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1 ECP 6701 Competitive Strategies in Expanding Markets How High-Tech Markets Develop.

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Presentation on theme: "1 ECP 6701 Competitive Strategies in Expanding Markets How High-Tech Markets Develop."— Presentation transcript:

1 1 ECP 6701 Competitive Strategies in Expanding Markets How High-Tech Markets Develop

2 2 Readings How High-Tech Markets Develop in Geoffrey Moore, Paul Johnson and Tom Kippola, The Gorilla Game, Harper Collins Publishers, 1999, pp 21-46.

3 3 Tornado Theory The tornado is a compressed period of hyper- growth coinciding with the first surge of mass- market adoption of any new technology. It puts a company into a position of a dominant competitive advantages The tornado is related to the existence of network externalities.

4 4 Discontinuous (drastic) Innovations In most industries innovations are continuous or incremental. They build upon the standards and infrastructure already in place. – Examples of continuous innovations are a new car, a new computer, a new TV, quality circle etc.

5 5 Discontinuous Innovations From time to time technology breakthroughs bring discontinuous innovations. These innovations introduced novel benefits that required new infrastructure investment and complementary products. Examples include the first car, the first PC, Windows, the first fax machine, the internet, the cell phone.

6 6 The Technology Adoption Life Cycle This model offers the foundation for understanding how high-tech markets develop. Innovators Early Adopters Early Majority Late Majority Laggards

7 7 The Technology Adoption Life Cycle Whenever a market is exposed to a discontinuous innovation, customers will seft- segregate into – Technology enthusiasts (innovators) – Visionaries (Early adopters) – Pragmatists (Early Majority) – Conservatives (Late Majority) – Skeptics (Laggards)

8 8 Technology Enthusiasts This type of customer believes in technology – He/she is willing to experiment with discontinuous innovation to explore its properties. – This group includes hackers and independent developers of technology who are exploring the frontiers of the internet and elsewhere. – They are not representatives of the marketplace at large.

9 9 Visionaries Highly placed executives interested in leapfrogging the rest of their industry. Their goal is set themselves apart from the herd. They love to do things others do not do. Their endorsement of a technology is not a good predictor of whether a main street market will develop.

10 10 Pragmatists These technology users (customers) are the herd. They adopt the new technology only if and only if everybody else does. They make or break the success of the new technology. They create the hyper growth region in the Technology Adoption Life Cycle.

11 11 Conservatives These users are much happier to stay with the existing technology than adopt the new one. Buying late allows them to exploit mature competition and get better prices. By the time this customer gets into the market the gorilla game (market shares) has been decided. Instead of hyper growth, conservatives support gorilla earnings

12 12 Skeptics They see technology as overpriced and overpromised. They are significant for their ability to hinder or block the adoption of discontinuous technology. They prefer low-cost, non-technical solutions.

13 13 High-Tech Market Evolution High-tech market development consists of the following phases: – Early market (new entrant) – The Chasm – The Bowling Alley – The Tornado (rising star) – The Main Street (cash flow) – End of Life (extinction)

14 14 The Early Market Early market starts with visionaries supported by technology enthusiasts. Adoption of new technology is based on individual customers (highly placed executives) not market segments. The early market is a gestation phase for the new company. It gives the company a chance to prove the feasibility of its technology

15 15 The Chasm During the Chasm there is no natural customer for the discontinuous technology. The Chasm is created because there is a polar opposition between the visionary and the pragmatist. During the Chasm, visionaries start loosing interest and pragmatists are not ready to adopt the new technology.

16 16 The Chasm Incumbent companies unite to expel the intruder by engaging in rent-protection activities. If the innovator cannot secure a market position relatively quickly, it will die in the chasm. Examples: Neural networks, pen-based computing, desktop videoconferencing.

17 17 The Bowling Alley This phase represents the market penetration phase of the Technology Adoption Life Cycle. Pragmatists are willing to adopt the new technology. A subset of pragmatists are facing real problems and the new technology provides the solution (demand meets supply). The demand for new technology comes from broken, mission critical business processes.

18 18 The Bowling Alley Examples of niche markets for discontinuous technologies. – Graphic artists for the Macintosh – Pharmaceutical regulatory affairs for Documentum document management systems. – Wall Street traders for Sun workstations and Sybase data bases. Managers who are under broken-process pressure will sponsor a new technology ahead of the herd.

19 19 The Bowling Alley During this phase the ongoing market growth for the new technology will be niche to niche. Each new niche creates a period of micro hyper growth. Many markets stabilize in a state of bowling alley forever (Applied Materials, Lam Research in semiconductors). These companies do not go to Main Street.

20 20 The Tornado It is metaphor for the hyper growth stage when pragmatists adopt the new technology en masse. It represents the proliferation phase of the life cycle. It is caused by the same dynamics that creates the chasm operating in reverse. Here is where the initial phase of network externalities appears.

21 21 The Tornado The Tornado has been associated with customer adoption S-curves. These curves track the proliferation of telephones, TVs, faxes, email, word processors, DVDs, etc. The Tornado has an impact on market shares and leads to the birth of gorillas (Microsoft, Intel, Cisco, Oracle etc). The Tornado determines the winners of standards and the standard-setter becomes the gorilla.

22 22 Main Street Main Street represents the assimilation phase of the adoption process. It is characterized by – incremental improvements in technology, – high earnings for the gorilla, – Long time (about 20 years ) as opposed to the Tornado (2-3 years) – Scale economies and scope economies that protect gorillas profits.

23 23 Total Assimilation This represents the end of the Technology Adoption Life Cycle. The market becomes a traditional one. Think of cars, televisions, microwave ovens, and other mature products. Gorillas maintain their market shares during this end of life phase.

24 24 Lessons and Conclusions Main Street is a very long phase The power relationships that will govern the market in the long run are established permanently during the Tornado phase. Like everything else, Main Street ends too. End of life starts only when an alternative technology enters its Tornado (substitution threat)

25 25 Lessons and Conclusions The process of creative destruction – PCs have displaced terminals – Windows has displaced the DOS system – World has displaced Word perfect – DVDs have displaced VHS videos – HD DVD will probably displace DVDs.

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