1. MKT 310 Entrepreneurship Mishari Alnahedh

2. LECTURE 6: Technology-based Industries

3. The Role of Technology in Creating Competitive Advantage
Mishari Alnahedh
Technological change is not simply a story of agile startups beating the stuffing out of established giants analysis
Pirelli, from tire to telecommunications
Nokia, from pulp and paper to telecommunications
Competitive advantage in technology-intensive industries
Appropriating the returns to innovation
Strategies to exploit innovation
Alternative approaches
Timing: to lead or to follow?
Managing risk
Competing for standards
Implementing technology strategy
The conditions for creativity
From invention to innovation

4. From Knowledge Generation to Diffusion
The Development of Technology
Mishari Alnahedh
From Knowledge Generation to Diffusion
© 2013 Robert M. Grant

5. The Development of Technology
Mishari Alnahedh
Lags Between Knowledge Generation and Commercialization
Basic Knowledge
First Patents
Product Launch
Imitation
Jet Engines
17th century Newtonian physics
1930
1957
1959
Xerography
Late 19th, early 20th centuries
1940
1958
1974
Fuzzy Logic Controllers
1960s
1981
1987
1988
Automobile Satellite Navigation
Late 1950s
Early 1960s
1998
2002
MP3 Players
Early 1990s
1994
1997
1999
© 2013 Robert M. Grant

6. Imitators and other “followers”
Appropriation of Value
Mishari Alnahedh
How are the Benefits from Innovation Distributed?
Customers
Suppliers
Innovator
Imitators and other “followers”
© 2013 Robert M. Grant

7. The Development of Technology
Mishari Alnahedh
The Profitability of Innovation:
Legal protection
Complementary Resources
Value of the Innovation
Profits from Innovation
Innovator’s ability to appropriate the value of the innovation
Imitability of the technology
Lead time
© 2013 Robert M. Grant

8. Legal Protection of Intellectual Properties
Mishari Alnahedh
Patents – Exclusive rights to a new product process, substance or design
Copyrights – Exclusive rights to artistic, dramatic and musical works
Trademarks – Exclusive rights to words, symbols or other marks to distinguish goods and services; trademarks are registered with the Patent Office
Trade Secrets – Protection of chemical formulae, recipes and industrial processes
Also, private contracts between firms and between a firm and its employees can restrict the transfer of technology and know how
© 2013 Robert M. Grant

9. technological know-how
Legal Protection of Intellectual Properties
Mishari Alnahedh
Manufacturing
Distribution
Finance
Service
Core
technological know-how
Complementary
technologies
Marketing
Other
Other
Bargaining power of owners of complementary resources depends upon whether complementary resources are generic or specialized.
© 2013 Robert M. Grant

10. But maintaining lead-time advantage requires continuous innovation
Mishari Alnahedh
If rivals can imitate – Time lag is the major advantage of the innovator
But maintaining lead-time advantage requires continuous innovation
Lead time is reinforced by learning effects

11. US Manager’s Perception of the Effectiveness of Different Mechanisms for Protecting Innovation
Mishari Alnahedh
Secrecy (%)
Patents (%)
Lead-time (%)
Sales/ Service (%)
Manufacturing (%)
Product Innovations
Food 59 18 53 40 51
Drugs 54 50 33 49
Electronic communications 34 21 46
Telecom equipment 47 26 66 42 41
Medical equipment 55 58 52
All industries 35 43
Process Innovations 56 16 30 68 36 25 44
Electronic equipment 15 45 32 23 38 31
© 2013 Robert M. Grant

12. Who Do You Think are More Successful: Leaders or Followers ?
The Comparative Success of Leaders and Followers
Mishari Alnahedh
Who Do You Think are More Successful: Leaders or Followers ?

13. How important are complementary resources
The Strategic Management of Technology
Mishari Alnahedh
To Lead or to Follow ?
Can the innovation be protected by intellectual property rights or lead-times advantages
If so, advantages in leadership
Followers can avoid investing in complementary resources by using better-established industry infrastructure
Firms possessing complementary resources have the luxury of waiting
How important are complementary resources
Is owning/controlling industry standard critical to competitive advantage
If so, advantages in leadership
© 2013 Robert M. Grant

14. Uncertainty and Risk Management in Tech-Based Industries
Mishari Alnahedh
Selection process for standards and
dominant designs emerge is complex
and difficult to predict, e.g. future of 3G
Technological
uncertainty
Sources of
uncertainty
Customer acceptance and adoption rates
of innovations notoriously difficult to
predict, e.g. PC, Xerox copier, Walkman
Market
uncertainty
Cooperating with lead users
early identification of customer requirements
assistance in new product development
Strategies for
managing risk
Limiting risk exposure
Avoid major capital commitments
(e.g. lease don’t buy)
Outsource
Alliances to access other firms’
resources & capabilities
Keep debt low
Flexibility
Keep options open
Use speed of response to
adapt quickly to new
information
Learn from mistakes
© 2013 Robert M. Grant

15. The Emergence of Standards
Mishari Alnahedh
Emergence of a dominant design paradigm
Model T in autos
IBM 360 in mainframes
Douglas DC3 in passenger aircraft
Emergence of technical standards
Emerge in industries where they are network externalities
Entrenchment of the dominant designs and technical standards
Learning effects: Incremental improvement of the dominant design
Switching costs
Need for coordinated action by multiple players
© 2013 Robert M. Grant

16. Sources of Network Externalities
Mishari Alnahedh
User linkages, e. g.
Telephone systems – Only value of telephone is connection to other users
Online auction – Value of auction depends on number of buyers and sellers participating
Smartphones – Same platform with the biggest user base (currently Android) attracts the most applications
Also social identification – The desire to conform encourages us to listen to the same music, watch the same TV shows and wear the same clothes as those with whom we identify
Availability of complementary products, e.g.
Most PC applications software Written for Windows, not Mac
In economy autos, easier to get parts and repair for a Ford Focus or Honda Accord than a Kia, Proton or Lamborghini
Economizing on switching costs, e.g.
In suites of office software, users of Microsoft Office more likely to avoid switching costs than users of Lotus SmartSuite when they move jobs
© 2013 Robert M. Grant

17. Network Externalities
Mishari Alnahedh
An industry has network externalities if the demand is dependent on the perception of number of product sold.
Three critical masses (Q=0, Q=Q1, Q=Q2)
Q1 is unstable  Knife‘s Edge
If you have a low market share, what strategies are available ? P P* Q1 Q2 Q

18. Maximize market acceptance
Sources of Network Externalities
Mishari Alnahedh
Competing for Standards: Value Appropriation vs. Market Acceptance
Video Cassette Recorders
VHS
Betamax
Maximize
value
appropriation
Maximize market acceptance
LOOSE
TIGHT
IBM-PC
Apple
Mac
Personal Computers
© 2013 Robert M. Grant

19. Fighting Standards War
Mishari Alnahedh
Determine the potential for standards emergence – Analyze network extremities
Assemble allies – Enlist partners (customers, complementors, competitors) to build a bandwagon
Pre-empt the market – Build user base quickly: enter early, attract key customers, adopt penetration marketing
Manage expectations – Use launch and pre-launch publicity and promotion to convince the market that you will be the winner
© 2013 Robert M. Grant

20. Today’s Main Takeaway
Mishari Alnahedh
In emerging industries and other industries where technology is the primary medium of competition, the nurturing and developing of innovation is the fundamental source of competitive advantage, and the focus of strategy formulation

21. Case: Video Games Console Industry in 2012: The Next Round
NEXT CLASS !
Mishari Alnahedh
Case: Video Games Console Industry in 2012: The Next Round