Strategy in High-Technology Industries Chapter Seven Strategy in High-Technology Industries

High-Technology Industries High-tech industries are those in which the underlying scientific knowledge that companies in the industry use is advancing rapidly. By implication, the attributes of the products and services that result from its application are also advancing rapidly. Technology is: The body of scientific knowledge used in the production of goods or services Accounting for an even larger share of economic activity Revolutionizing aspects of the product or production system in industries not thought of as high-tech Copyright © Houghton Mifflin Company. All rights reserved.

Technical Standards and Format Wars Technical standards are a set of technical specifications that producers adhere to when making the product or a component of it. Format wars Often, only one standard will come to dominate a market. Many battles in high-tech industries revolve around companies competing to be the one that sets the standard. The source of product differentiation and competitive advantage is based on the technical standard. Copyright © Houghton Mifflin Company. All rights reserved.

Technical Standards for Personal Computers Figure 7.1 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Benefits of Standards Standards emerge because there are economic benefits associated with them. Standards help: Guarantee compatibility between products and their compliments Reduce confusion in the minds of consumers Reduce production costs through mass-production Reduce the risks associated with supplying complementary products and help Standards lead to both low-cost and differentiation advantages for individual companies. Copyright © Houghton Mifflin Company. All rights reserved.

Establishments of Standards Standards emerge in one of three ways: Companies may lobby the government to mandate an industry standard. Standards are often set by cooperation among businesses or industry forums. May become part of the public domain Standards are often selected competitively by market demand. Network effects – size of the network for complementary products determines industry demand Positive feedback loop – increase in demand further increases the value of owning a product Lockout – from the market occurs for companies promoting alternate standards when consumers are unwilling to bear the switching costs (unless benefits outweigh costs of switching) Copyright © Houghton Mifflin Company. All rights reserved.

Positive Feedback in the Market for VCRs Figure 7.2 Copyright © Houghton Mifflin Company. All rights reserved.

Strategies for Winning a Format War Successful strategies revolve around finding ways to make network effects work in their favor and against their competitors: Ensure a supply of complements. In addition to the product itself Leverage killer applications. New products that are so compelling that customers adopt them in droves, killing demand for competing formats Aggressively price and market. Pricing the product low to increase the installed base, then pricing complements high to make profits Cooperate with competitors. To speed up adoption of the technology License the format. Reduce financial incentive for competitors to develop their own Copyright © Houghton Mifflin Company. All rights reserved.

Cost Structures in High-Technology Industries Figure 7.3 Copyright © Houghton Mifflin Company. All rights reserved.

Managing Intellectual Property Rights Intellectual property rights apply to the product of any intellectual and creative efforts. Patents, copyrights, and trademarks give individuals and companies incentives to engage in the expense and risk of creating new intellectual property. Digitalization and piracy rates Large scale problem with high piracy rates Legal and technological solutions are required Strategies for managing digital rights Low costs of copying and distributing digital media Can be used to the company’s advantage Drive down costs of purchasing media Encryption software Vigorous defense of intellectual property rights Copyright © Houghton Mifflin Company. All rights reserved.

Capturing First-Mover Advantages First-mover advantage: the first to develop and pioneer revolutionary new products that can lead to an enduring competitive advantage If the new product satisfies unmet consumer needs and demand is high: First mover may be in a monopoly position to capture significant revenues and profits. Strong revenues and profits signal an opportunity to potential rivals. Rival imitators may enter market in the absence of strong barriers to imitation resulting in lower market returns. Being a first-mover does not guarantee success. Success depends on the first-mover strategy that is pursued. Copyright © Houghton Mifflin Company. All rights reserved.

The Impact of Imitation on Profits of a First Move Figure 7.4 Copyright © Houghton Mifflin Company. All rights reserved.

First-Mover Advantages The five main sources of first-mover advantages: Exploit network effects and positive feedback loops Locking customers into its technology Establish significant brand loyalty Expensive for later entrants to break down Enable economies of scale and learning effects So first-mover has cost advantage and can respond to new entrants by cutting price to maintain market share Create switching costs for customers Making it difficult for rivals to take customers away Accumulate valuable knowledge Regarding customers, distribution, and technology that late entrants will find difficult or expensive to match Copyright © Houghton Mifflin Company. All rights reserved.

First-Mover Disadvantages Pioneering costs To develop technology and distribution channels and to educate the customers Later entrants ‘free-ride’ on first-mover’s investments. More prone to make mistakes Because of the uncertainties in a new market Later entrants learn from the mistakes of first-movers. Risk of building the wrong resources and capabilities Mass-market may differ from the needs of early adopters First-movers risk ‘Plunging into the chasm’. May invest in inferior or obsolete technology If the underlying technology is advancing rapidly Late entrants may be able to ‘leap frog’ the technology. Copyright © Houghton Mifflin Company. All rights reserved.

Strategies for Exploiting First-Mover Advantages Going it alone Develop and market the innovation itself. Strategic alliance or joint venture Develop and market the innovation jointly with other companies. License the innovation to others Let them develop the market. Key questions in choosing a strategy: Does the company have the complementary assets to exploit its innovation? How difficult is it for imitators to copy the company’s innovation (height of barriers to imitation)? Are there capable competitors who could rapidly imitate the innovation? Copyright © Houghton Mifflin Company. All rights reserved.

Strategies for Profiting from Innovation Table 7.1 Copyright © Houghton Mifflin Company. All rights reserved.

Technological Paradigm Shifts Occur when new technologies emerge that: Revolutionize the structure of the industry Dramatically alter the nature of the competition Requires companies to adopt new strategies to survive Paradigm shifts are more likely to occur with: Natural limits to technology The established technology in the industry is mature and approaching its natural limit. New disruptive technology Has entered the marketplace and is taking root in niches that are poorly served by incumbent companies using established technology. Copyright © Houghton Mifflin Company. All rights reserved.

The Technology S-Curve Figure 7.5 Copyright © Houghton Mifflin Company. All rights reserved.

Established and Successor Technologies Figure 7.6 Copyright © Houghton Mifflin Company. All rights reserved.

Swarm of Successor Technologies Figure 7.7 Copyright © Houghton Mifflin Company. All rights reserved.

Disruptive Technology Disruptive technology is a new technology that gets its start away from the mainstream of a market and invades the main market as its functionality improves over time. Revolutionizes the industry structure and competition Causes a technological paradigm shift Disruptive technology often causes the decline of established companies –because they listen to customers who say they do not want it. Copyright © Houghton Mifflin Company. All rights reserved.

Strategic Implications of Paradigm Shifts for Established Companies Having access to knowledge about how disruptive technologies can revolutionize markets is in itself a valuable asset. It is important for established enterprises to invest in newly emerging technologies that may become disruptive. Commercialization of disruptive technology may require a different value chain with a different cost structure. Internal forces suppress change. Chances of success in developing and commercializing disruptive technology will be enhanced if it is placed in its own organization. Copyright © Houghton Mifflin Company. All rights reserved.

Strategic Implications of Paradigm Shifts for New Entrants New entrants, or attackers, have several advantages over established enterprises: Pressure to continue the out-of-date existing business model does not hamper new entrants. New entrants need not worry about established customer base, distribution channels, or suppliers. But new entrants face important new issues: May be constrained by lack of capital Need to manage the organizational problems associated with rapid growth Find a way to take the technology from a small niche into the mass-market Decide whether to go it alone or partner with an established company Copyright © Houghton Mifflin Company. All rights reserved.