GARETH R. JONES /CHARLES W. L. HILL
Theory of Strategic Management 10th ed.
Chapter
7
Strategy and
Technology
Student Version
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Prepared by C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
Learning Objective: After reading this chapter
you should be able to understand the tendency
toward standardization in many hightechnology markets.
TECHNICAL STANDARDS AND FORMAT WARS
 A technical standards are a set of technical
specifications that producers adhere to when
making the product, or a component of it.
 A dominant design refers to a common set of
features or design characteristics.
 Most personal computers share a common set of
features: RAM, a monitor, keyboard, etc.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
TECHNICAL STANDARDS AND FORMAT WARS
Benefits of Standards
 A technical standard helps to guarantee
compatibility between products and their
complements.
 Having a standard can reduce confusion in the
minds of consumers.
 Having standards can reduce production costs.
 The emergence of standards can help to reduce
the risks associated with supplying
complementary products.
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TECHNICAL STANDARDS AND FORMAT WARS
Establishment of Standards
 Standards emerge in industry in three primary
ways:
1) When the benefits of establishing a standard are
recognized, companies in an industry might lobby
the government to mandate an industry standard.
2) Technical standards are often set by cooperation
among businesses.
3) The standard is set by market demand.
 When a standard becomes public domain, any
company can freely use the technology.
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TECHNICAL STANDARDS AND FORMAT WARS
Network Effects, Positive
Feedback, and Lockout
 Network effects arise in industries where the
size of the “network” of complementary products
is a primary determinant of demand for a product.
 General principle: When two or more companies
are competing with each other to get technology
adopted as a standard in an industry, the
company that wins the format war will be the one
whose strategy best exploits positive feedback
loops.
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Learning Objective: After reading this chapter
you should be able to describe the strategies
that firms can use to establish their
technology as the standard in a market.
STRATEGIES FOR WINNING A FORMAT WAR
 The various strategies that companies should
adopt in order to win format wars are centered
upon finding ways to make network effects work
in their favor and against their competitors.
 Winning a format war requires a company to
build the installed base for its standard as
rapidly as possible.
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STRATEGIES FOR WINNING A FORMAT WAR
 It is important for the company to make sure
that, in addition to the product itself, there is an
adequate supply of complements (for example,
games for Sony PlayStation 3).
 Killer applications are applications or uses of
new technology or product that are so
compelling that they persuade customers to
adopt the new format.
 The theory is to “kill” demand for competing
formats.
 E-mail, chats, and Web browsing gave AOL killer
applications that attracted consumers.
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STRATEGIES FOR WINNING A FORMAT WAR
 By pricing the product (for example, a razor) low
in order to stimulate demand and increase the
installed base, and then trying to make high
profits on the sale of complements (for example,
razor blades) is called a razor and blade
strategy.
 Aggressive marketing is a key approach to
getting an early lead.
 Substantial upfront marketing and point-of-sales
promotion techniques are used to attract
potential early adopters who will bear the
switching cost of a new format.
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STRATEGIES FOR WINNING A FORMAT WAR
 When two or more competitors are close to
simultaneously introducing competing and
incompatible technology standards, some firms
have chosen to join forces to make and market
the product (Sony and Phillips joined forces to
make the CD players).
 Licensing the format to other enterprises so
that those others can produce products based on
the format is another strategy often adopted.
 In addition to producing VCRs at its own factory,
Matsushita let a number of other companies
produce VHS format players under a license.
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Learning Objective: After reading this chapter
you should be able to explain the cost
structure of many high-technology firms, and
articulate the strategic implications of this
structure.
COST IN HIGH-TECHNOLOGY INDUSTRIES
 In many industries, marginal costs rise as a
company tries to expand output (the law of
diminishing returns).
 To produce more of a good, a company must
hire more labor and invest in more plants, etc.
 This law often does not apply in many high-tech
settings, such as the production of software.
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COST IN HIGH-TECHNOLOGY INDUSTRIES
Strategic Significance
 If a company can shift from a cost structure where
it encounters increasing marginal costs to one
where fixed costs may be high but marginal costs
are much lower, its profitability may increase.
 When a high-tech company faces high fixed costs
and low marginal costs, its strategy should be to
deliberately drive down prices to increase volume.
 The strategy of pricing low to drive volume up is
central to the business model of Microsoft.
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CAPTURING FIRST-MOVER ADVANTAGES
 Some first movers have the ability to capitalize on
(and reap) substantial first-mover advantages that
lead to an enduring competitive advantage (for
example, Intel).
 There might be first-mover disadvantages.
 The first mover has to bear significant pioneering
costs that later entrants do not.
 The first mover must pioneer the technology, develop
distribution channels, and educate customers about
the nature of the product.
 The first mover runs the risk of building the wrong
resources and capabilities.
