Hill inst manual 12e ch07 Updated PDF

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CHAPTER 7Strategy and TechnologySynopsis Of ChapterThe goal of this chapter is to describe the strategies and concepts that are unique to high-technology industries. High-tech industries are growing in number and many formerly low-technology industries are becoming more high-tech. In addition, high-...

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CHAPTER 7 Strategy and Technology Synopsis Of Chapter The goal of this chapter is to describe the strategies and concepts that are unique to high-technology industries. High-tech industries are growing in number and many formerly low-technology industries are becoming more high-tech. In addition, high-technology industries face similar industry conditions, and thus tend to employ a similar range of strategies. One of the most important concepts in understanding high-technology industries is the idea of technical standards. These standards emerge as a new technology evolves rapidly in its early days. Typically, many alternate technologies are tried before a new standard is chosen. The existing technology is usually completely replaced by the new technology in time. The contest is to decide which firm will own the technical standard which is called a “format war.” Standards may emerge as a result of government policy or through an agreement made by firms within an industry, or gradually emerge based on consumer buying patterns. A critical part of a new technology’s success is often the support of complementary products. A network of interrelated buyer and supplier firms creates a support system for new technology. Winning the format wars require a company to build the installed base for its standard as rapidly as possible, thereby leveraging the positive feedback loop, inducing consumers to bear switching costs, and ultimately locking the market into its technology. A number of strategies for winning a format war include ensuring a supply of complements, leveraging killer applications, being aggressive in marketing and pricing, cooperating with competitors, and licensing formats. Such activities contribute to the cost of being present in high-tech industries. The cost structure is reflected in comparative cost economics and its strategic significance. First movers typically have an economic benefit, due to the early monopoly and the opportunity to gain technology-specific knowledge, driving down costs and increasing sales. Sometimes, however, firms that follow first movers can benefit from the first mover’s experience without the steep up-front investment. There are first mover disadvantages which include bearing significant pioneering costs, mistakes because of the uncertainties in new markets, risk of building the wrong resources and capabilities, and investment in inferior or obsolete technologies. In addition, high-tech products are increasingly digitized, which makes it easier to steal the product through piracy. Therefore, intellectual property rights are an important concern of high-tech firms. Also, hightechnology industries tend to have high fixed costs and low marginal costs. Therefore, strategies for success in high-tech industries include being a first mover, owning the technical standard, building demand early by dropping price, riding down the experience curve, and being open to strategic alliances with firms that possess complementary assets.

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The last part of the chapter examines various strategies for use in high-technology industries and the nature of the technological paradigm shifts. Strategies for exploiting first-mover advantages include having complementary assets, higher barriers to imitation, being aware of capable competitors, and investing in innovation. Technological paradigm shifts require companies to adopt new strategies in order to survive. Paradigm shifts are more likely to occur in industries when there are limits to technology and when there is disruptive technology. All the more reason that established companies have access to knowledge of disruptive technology and invest in technologies that may produce disruptive technologies. New entrants, on the other hand, can just focus on the opportunities available with disruptive technology.

Learning Objectives 1. Understand the tendency toward standardization in many high-technology markets. 2. Describe the strategies that firms can use to establish their technology as the standard in a market. 3. Explain the cost structure of many high-technology firms and articulate the strategic implications of this structure. 4. Explain the nature of technological paradigm shifts and their implications for enterprise strategy.

Opening Case Blu-Ray versus HD-DVD and Streaming: Standards battles in Video In 2003, Sony officially launched its Blu-Ray Disc, an optical disc data storage format technology had the backing of a consortium that included Philips, Panasonic, Pioneer, Sharp, Samsung, Hitachi, and others. In response, competitor Toshiba thus formed a consortium called the DVD Forum which developed a competing high definition DVD standard, called HD-DVD, making it the “official” successor to the DVD format. Both new formats were intended to deliver a theater-like experience at home, with brilliantly clear video and surround-sound audio, on high-end LCD and plasma televisions. The formats, however, would be incompatible, with and expected format war similar to Beta and VHS earlier. The battle was short-lived. However, on the eve of the Consumer Electronics Show in Las Vegas in early January 2008, Warner Brothers announced it would no longer be supporting the HD-DVD standard. Within a month, other major content producers and retailers joined suit. By 2009 Toshiba began making its own BluRay player and had halted HD-DVD players. Blu-Ray was not a blockbuster itself, soon digital formats became popular. By 2012 one-third of US households had Blu-Ray players, but by 2014 Sony warned investors that Blue-Ray sales contracting faster than it expected.

