continues to hold a process patent. The profit disadvantage of the “average” business unit disappears when customer learning is limited, but they do not find a significant profit advantage in this situation. Market position does not moderate the long-term profit effect in their industrial goods sample. The authors conclude that firms should not rely on entry timing, per se, as a source of a sustainable profit advantage. Rather, they need to articulate and evaluate why and how being ‘first-to-market’ will lead to a sustainable advantage. More importantly though, the authors hope that their results stimulate future research about 1) the “supply-side” effects due to the entry timing decision to better understand the reasons behind the pioneering cost disadvantage; and 2) the expectations of managers that lead them to pioneer markets.

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