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STRATEGIES FOR EXPLOITING
FIRST-MOVER ADVANTAGES
 First movers need to build a sustainable long-term
competitive advantage and reduce risks.
 The three basic strategies for exploiting firstmover advantages are:
1) Develop and market the innovation.
2) Develop and market the innovation jointly with other
companies through a strategic alliance or joint
venture.
3) License the innovation to others and allow them to
develop the market.
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STRATEGIES FOR EXPLOITING FIRSTMOVER ADVANTAGES
The Three Questions
1) Does the innovating company have the
complementary assets to exploit its innovation and
capture first-mover advantages?
Complementary assets are the assets
required to exploit a new innovation and gain
a competitive edge (state-of-the-art
manufacturing facilities capable of satisfying
demand, marketing know-how).
(continued)
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STRATEGIES FOR EXPLOITING FIRSTMOVER ADVANTAGES
The Three Questions
2) How difficult is it for imitators to copy the
company’s innovation? In other words, what is the
height of barriers to imitation?
Barriers to imitation give an innovator time
to establish a competitive advantage and
build more enduring barriers to entry in the
newly created market (patents).
(continued)
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STRATEGIES FOR EXPLOITING FIRSTMOVER ADVANTAGES
The Three Questions
3) Are there capable competitors that could rapidly
imitate the innovation?
Capable competitors are companies that can
move quickly to imitate the pioneering company. In
general, the greater the number of capable
competitors with access to the R&D skills and
complementary assets needed to imitate an
innovation, the more rapid imitation is likely to be.
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Learning Objective: After reading this
chapter you should be able to explain the
nature of technological paradigm shifts and
their implications for enterprise strategy.
TECHNOLOGICAL PARADIGM SHIFTS
 Technological paradigm shifts occur when:
 New technologies revolutionize the structure of the
industry.
 It dramatically alters the nature of competition.
 It requires companies to adopt new strategies to
survive.
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PARADIGM SHIFTS AND THE DECLINE OF
ESTABLISHED COMPANIES
 Paradigm shifts appear to be more likely to occur
in an industry when one, or both, of the following
conditions are in place.
1) The established technology in the industry is
mature and approaching or at its “natural limit,” and
2) A new “disruptive technology” has entered the
marketplace and is taking root in niches that are
poorly served by incumbent companies using
established technology.
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PARADIGM SHIFTS AND THE DECLINE OF
ESTABLISHED COMPANIES
The Natural Limit to Technology
 The silicon-based semiconductor chip may be
approaching its natural limit because we are
approaching the limits to the ability to shrink the
width of lines on a chip that allows the
manufacturer to add more transistors on a chip.
 It is more likely that manufacturers will find
another technology to replace silicon-based
computing and enable them to continue building
smaller, faster, cheaper computers.
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PARADIGM SHIFTS AND THE DECLINE OF
ESTABLISHED COMPANIES
The Natural Limit to Technology
 Richard Foster noted that initially the contenders
for the replacement technology are not as
effective as the established technology.
 He further noted that established companies and
their customers often make the mistake of
dismissing the new technology, only to be
surprised by its rapid performance improvement.
 Foster pointed out that there is not one potential
successor technology, but a swarm of them.
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PARADIGM SHIFTS AND THE DECLINE OF
ESTABLISHED COMPANIES
Disruptive Technology
 Clayton Christensen uses the term disruptive
technology to refer to a new technology that
gets it start away from the mainstream of a
market.
 Its functionality improves over time, and invades
the main market.
 Established companies are often aware of the
new technology but do not invest in it because
they listen to their customers, who do not want it.
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PARADIGM SHIFTS AND THE DECLINE OF
ESTABLISHED COMPANIES
Disruptive Technology
 Many established companies decline to invest in
new disruptive technologies because initially they
serve such small market niches that it seems
unlikely there would be an impact on the
company’s revenue and profits.
 When disruptive technology occurs, a new
network of suppliers and distributors typically
grow alongside the new entrants.
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STRATEGIC IMPLICTIONS FOR
ESTABLISHED COMPANIES
 Having access to the knowledge about how
disruptive technologies can revolutionize market is
a valuable strategic asset.
 It is important for established enterprises to invest
in newly emerging technologies that may ultimately
become disruptive technologies (a strategy used
by Cisco Systems).
 Established companies should separate out the
disruptive technology and create an autonomous
operating division solely for this new technology.
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STRATEGIC IMPLICTIONS FOR NEW ENTRANTS
 The new entrants have several advantages over
established enterprises.
 Pressures to continue the existing out-of-date
business model do not hamstring new entrants.
 They do not have to worry about their established
customer base, or about relationships with
established suppliers and distributors.
 New entrants can focus all their energies on the
opportunities offered by new disruptive technology.
 New entrants must choose whether to partner with
an established company, or go it alone.
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