Elsevier

Long Range Planning

Volume 32, Issue 5, October 1999, Pages 483-493
Long Range Planning

Bridging finance and strategy
Finance and strategy: time-to-wait or time-to-market?

https://doi.org/10.1016/S0024-6301(99)00086-2Get rights and content

Abstract

Determining the optimal time to enter a market for technology-based products is paramount for the profitability and competitive position of an industrial company. Finance theory and strategic marketing theory seem to differ fundamentally in the answer to the question of how to determine the optimal timing of an investment. Finance theory focuses on the value of waiting to invest, whilst strategic marketing theory stresses early market entry in order to leapfrog competition and gain competitive advantage. We discuss both points of view and synthesize different approaches in order to develop an optimal timing framework for market entry for product innovations. Recent literature on investment under uncertainty, which suggests that a company should invest when the value of a project passes a certain threshold, forms the basis of our attempt to integrate finance and strategic marketing theory.

Section snippets

The decision to go to market under uncertainty

The contemporary industrial company is confronted with increasing speed of technological change, as well as change in underlying market dynamics and worldwide competition. These factors contribute to a high degree of uncertainty surrounding investment decisions. In particular, the decision to introduce a technology-based new product in the marketplace is taken under circumstances of high uncertainty. Market introduction generally entails substantial investments in production facilities and

The financial–economic perspective

Recent insights in finance theory have developed the concept of real options.1, 2, 3, 4, 5, 6 Typical examples of real options are expenditures on R&D7, 8, 9 or emerging manufacturing platforms.10 Real option theory acknowledges the value of decision flexibility and growth opportunities that management has at its disposal within investment trajectories under uncertainty.11 Just like stock options, real options will only be exercised—that is firms commit to the follow-on investment—when

The marketing–strategic perspective

Opposite to the time-to-wait perspective of financial economic thinking, strategic marketing theory has provided an abundant literature on pioneering advantages under high uncertainty. Pioneering advantages occur primarily during the initial stages of the product life cycle and generate a substantial amount of company profit. These profits result from early market share gains that make it difficult for competitors to catch up during later stages of the product life cycle. Both

The strategic choice: pioneering or keeping options open

The study by Urban et al.21 also demonstrates that, at the level of product brands, later entrants are able to keep their options open in terms of product positioning and promotion. Such factors are often more likely to result in a sustainable market share than early market entry.23 For this reason, we can distinguish between two kinds of companies. Companies with excellent R&D competencies will prefer to pioneer when first mover advantages exist. Companies with excellent competencies in

Real options to go to market

The real options perspective enables us to explicitly derive the value of postponing market introduction. The valuation of real options emerged about 10 years ago, notably with regard to investment options with an underlying value related to (internationally quoted) prices of natural resources. With this kind of option, the underlying value of the option consists of the Net Present Value (NPV) of cash inflows generated by undertaking the irreversible follow-on investment. As with financial

The threshold approach

In recent microeconomic studies, it is shown that when the timing of the decision on follow on investments (the exercise moment of the option) is not fixed, firms must invest as soon as the project value exceeds a critical value.28 It is demonstrated that the optimal exercise moment (the moment at which the underlying value passes the threshold) can be determined by dynamic programming. This critical value increases as the uncertainty surrounding the project value increases. Hence, it will take

Micro-uncertainty and macro-uncertainty

A high degree of uncertainty leads to a high investment threshold and to a long expected waiting time until the optimal exercise moment of the market launch option. In the threshold approach, the uncertainty surrounding the underlying value plays a crucial role. This uncertainty can be decomposed into uncertainty in the micro-environment and uncertainty in the macro-environment. This is a major difference with financial options. Uncertainty surrounding financial instruments, such as stocks and

The impact of micro-uncertainty on marketing–strategic management

The previous example assumes that there is no micro-uncertainty surrounding future payoffs. Thus far, most examples of real options applications are limited to options on underlying assets related to the price of oil, copper or other natural resources. These prices are also only exposed to macroeconomic uncertainty. The uncertainty of options on market launch of a newly developed product is in general not fully determined by uncertainty in the macroeconomic environment. Instead, its uncertainty

Reducing micro-uncertainty by strategic management

With regard to theory and practice of the content of marketing–strategic management, two fundamentally different approaches coexist: the position-based approach to competitive dominance33 and the resource-based approach to strategic thinking.34 Basically, the position-based approach takes the view that the company’s environment (both macro and micro) has more impact on the company’s strategy than the other way around. Therefore, the company has to adapt to the environment and take this

Reducing micro-uncertainty by marketing management

Besides competition and cooperation from a strategic perspective, several tactics can be applied from a marketing perspective to reduce micro-uncertainty before a commitment to market introduction. First of all, test marketing can be used.38, 39 Test marketing is the attempt to replicate the business environment in a few representative cities and duplicate the market launch in them before a commitment to global market introduction. This way, the company can obtain important information about

Managerial implications

In this section, real life examples are provided to highlight the previously discussed key points and to emphasize their implications to management. The strategic alliance of Philips and Matsushita regarding DCC elucidates uncertainty reduction by strategic management. The recent takeover of a biotech firm by DuPont illustrates uncertainty reduction when a company needs additional know-how in a specific area in order to secure rapid market entry. Matsushita is an excellent example of a company

Discussion

The application of a threshold approach by management will prevent companies, able to postpone investment, from possible disappointments after early market entrance under conditions of high microeconomic uncertainty. If, for instance, idiosyncratic predictions by managers who are involved from different functional areas (R&D, engineering, production, marketing or finance) are widely dispersed, sales after market introduction might strongly deviate from ex ante predictions. This spread around

Acknowledgements

The authors are indebted to Charles Baden-Fuller (the Editor), Susan Douglas, and two anonymous referees, for fruitful suggestions. Financial support from the Technology Foundation (STW) in the Netherlands is gratefully acknowledged.

Onno Lint is affiliated as a senior research fellow with the Faculty of Economics at Erasmus University, Rotterdam and the Faculty of Technology Management at Eindhoven University of Technology. He has worked as a consultant for several SMEs and major technology-driven companies such as Philips Electronics. Corresponding address: Department of Industrial Economics, Room H 16-02, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands, e-mail: Lint:few.eur.nl

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    Onno Lint is affiliated as a senior research fellow with the Faculty of Economics at Erasmus University, Rotterdam and the Faculty of Technology Management at Eindhoven University of Technology. He has worked as a consultant for several SMEs and major technology-driven companies such as Philips Electronics. Corresponding address: Department of Industrial Economics, Room H 16-02, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands, e-mail: Lint:few.eur.nl

    Enrico Pennings is a research fellow at the Faculty of Economics at Erasmus University Rotterdam, and at the Faculty of Economics at the Catholic University of Leuven. He is a consultant to the European Commission and Philips Corporate Research.

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