TMitTI 1 © Sakari Luukkainen Technological change Market change Standardization Productization Marketing R&D Technology Assessment and Forecasting Market Assessment and Forecasting Innovation process

TMitTI 2 © Sakari Luukkainen Market uncertainty (Gaynor) Recognizing lock-in (Varian chapter 5) Managing lock-in (Varian chapter 6) Networks and positive feedback (Varian chapter 7) Content

TMitTI 3 © Sakari Luukkainen Era of Incremental Change Era of Ferment Technological Discontinuity Dominant Design Variation Selection Era of Incremental Change Era of Ferment Technological Discontinuity Dominant Design Variation Selection Technological Substitution Technology cycle

TMitTI 4 © Sakari Luukkainen What is market uncertainty Market uncertainty relates to the inability of vendors and service providers offering new communications solutions to predict what are the latent end users needs The uncertainty exists partly also because users do not know what they want until they see and use it When users are first introduced to new technology they tend to view it in the context of the older technology Users needs evolve hiearchically from basic features to more sophisticated ones along with the technology evolution as they become more educated about the benefits it provides

TMitTI 5 © Sakari Luukkainen Market uncertainty and Internet A similar phenomen has happened with the Internet Nobody predicted in the early 90´s what Web is today and its impact to society Understanding market uncertainty affects directly to R&D When Netscape started its development there was extreme uncertainty, it altered the traditional sw development process in a way that allowed taking into account early feedback from users

TMitTI 6 © Sakari Luukkainen Managing market uncertainty The only way to meet uncertain markets is to experiment several ideas and hope at least one will work When market uncertainty is high, being lucky with correct guess about the market is likely to produce more revenue than being right in markets with low uncertainty In high uncertainty competition is feature based and low price based The use of distributed architecture in the introduction phase of new communications platform when the market uncertainty is high Centralized management structure should then be used in later phases of the cycle when the technology and market is mature

TMitTI 7 © Sakari Luukkainen Recognizing Lock-in Investments in varying complementary assets related to the actual ICT investment influence switching costs When the switching costs from one brand to another are substantial, customers face lock-in Sonera & Radiolinja example: low number of moving customers before portability of telephone number iki.fi solution to reduce switching cost Proprietary interfaces

TMitTI 8 © Sakari Luukkainen Recognizing Lock-in Existing installed customer base with high switching cost is significantly valuable asset Collective switching costs, group pricing of mobile calls Total switching cost = costs the customer bears + costs the new supplier bears The present discounted value to a supplier of locked-in customer is equal to total switching costs, plus the quality or cost advantage of current supplier’s product

TMitTI 9 © Sakari Luukkainen Contractual commitmentsCompensatory or liquidated damages Durable purchasesReplacement of equipment Brand-specific trainingLearning new system Information and dbConverting data to new format Specialized suppliersFinding of new supplier Search costsLearning about quality of altern. Loyalty programsLost benefits from existing supplier Type of Lock-in Switching Costs

TMitTI 10 © Sakari Luukkainen Managing Lock-in – Customer view Bargaining before lock-in taking into account life- cycle cost Being aware about whole cost structure before investment decision, e.g. maintenance contracts are typically offered afterwards Second sourcing and open systems Long view to the next supplier choice situation Keeping record about perceived cost structure

TMitTI 11 © Sakari Luukkainen Managing Lock-in – Supplier view Investments to build large installed base Concentrating on influential customers with high switching costs Differential pricing Being aware of customer`s timing in brand selection points Reselling and bundling of complementary products and long maintenance contracts Usage of purchase history of existing customers in the marketing of new products

TMitTI 12 © Sakari Luukkainen Positive Feedback Market Share (%) Time Winner Loser Battle zone

TMitTI 13 © Sakari Luukkainen Adoption Dynamics Number of Users Time Saturation Launch Takeoff Critical mass Laggards (16%) Late majority (34%) Early majority (34%) Early adopters (13,5%) Innovators (2,5%) Source: Rogers, 1995

TMitTI 14 © Sakari Luukkainen Internet Servers Source: Koski, H., Rouvinen, P., & Ylä-Anttila, P. (2001)

TMitTI 15 © Sakari Luukkainen Fax-service Source: Varian

TMitTI 16 © Sakari Luukkainen Demand-side Economies of Scale Value to User Number of Compatible Users Virtuous cycle Vicious cycle

TMitTI 17 © Sakari Luukkainen Networks and Positive Feedback Increasing returns to scale (economies of scale) exist when the cost per unit decreases as more units of the good are produced. Recently, the term "increasing returns to scale" has been used to describe more generally a situation where the net value of the last produced unit [= (€ amount consumers are willing to pay for the last unit) - (average per unit cost of production)] increases with the number of units produced. This effect can be called also demand side of economies of scale.

TMitTI 18 © Sakari Luukkainen Networks and Positive Feedback A network exhibits network externalities when the value of a subscription to the network is higher when the network has more subscribers. Metcalfe´s law: n * (n-1) = n 2 – n Dominant design is a technology that wins the allegiance of the market place, it usually takes the form of a new product (or a set of features) synthesized from individual technological innovations introduced independently

TMitTI 19 © Sakari Luukkainen Networks and Positive Feedback Virtual Network is a collection of compatible goods (that share a common technical platform). In a virtual network network externalities arise because larger sales of component A induce larger availability of complementary components B1,..., Bn, thereby increasing the value of component A. The increased value of component A results in further positive feedback. For example, all VHS video players, cassettes and accessories make up a virtual network. Similarly, all computers running Windows or mobile phones and their accessories can be thought of as a virtual network.

TMitTI 20 © Sakari Luukkainen Performance vs Compatibility Compatibility Performance Evolution Revolution Improved Design or adapters

TMitTI 21 © Sakari Luukkainen Openness vs Control Your Share of Industry Value Total Value Added to Industry Proprietary Open Your Reward Optimum

TMitTI 22 © Sakari Luukkainen Generic Network Strategies ControlOpenness CompatibilityControlledOpenmigration PerformancePerformanceDiscontinuity play