Teaching Note: This case talks about the highly competitive format war between Sony’s Blu-Ray and Toshiba’s HD-DVD to succeed the DVD format. Though Blu-Ray won by 2009, it was no blockbuster. Digital and streaming services developed by the tech industry. By 2012 one-third of US households had Blu-Ray players, but by 2014 Sony warned investors that Blue-Ray sales contracting faster than it expected.

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Lecture Outline I. Overview In this chapter, we will take a close look at the nature of competition and strategy in high-technology industries. Technology refers to the body of scientific knowledge used in the production of goods or services. High-technology (high-tech) industries are those in which the underlying scientific knowledge that companies in the industry use is rapidly advancing, and, by implication, so are the attributes of the products and services that result from its application. The computer industry is often thought of as the quintessential example of a high-technology industry. The circle of high-technology industries is both large and expanding, and technology is revolutionizing aspects of the product or production system even in industries not typically considered high-tech. Although high-tech industries may produce very different products, when developing a business model and strategies that will lead to a competitive advantage and superior profitability and profit growth, they often face a similar situation. II. 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 that can be an important source of competitive advantage. Battles to set and control technical standards in a market are referred to as format wars - essentially, battles to control the source of differentiation, and the value that such differentiation can create for the customer.

Strategy in Action 7.1 “Segment Zero” - A Serious Threat to Microsoft? For over two decades Microsoft dominated the computer operating systems market. However, in 2013, Microsoft faced a great threat as serious competitors had begun to emerge. The CEO of Intel said that technologies improve faster than the customers’ demand of it. Although, customers expect better and improved products over time, their ability to use these features is slowed by the need to learn how to use it, and make it part of their lifestyle. This explains that the trajectory of technological development and customer demands are upward sloping, but technology improvements are steeper. Most part of the market may feel that they overpay for technology that they do not value. Whereas, another part of the market may feel that they pay a lot more than they need or go without it. This is referred to as segment zero. Firms can make best use of this “segment zero” by balancing their trajectory of technological development with the trajectory of customer demands. The threat to Microsoft came when 90% of the worldwide market for smartphones was from Apple, Google, and Blackberry in 2013. Soon these companies launched tablet operating systems, and fully functional computers. Although, Microsoft still possessed an impressive set of resources, it still faced competition from a disadvantaged position for the first time.

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Teaching Note: This case talks about “Segment Zero,” and how Microsoft, the leader in computer operating systems, is fighting to save its market position. The instructor may use this case and ask the students to express their opinions on what Microsoft can do to regain their market, and how they could use the segment zero to their benefit. Figure 7.1: Trajectories of Technology Improvement and Customer Requirements Figure 7.2: Low-End Technology’s Trajectory Intersects Mass-Market Trajectory A. Examples of Standards A familiar example of a standard is the layout of a computer keyboard. The standard format (QWERTY) makes it easy for people to move from computer to computer because the input medium, the keyboard, is set in a standard way. Examples of products that rely on technical standards include the dimensions of shipping containers such as trucks and railcars, and the components included in a personal computer. When an industry relies upon a common set of features or design characteristics it is called a dominant design. Embedded in this design are several technical standards. Figure 7.3: Technical Standards for Personal Computers B.

Benefits of Standards Standards emerge because there are economic benefits associated with them. Following are the benefits:  A technical standard helps to guarantee compatibility between products and their complements.  Standards help reduce consumer confusion.  The emergence of a standard can help to reduce production costs. Once a standard emerges, products that are based on the standard design can be mass produced, enabling the manufacturers to realize substantial economies of scale while lowering their cost structures.  The emergence of standards can help reduce risks associated with supplying complementary products, and thus increase the supply for those complements.

