1 Strategy in High-Technology Industries Lecture 7

2 Overview  Technology 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  Examples Computer, communications, biotech, aerospace, defense

3 The Importance of High-Tech  Technology is accounting for an ever larger share of economic activity (15% of GDP is IT)  Many low-tech industries are becoming more high tech (e.g. agriculture)  High-tech products are making their way into a wide range of businesses (e.g. cars)  Even in industries not thought of as high tech, technology is changing aspects of the product or production system (e.g. retail)

4 Technical Standards and Format Wars  Technical standards 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  Product differentiation can be based on a technical standard (e.g. AACSB, ISO9000)  Examples: QWERTY keyboard, rail gauges

5 Technical Standards for Personal Computers

6 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

7 Establishments of Standards  Companies may lobby the government to mandate an industry standard (de jure standard)  Technical standards are often set by cooperation among businesses (IEEE ethernet) In theory, standards are in the public domain and no company can profit by controlling the standard (or can they)  Standard is often selected competitively by market demand (de facto standard)  Open source

8 Network Effects and Positive Feedback  Network effects The size of the network of complementary products is a primary determinant of demand for an industry’s products (Example: VHS vs. Betamax)  Positive feedback Reinforcing network effects to encourage adoption of a standard

9 Positive Feedback in the Market for VCRs

10 Lockout and Switching Costs  Lockout 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

11 Strategies for Winning a Format War  Ensure a supply of complements e.g. games for Playstation were pre- developed  Leverage killer applications New technology or products that are so compelling that customers adopt them in droves, killing demand for competing formats (e.g. spreadsheet/word processing in early computers, handwriting recognition on Palm)

12 Format war strategies ctd.  Aggressively price and market Razor and blade strategy: pricing the product low to increase the installed base, then pricing complements high to make profits  Inkjet printers and cartridges  Game consoles and games  Vaporware/Building anticipation  Cooperate with competitors Some standard is better than no standard  License the format e.g. Dolby noise reduction  free for media, licensed for players

13 Cost Structures in High- Technology Industries

14 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 But what is they all think the same way? Is giving away the product sensible (Adobe Reader, Netscape, Java)? Is paying people to adopt the product sensible?

15 Managing Intellectual Property Rights  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

16 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 the price of purchased media (coupled with encryption software and vigorous legal action)  See Apple’s iTunes store and new Napster  99¢ cents per song, 200K songs

17 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 But, revenues and profits signal an opportunity to potential rivals Concept of first mover disadvantages

18 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

19 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  Example: Apple Newton

20 Strategies for Profiting from Innovation

21 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

22 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 (e.g. semiconductors) A new disruptive technology has entered the marketplace and is taking root in niches that are poorly served by incumbent companies using established technology (e.g. microcomputers)

23 Established and Successor Technologies

24 Disruptive Technology  A new technology that gets its start away 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

25 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 An ambidextrous organization  Microsoft is very good at this

26 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

27 Exercises  Orbital Engine Case  DVD Burning  IBM Case

28 Orbital Engine Stock Price History