University of Southern California

The Latest Development in High Tech: Quality Outruns Speed
Study from Innovation Expert Gerard Tellis Shows it’s Better to be Better than First
September 25, 2009 • by Jeremy Deutchman

Turning conventional wisdom on its head, a new study from the University of Southern California’s Marshall School of Business shows that, in high-tech markets, the best quality product - not the first to enter the marketplace and build a network of users - enjoys the greatest success. Conventional wisdom held that once a firm established a network of users, consumers would be reluctant to switch to a new rival for fear of losing the benefit of their network. The study finds that rather than being a hindrance, the network can help a new entrant with superior quality. The new finding has the potential to drive innovation strategy across the high-tech sector and beyond.

Gerard Tellis, director of USC Marshall's Center for Global Innovation, Eden Yin, Assistant Professor of Marketing at Cambridge University's Judge Business School and Rakesh Niraj, Assistant Professor of Marketing at Marshall completed the study, "Does Quality Win? Network Effects Versus Quality in High-Tech Markets," which appeared in the April 2009 issue of the Journal of Marketing Research. Their central conclusion is that timing is less important to new product launches than superior quality - convenience, durability, power, reliability, effectiveness and similar factors. Their study is based on an analysis of data covering 19 hardware and software product categories and 54 brands.

"Entrepreneurs believe that, if they don’t rush to market, someone else will get there first and build a network of users," says Tellis. "But it’s actually better not to hurry, and instead to take the time to get your product right." Markets, he continues, turn out to be reasonably efficient. "Better quality products don’t win overnight," he says, "but they do win ultimately." For Tellis, the bottom line is clear: "It’s better to be better than first."

The study does find a role for "network effects" -  the increased benefit that ensues from more users of a product. However, the study demonstrates that this effect is not a hindrance but an aid to new entrants. Because of the influential role of informed innovators who are willing to try a new product, a new product with superior quality can enter and grow market share against an entrenched incumbent with a large network. And this, says Tellis, has broad implications for both business and government policy. "In the old days, when companies won a commanding market share, the government would get suspicious of its monopoly power." The fear was that the monopoly would survive in the marketplace with inferior products due to network effects. This fear the study proves to be unfounded. "What we see in high tech markets is that it’s unlikely for a firm to sustain dominant market share unless its products are high quality," Tellis says. Every time a new product's quality crosses that of the dominant incumbent, its market share also crosses that of the incumbent’s a few years later. Firms did not stay dominant with inferior products. So while governments should be watchful, "there is no compelling need to intervene because high tech markets seem to be reasonably efficient."

By the same token, the study’s findings reinforce that today’s top brands will not necessarily be tomorrow's market leaders. Microsoft's Internet Explorer, Google’s search engine, and Apple’s iPod were not the first products in their respective markets. There is constant flux in the marketplace, which rewards companies whose innovations offer consumers a better quality solution. Market dominance does not guarantee security. And network effects can also aid the new entrant through the informed choices of innovative consumers.

About the USC Marshall School of Business
Consistently ranked among the nation's premier schools, USC Marshall is internationally recognized for its emphasis on entrepreneurship and innovation, social responsibility and path-breaking research. Located in the heart of Los Angeles, one of the world's leading business centers and the U.S. gateway to the Pacific Rim, Marshall offers its 5,700-plus undergraduate and graduate students a unique world view and impressive global experiential opportunities. With an alumni community spanning 123 countries, USC Marshall students join a worldwide community of thought leaders who are redefining the way business works.