Disruptive Technologies: Explaining Entry in Next Generation Information Technology Markets

The most difficult challenge facing a market leader is maintaining its leading position. This is especially true in information technology and telecommunications industries, where multiple product generations and rapid technological evolution continually test the ability of the incumbent to stay ahead of potential entrants. In these industries, an incumbent often protects its position by launching prematurely to retain its leadership. Entry, however, happens relatively frequently. We identify conditions under which an entrant will launch a next generation product thereby preventing the incumbent from employing a protection strategy. We define a capabilities advantage as the ability to develop and launch a next generation product at a lower cost than a competitor, and a product with a greater market response is one with greater profit flows. Using these definitions, we find that an incumbent with a capabilities advantage in one next generation product can be overtaken by an entrant with a capabilities advantage in another next generation product only if the entrant's capabilities advantage is in a disruptive technology that yields a product with a greater market response. This can occur even though both next generation products are available to both firms. We also show that the competition may require the launching firm to lose money at the margin on the next generation product.