7
Chapter 7: Strategy in HighTechnology Industries
BA 469 Spring Term, 2005
Professor Dowling
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
7-2
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
7-3
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
• The source of product differentiation is based
on the technical standard
7-4
Technical Standards for Personal
Computers
7-5
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
7-6
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
7-7
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
• Positive feedback
– Reinforcing network effects to encourage adoption
of a standard
7-8
Positive Feedback in the Market for
VCRs
7-9
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
7 - 10
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
7 - 11
Cost Structures in High-Technology
Industries
7 - 12
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
7 - 13
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
7 - 14
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)
7 - 15
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
7 - 16
The Impact of Imitation on Profits of a
First Move
7 - 17
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
7 - 18
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
7 - 19
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
7 - 20
Choosing a Strategy for Exploiting FirstMover 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?
7 - 21
Strategies for Profiting from Innovation
7 - 22
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
7 - 23
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
7 - 24
The Technology S-Curve
7 - 25
Established and Successor Technologies
7 - 26
Swarm of Successor Technologies
7 - 27
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
7 - 28
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
7 - 29
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
7 - 30