Evaluating a Firm's External Environment - Illinois State University

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Chapter 2: Evaluating a Firm’s External Environment 53
customers to begin purchasing from other firms. 46 Such switching costs are important
factors in industries as diverse as applications software for personal computers,
prescription pharmaceuticals, and groceries. 47
In applications software for personal computers, users make significant
investments to learn how to use a particular software package. Once computer
users have learned how to operate particular software, they are unlikely to switch
to new software, even if that new software system is superior to what they currently
use. Such a switch would require learning the new software and determining
how it is similar to and different from the old software. For these reasons,
some computer users will continue to use outdated software, even though new
software performs much better.
Similar switching costs can exist in some segments of the prescription pharmaceutical
industry. Once medical doctors become familiar with a particular
drug, its applications, and side effects, they are sometimes reluctant to change to
a new drug, even if that new drug promises to be more effective than the older,
more familiar one. Trying the new drug requires learning about its properties and
side effects. Even if the new drug has received government approvals, its use
requires doctors to be willing to “experiment” with the health of their patients.
Given these issues, many physicians are unwilling to rapidly adopt new drug
therapies. This is one reason that pharmaceutical firms spend so much time and
money using their sales forces to educate their physician customers. This kind of
education is necessary if a doctor is going to be willing to switch from an old
drug to a new one.
Customer-switching costs can even play a role in the grocery store industry.
Each grocery store has a particular layout of products. Once customers learn
where different products in a particular store are located, they are not likely to
change stores, because they would then have to relearn the location of products.
Many customers want to avoid the time and frustration associated with wandering
around a new store looking for some obscure product. Indeed, the cost of
switching stores may be large enough to enable some grocery stores to charge
higher prices than would be the case without customer-switching costs.
First-Mover Disadvantages
Of course, the advantages of first moving in emerging industries must be balanced
against the risks associated with exploiting this opportunity. Emerging
industries are characterized by a great deal of uncertainty. When first-moving
firms are making critical strategic decisions, it may not be at all clear what the
right decisions are. In such highly uncertain settings, a reasonable strategic alternative
to first moving may be retaining flexibility. Where first-moving firms
attempt to resolve the uncertainty they face by making decisions early and then
trying to influence the evolution of an emerging industry, they use flexibility to
resolve this uncertainty by delaying decisions until the economically correct path
is clear and then moving quickly to take advantage of that path.
Opportunities in Mature Industries: Product Refinement,
Service, and Process Innovation
Emerging industries are often formed by the creation of new products or technologies
that radically alter the rules of the game in an industry. However, over time,
as these new ways of doing business become widely understood, as technologies