Assignment (Read the Theory in Action on page 59. Write a 7 page paper in APA format.)

Theory in Action Page 59 “Segment Zero”—A Serious Threat to Microsoft? From 1980 to 2012, Microsoft was entrenched as the dominant personal computer operating system, giving it enormous influence over many aspects of the computer hardware and software industries. Though competing operating systems had been introduced during that time (e.g., Unix, Geoworks, NeXTSTEP, Linux, and the Mac OS), Microsoft’s share of the personal computer operating system market held stable at roughly 85 percent throughout most of that period. In 2013, however, Microsoft’s dominance in computer operating systems was under greater threat than it had ever been. A high-stakes race for dominance over the next generation of computing was well underway, and Microsoft was not even in the front pack. “SEGMENT ZERO” As Andy Grove, former CEO of Intel, noted in 1998, in many industries—including microprocessors, software, motorcycles, and electric vehicles—technologies improve faster than customer demands of those technologies increase. Firms often add features (speed, power, etc.) to products faster than customers' capacity to absorb them. Why would firms provide higher performance than that required by the bulk of their customers? The answer appears to lie in the market segmentation and pricing objectives of a technology’s providers. As competition in an industry drives prices and margins lower, firms often try to shift sales into progressively higher tiers of the market. In these tiers, high performance and feature-rich products can command higher margins. Though customers may also expect to have better-performing products over time, their ability to fully utilize such performance improvements is slowed by the need to learn how to use new features and adapt their work and lifestyles. Thus, while both the trajectory of technology improvement and the trajectory of customer demands are upward sloping, the trajectory for technology improvement is steeper (for simplicity, the technology trajectories are drawn in Figure 3.8 as straight lines and plotted against time in order to compare them against customer requirements). In Figure 3.8, the technology trajectory begins at a point where it provides performance close to that demanded by the mass market, but over time it increases faster than the expectations of the mass market as the firm targets the high-end market. As the price of the technology rises, the mass market may feel it is overpaying for technological features it does not value. In Figure 3.9, the low-end market is not being served; it either pays far more for technology that it does not need, or it goes without. It is this market that Andy Grove, former CEO of Intel, refers to as segment zero. For Intel, segment zero was the market for low-end personal computers (those less than $1,000). While segment zero may seem unattractive in terms of margins, if it is neglected, it can become the breeding ground for companies that provide lower-end versions of the technology. As Grove notes, “The overlooked, underserved, and seemingly unprofitable end of the market can provide fertile ground for massive competitive change.“a

As the firms serving low-end markets with simpler technologies ride up their own trajectories (which are also steeper than the slope of the trajectories of customer expectations), they can eventually reach a performance level that meets the demands of the mass market, while offering a much lower price than the premium technology (see Figure 3.9). At this point, the firms offering the premium technology may suddenly find they are losing the bulk of their sales revenue to industry contenders that do not look so low end anymore. For example, by 1998, the combination of rising microprocessor power and decreasing prices enabled personal computers priced under $1,000 to capture 20 percent of the market.

THE THREAT TO MICROSOFT

So where was the “segment zero“ that could threaten Microsoft? Look in your pocket. In 2015, Apple’s iPhone operating system (iOS) and Google’s Android collectively controlled over 90 percent of the worldwide market for smartphone, followed by Research in Motion’s Blackberry.b Gartner estimates put Microsoft’s share at 3 percent. The iOS and Android interfaces offered a double whammy of beautiful aesthetics and remarkable ease of use. The applications business model used for the phones was also extremely attractive to both developers and customers, and quickly resulted in enormous libraries of applications that ranged from the ridiculous to the indispensible.

From a traditional economics perspective, the phone operating system market should not be that attractive to Microsoft—people do not spend as much on the applications, and the carriers have too much bargaining power, among other reasons. However, those smartphone operating systems soon became tablet operating systems, and tablets were rapidly becoming fully functional computers. Suddenly, all of that mindshare that Apple and Google had achieved in smartphone operating systems was transforming into mindshare in personal computer operating systems. Despite years of masterminding the computing industry, Microsoft’s dominant position was at risk of evaporating. The outcome was still uncertain–in 2015 Microsoft had an impressive arsenal of capital, talent, and relationships in its armory—but for the first time, it was fighting the battle from a disadvantaged position.

Building on the Utterback and Abernathy model, Anderson and Tushman studied the history of the U.S. minicomputer, cement, and glass industries through several cycles of technological change. Like Utterback and Abernathy, Anderson and Tushman found that each technological discontinuity inaugurated a period of turbulence and uncertainty (which they termed the era of ferment) (see Figure 3.10). The new technology might offer breakthrough capabilities, but there is little agreement about what the major subsystems of the technology should be or how they should be configured together. Furthermore, as later researchers noted, during the era of ferment different stakeholders might have different concepts of what purpose the technology should serve, or how a business model might be built around it.20 Thus, while the new technology displaces the old (Anderson and Tushman refer to this as substitution), there is considerable design competition as firms experiment with different forms of the technology. Just as in the Utterback and Abernathy model, Anderson and Tushman found that a dominant design always arose to command the majority of the market share unless the next discontinuity arrived too soon and disrupted the cycle, or several producers patented their own proprietary technologies and refused to license to each other. Anderson and Tushman also found that the dominant design was never in the same form as the original discontinuity, but it was also never on the leading edge of the technology. Instead of maximizing performance on any individual dimension of the technology, the dominant design tended to bundle together a combination of features that best fulfilled the demands of the majority of the market. In the words of Anderson and Tushman, the rise of a dominant design signals the transition from the era of ferment to the era of incremental change.21 In this era, firms focus on efficiency and market penetration. Firms may attempt to achieve greater market segmentation by offering different models and price points. They may also attempt to lower production costs by simplifying the design or improving the production process. This period of accumulating small improvements may account for the bulk of the technological progress in an industry, and it continues until the next technological discontinuity. Understanding the knowledge that firms develop during different eras lends insight into why successful firms often resist the transition to a new technology, even if it page 63provides significant advantages. During the era of incremental change, many firms cease to invest in learning about alternative design architectures and instead invest in refining their competencies related to the dominant architecture. Most competition revolves around improving components rather than altering the architecture; thus, companies focus their efforts on developing component knowledge and knowledge related to the dominant architecture. As firms' routines and capabilities become more and more wedded to the dominant architecture, the firms become less able to identify and respond to a major architectural innovation. For example, the firm might establish divisions based on the primary components of the architecture and structure the communication channels between divisions on the basis of how those components interact. In the firm's effort to absorb and process the vast amount of information available to it, it is likely to establish filters that enable it to identify the information most crucial to its understanding of the existing technology design.22 As the firm's expertise, structure, communication channels, and filters all become oriented around maximizing its ability to compete in the existing dominant design, they become barriers to the firm's recognizing and reacting to a new technology architecture. While many industries appear to conform to this model in which a dominant design emerges, there are exceptions. In some industries, heterogeneity of products and production processes are a primary determinant of value, and thus a dominant design is undesirable.23 For example, art and cuisine may be examples of industries in which there is more pressure to do things differently than to settle upon a standard.