Strategy in High-Technology Industries 7 Strategy in High-Technology Industries

Overview Technology High-tech industries The body of scientific knowledge used in the production of goods or services High-tech industries Those in which the underlying scientific knowledge that companies in the industry use is advancing rapidly, and by implication so are the attributes of the products and services that result from its application Copyright © Houghton Mifflin Company. All rights reserved.

The Importance of High-Tech Technology is accounting for an ever larger share of economic activity Many low-tech industries are becoming more high tech High-tech products are making their way into a wide range of businesses Even in industries not thought of as high tech, technology is changing aspects of the product or production system Copyright © Houghton Mifflin Company. All rights reserved.

Technical Standards and Format Wars A set of technical specifications that producers adhere to when making the product or a component of it Format wars Battles to set and control technical standards The source of product differentiation is based on the technical standard Copyright © Houghton Mifflin Company. All rights reserved.

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

Benefits of Standards Helps to guarantee compatibility Can help to reduce confusion Can help to reduce production costs Can help to reduce the risks associated with supplying complementary products Copyright © Houghton Mifflin Company. All rights reserved.

Establishments of Standards Companies may lobby the government to mandate an industry standard Technical standards are often set by cooperation among businesses Public domain Standard is often selected competitively by market demand Copyright © Houghton Mifflin Company. All rights reserved.

Network Effects and Positive Feedback The size of the network of complementary products is a primary determinant of demand for an industry’s products Positive feedback Reinforcing network effects to encourage adoption of a standard Copyright © Houghton Mifflin Company. All rights reserved.

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

Lockout and Switching Costs Occurs when the market settles on a standard and companies promoting alternate standards are no longer able to compete Switching costs The costs consumers must bear to switch from a product based on one standard to a product based on another If consumers are unwilling to bear switching costs, a company will be locked out Copyright © Houghton Mifflin Company. All rights reserved.

Strategies for Winning a Format War Ensure a supply of complements Leverage killer applications New technology or products that are so compelling that customers adopt them in droves, killing demand for competing formats Aggressively price and market Razor and blade strategy: pricing the product low to increase the installed base, then pricing complements high to make profits Cooperate with competitors License the format Copyright © Houghton Mifflin Company. All rights reserved.

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

Strategic Significance of High-Tech Cost Structure If a company can shift from a cost structure with increasing marginal costs to one with high fixed costs but low marginal costs, its profitability may increase When a high-tech company faces high fixed costs and low marginal costs, it should deliberately drive prices down to drive up volume Copyright © Houghton Mifflin Company. All rights reserved.

Managing Intellectual Property Rights The product of any intellectual and creative effort 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 Scale of the problem is very large Legal and technological solutions are required Copyright © Houghton Mifflin Company. All rights reserved.

Managing Intellectual Property Rights (cont’d) Strategies for managing digital rights Recognize that low costs of copying and distributing digital media can be used to the company’s advantage Take advantage of low costs of copying and distribution to drive down costs of purchasing media (coupled with encryption software) Copyright © Houghton Mifflin Company. All rights reserved.

Capturing First-Mover Advantages The company that is first to develop revolutionary new products If the new product satisfies unmet consumer needs and demand is high: The first mover can capture significant revenues and profits Revenues and profits signal an opportunity to potential rivals Copyright © Houghton Mifflin Company. All rights reserved.

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

First-Mover Advantages Opportunity to exploit network effects and positive feedback loops Potential to establish significant brand loyalty May be able to reap economies of scale and learning effects May be able to create switching costs for customers May be able to accumulate valuable knowledge Copyright © Houghton Mifflin Company. All rights reserved.

First-Mover Disadvantages Bear significant pioneering costs More prone to make mistakes Run the risk of building the wrong resources and capabilities May invest in inferior or obsolete technology Copyright © Houghton Mifflin Company. All rights reserved.

Strategies for Exploiting First-Mover Advantages Develop and market the innovation itself Develop and market the innovation jointly with other companies through a strategic alliance or joint venture License the innovation to others and let them develop the market Copyright © Houghton Mifflin Company. All rights reserved.

Choosing a Strategy for Exploiting First-Mover Advantages 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 Copyright © Houghton Mifflin Company. All rights reserved.

Technological Paradigm Shifts When new technologies emerge that Revolutionize the structure of the industry Dramatically alter the nature of competition Require companies to adopt new strategies to survive Copyright © Houghton Mifflin Company. All rights reserved.

Paradigm Shifts and the Decline of Established Companies Paradigm shifts are more likely to occur when The established technology in the industry is mature and approaching its natural limit A 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 Copyright © Houghton Mifflin Company. All rights reserved.

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

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

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

Strategic Implications of Paradigm Shifts for New Entrants May be constrained by lack of capital May have to manage the organizational problems associated with rapid growth May need to find a way to take the technology from a small niche into the mass market May need to decide whether to go it alone or partner with an established company Copyright © Houghton Mifflin Company. All rights reserved.