14.5: The Influence of Competitor’s Response on Investment Decisions

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A new investment may force competitors to think about their existing investments and engage in counterinvestments to compete with a new investment. These competitor reactions or counterinvestments made by competitors can affect the revenue base and cost structure of a firm in the long term. This is part of the reason that first-mover advantages are transient. If a move appears to be threatening, then competitors may invest substantially more in the technology or product in order to catch up and perhaps even surpass the first mover’s investment. The net effect is that the new entrant can dilute earnings and performance. An investment that is projected to produce profits can prompt the competition to overreact and invest at higher levels than expected. These types of responses are common in the consumer electronics marketplace and, in general, are found in many types of markets.

When Amazon entered the cloud-computing market in 2006 with the introduction of Amazon Web Services, there was a definite reaction by many companies, some of them were competitors and others were just interested. Data storage vendors, CPU and hardware manufacturers, infrastructure companies, operating systems companies, service providers, consulting companies, ERP vendors and application software developers took note. Many of these companies responded by investing more and more money in cloud computing. Amazon’s continued pursuit of the growth option in cloud computing was in turn answered with many other companies pursuing a growth option in cloud computing. Dell, for example, invested more than a billion dollars in cloud computing.