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CHAPTER 7

STRATEGY AND TECHNOLOGY

LEARNING OBJECTIVES

§  Understand the tendency toward standardiza?on in many high-‐technology markets

§  Describe the strategies that firms can use to establish their technology as the standard in a market

LEARNING OBJECTIVES

§  Explain the cost structure of many high-‐ technology firms, and ar?culate the strategic implica?ons of this structure

§  Explain the nature of technological paradigm shiMs and their implica?ons for enterprise strategy

TECHNICAL STANDARDS AND FORMAT WARS

•  Set of technical specifications that producers adhere to when making the product, or a component of it

Technical standards

•  Battles to control the source of differentiation, and the value that such differentiation can create for the customer

Format wars

•  Common set of features or design characteristics

Dominant design

BENEFITS OF STANDARDS

§  Guarantees compa?bility between products and their complements

§  Reduces confusion in the minds of consumers §  Reduces produc?on costs and risks associated with supplying complementary products

§  Leads to low-‐cost and differen?a?on advantages for individual companies

§  Helps raise the level of industry profitability

ESTABLISHMENT OF STANDARDS

§  Standards emerge in an industry when the benefits of establishing are recognized

§  Technical standards are set by coopera?on among businesses, through the medium of an industry associa?on

§  When the government sets standards they fall into the public domain §  Public domain: Any company can freely incorporate the knowledge and technology upon which the standard is based into its products

NETWORK EFFECTS, POSITIVE FEEDBACK, AND LOCKOUT §  Network effects: Network of complementary products as a primary determinant of the demand for an industry’s product

§  Posi?ve feedback loops -‐ Increase in demand for a technology that triggers an increase in demand for products that support it

§  Alterna?ve standards get locked out as consumers are unwilling to bear the switching costs

STRATEGIES FOR WINNING A FORMAT WAR §  Make network effects work in one’s favor and against compe?tors

§  Build the installed base for the standard as rapidly as possible

§  Ensure a supply of complements §  Leverage killer applica?ons §  Killer applica7ons: Applica?ons or uses of a new technology or product so compelling that customers adopt them in droves, killing compe?ng formats

STRATEGIES FOR WINNING A FORMAT WAR §  Pursue aggressive pricing and marke?ng §  Razor and blade strategy: Pricing the product low to s?mulate demand, and pricing complements high

§  Cooperate with compe?tors §  License the format

FIGURE 7.5 -‐ COST STRUCTURES IN HIGH-‐TECHNOLOGY INDUSTRIES

FIRST MOVER

§  Firm that pioneers a par?cular product category or feature by being first to offer it to the market §  Crea?on of a revolu?onary product results in a monopoly posi?on

§  First-‐mover advantage -‐ Pioneering new technologies and products that lead to slowing the rate of imita?on

§  First-‐mover disadvantages: Compe??ve disadvantages associated with being first

STRATEGIES FOR EXPLOITING FIRST-‐ MOVER ADVANTAGES §  Develop and market the innova?on §  Develop and market the innova?on jointly with other companies §  Through a strategic alliance or joint venture §  License the innova?on to others and allow them to develop the market

FACTORS TO CONSIDER WHEN SELECTING A STRATEGY

Complementary assets

Height of barriers to imitation

Capable competitors

TABLE 7.1 -‐ STRATEGIES FOR PROFITING FROM INNOVATION

TECHNOLOGICAL PARADIGM SHIFT

§  ShiMs in new technologies that: §  Revolu?onize the structure of the industry §  Drama?cally alter the nature of compe??on §  Require companies to adopt new strategies for survival §  Occur in an industry when: §  Established technology is approaching or is at its natural limit

§  New disrup?ve technology has entered the marketplace and is invading the main market

FIGURE 7.7 -‐ THE TECHNOLOGY S-‐ CURVE

FIGURE 7.8 -‐ ESTABLISHED AND SUCCESSOR TECHNOLOGIES

FIGURE 7.9 -‐ SWARM OF SUCCESSOR TECHNOLOGIES

STRATEGIC IMPLICATIONS FOR ESTABLISHED COMPANIES §  Being aware of how disrup?ve technologies can revolu?onize markets is a valuable strategic asset

§  Inves?ng in new technologies that may become disrup?ve technologies

§  Crea?ng an autonomous opera?ng division solely for the disrup?ve technology

STRATEGIC IMPLICATIONS FOR NEW ENTRANTS §  Do not face pressures to con?nue the exis?ng out-‐of-‐date business model

§  Do not have to worry about established: §  Customer base §  Rela?onships with suppliers and distributors §  Can focus their energies on the opportuni?es offered by the new disrup?ve technology

§  Must decide whether to partner with an established company or go solo