Chapter
Seven
Strategy in
HighTechnology
Industries
“Whoever is first in the
field and awaits the
coming of the enemy,
will be fresh for the fight;
whoever is second in the
field and has to hasten to
battle will arrive
exhausted.
- Sun-Tzi
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High-Technology Industries
High-tech industries are those in which the
underlying scientific knowledge that companies in
the industry use is advancing rapidly.
By implication, the attributes of the products and services
that result from its application are also advancing rapidly.
Technology is:
• The body of scientific knowledge used
in the production of goods or services
• Accounting for an even larger share
of economic activity
• Revolutionizing aspects of the
product or production system in
industries not thought of as high-tech
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The Telecommunication Industry
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Technical Standards
and Format Wars
Technical standards are a set of technical
specifications that producers adhere to when
making the product or a component of it.
Format wars
• Often, only one standard will
come to dominate a market.
• Many battles in high-tech industries revolve
around companies competing to be the one
that sets the standard.
The source of product differentiation
and competitive advantage
is based on the technical standard.
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Technical Standards
for Personal Computers
Figure 7.1
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Benefits of Standards
Standards emerge because there are
economic benefits associated with them.
Standards help:
 Guarantee compatibility between products and
their compliments
 Reduce confusion in the minds of consumers
 Reduce production costs through massproduction
 Reduce the risks associated with supplying
complementary products and help
Standards lead to both low-cost and differentiation
advantages for individual companies.
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Establishments of Standards
Standards emerge in one of three ways:
1.
Companies may lobby the government to
mandate an industry standard.
Standards are often set by cooperation among
businesses or industry forums.
2.
 May become part of the public domain
3.
Standards are often selected competitively by
market demand.
•
•
•
Network effects – size of the network for complementary
products determines industry demand
Positive feedback loop – increase in demand
further increases the value of owning a product
Lockout – from the market occurs for companies promoting
alternate standards when consumers are unwilling to bear the
switching costs (unless benefits outweigh costs of switching)
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Positive Feedback in
the Market for VCRs
Figure 7.2
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Strategies for Winning
a Format War
Successful strategies revolve around finding
ways to make network effects work in their
favor and against their competitors:
 Ensure a supply of complements.
• In addition to the product itself
 Leverage killer applications.
• New products that are so compelling that customers adopt
them in droves, killing demand for competing formats
 Aggressively price and market.
• Pricing the product low to increase the installed base,
then pricing complements high to make profits
 Cooperate with competitors.
• To speed up adoption of the technology
 License the format.
• Reduce financial incentive for competitors to develop their own
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Cost Structures in
High-Technology Industries
Figure 7.3
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Strategic Significance of
High-Tech Cost Structure
In many high-tech industries, the fixed costs of
developing the product are very high, but the
costs of producing additional units are low:


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.
The strategy of pricing low to drive volume to
reap wider profit margins is central to the business
model of some successful high-tech companies.
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Managing
Intellectual Property Rights
Intellectual property rights apply to the
product of any intellectual and creative efforts.

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
•
•
Large scale problem with high piracy rates
Legal and technological solutions are required
 Strategies for managing digital rights
•
Low costs of copying and distributing digital media
»
»
•
•
Can be used to the company’s advantage
Drive down costs of purchasing media
Encryption software
Vigorous defense of intellectual property rights
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Capturing First-Mover Advantages
First-mover advantage: the first to develop and
pioneer revolutionary new products that can lead
to an enduring competitive advantage
If the new product satisfies unmet
consumer needs and demand is high:
• First mover may be in a monopoly position
to capture significant revenues and profits.
• Strong revenues and profits signal an
opportunity to potential rivals.
• Rival imitators may enter market in the absence of strong
barriers to imitation resulting in lower market returns.
Being a first-mover does not guarantee success.
Success depends on the first-mover strategy
that is pursued.
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The Impact of Imitation on Profits
of a First Move
Figure 7.4
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First-Mover Advantages
The five main sources of first-mover advantages:
1. Exploit network effects and positive feedback loops
Locking customers into its technology
2. Establish significant brand loyalty
Expensive for later entrants to break down
3. Enable economies of scale and learning effects
So first-mover has cost advantage and can respond to new
entrants by cutting price to maintain market share
4. Create switching costs for customers
Making it difficult for rivals to take customers away
5. Accumulate valuable knowledge
Regarding customers, distribution, and technology that late
entrants will find difficult or expensive to match
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First-Mover Disadvantages
1. Pioneering costs
To develop technology and distribution channels
and to educate the customers
Later entrants ‘free-ride’ on first-mover’s investments.
2. More prone to make mistakes
Because of the uncertainties in a new market
Later entrants learn from the mistakes of first-movers.
3. Risk of building the wrong resources and
capabilities
Mass-market may differ from the needs of early adopters
First-movers risk ‘Plunging into the chasm’.
4. May invest in inferior or obsolete technology
If the underlying technology is advancing rapidly
Late entrants may be able to ‘leap frog’ the technology.
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Strategies for Exploiting
First-Mover Advantages
1.
Going it alone
Develop and market the innovation itself.
2.
Strategic alliance or joint venture
Develop and market the innovation jointly
with other companies.
3.
License the innovation to others
Let them develop the market.
Key questions in choosing a strategy:
•
•
•
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?
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Strategies for Profiting
from Innovation
Table 7.1
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Technological Paradigm Shifts
Occur when new technologies emerge that:
• Revolutionize the structure of the industry
• Dramatically alter the nature of the competition
• Requires companies to adopt new strategies to
survive
Paradigm shifts are more likely to occur with:
• Natural limits to technology
The established technology in the industry is mature
and approaching its natural limit.
• 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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The Technology S-Curve
Figure 7.5
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Established and Successor
Technologies
Figure 7.6
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Swarm of Successor
Technologies
Figure 7.7
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Disruptive Technology
Disruptive technology is a new technology that
gets its start away from the mainstream of a market
and invades the main market as its functionality
improves over time.
 Revolutionizes the industry
structure and competition
 Causes a technological
paradigm shift
Disruptive technology often causes the
decline of established companies –
because they listen to customers
who say they do not want it.
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Strategic Implications of Paradigm
Shifts for Established Companies
 Having access to knowledge about how
disruptive technologies can revolutionize
markets is in itself a valuable asset.
 It is important for established enterprises 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.
Internal forces suppress change.
Chances of success in developing and
commercializing disruptive technology will be
enhanced if it is placed in its own organization.
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Strategic Implications of
Paradigm Shifts for New Entrants
New entrants, or attackers, have several
advantages over established enterprises:


Pressure to continue the out-of-date existing
business model does not hamper new entrants.
New entrants need not worry about established
customer base, distribution channels, or suppliers.
But new entrants face important new issues:




May be constrained by lack of capital
Need to manage the organizational problems
associated with rapid growth
Find a way to take the technology from a small niche
into the mass-market
Decide whether to go it alone or partner with an
established company
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“The guy with the competitive
advantage is the one with the
best technology.” - Walter Wriston
“A business’s flexibility in
adapting to change and market
dynamics will mark the winners
and losers in this fast-changing
Internet Age.”
- Michael Dell
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