A. Establishment of Standards Standards emerge in an industry in three primary ways:  When the benefits of establishing a standard are recognized, companies in an industry might lobby the government to mandate an industry standard.  Technical standards are often set by cooperation among businesses, without government help, and often through the medium of an industry association.  When the government or an industry association sets standards, these standards fall into the public domain, meaning that any company can freely incorporate the knowledge and technology upon which the standard is based into its products. Often, however, the industry standard is selected competitively by the purchasing patterns of customers in the marketplace - that is, by market demand. In this case, the strategy and business model a company ©2 0 17Ce n g a g eL e a r n i n g .Al l Ri gh t sRe s e r v e d . Ma yn o t b es c a n n e d ,c o p i e do rd u p l i c a t e d ,o rp o s t e dt oap u b l i c l ya c c e s s i b l ewe b s i t e ,i nwh o l eo ri np a r t .

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has developed for promoting its technological standard are of critical importance because ownership of an industry standard that is protected from imitation by patents and copyrights is a valuable asset - a source of sustained competitive advantage and superior profitability. Format wars are common in hightech industries where standards are important. B.

Network Effects, Positive Feedback, and Lockout There has been a growing realization that when standards are set by competition between companies promoting different formats, network effects are a primary determinant of how standards are established. Network effects arise in industries where the size of the “network” of complementary products is a primary determinant of demand for an industry’s product. Network effects are important in the establishment of standards. The classic example of a format war can be considered: the battle between Sony and Matsushita to establish their respective technologies for videocassette recorders (VCRs) as the standard in the marketplace. Sony was first to market with its Betamax technology, followed by JVC with its VHS technology. As more prerecorded VHS tapes were made available for rental, the VHS player became more valuable to consumers, and therefore the demand for VHS players increased. A large number of companies signed on to manufacture VHS players, and soon far more VHS players were available for purchase in stores. Before long, it was clear to anyone who entered a video rental store that there were more VHS tapes available for rent and fewer Betamax tapes available. This served to reinforce the positive feedback loop, and ultimately Sony’s Betamax technology was shut out of the market. The pivotal difference between the two companies was strategy: JVC and Matsushita chose a licensing strategy, and Sony did not. As a result, JVC’s VHS technology became the de facto standard for VCRs, whereas Sony’s Betamax technology was locked out. Figure 7.4: Positive Feedback in the Market for VCRs When two or more companies are competing with each other to get technology adopted as a standard in an industry, and when network effects and positive feedback loops are important, the company that wins the format war will be the one whose strategy best exploits positive feedback loops. As the market settles on a standard, an important implication of the positive feedback process occurs: companies promoting alternative standards can become locked out of the market when consumers are unwilling to bear the switching costs required to abandon the established standard and adopt the new standard. In this context, switching costs are the costs that consumers must bear to switch from a product based on one technological standard to a product based on another technological standard. However, consumers will bear switching costs if the benefits of adopting the new technology outweigh the costs of switching.

III. Strategies for Winning a Format War Firms benefit when they exploit network effects and when positive feedback loops are in operation. 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, thereby leveraging

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the positive feedback loop, inducing consumers to bear switching costs, and ultimately locking the market into its technology. A. Ensure a Supply of Complements It is important for the company to make sure that there is an adequate supply of complements. One way for companies to ensure a supply of complements is to diversify into the production of complements and seed the market with sufficient supply to help jump-start demand for their format. Also, companies may create incentives or make it easy for independent companies to produce complements. B.

Leverage Killer Applications Killer applications are applications or uses of a new technology or product that are so compelling that they persuade customers to adopt the new format or technology in droves, thereby “killing” demand for competing formats. Killer applications often help to jumpstart demand for the new standard.

C. Aggressive Pricing and Marketing One common tactic to jump-start demand is to adopt a razor and blade strategy: pricing the product (razor) low in order to stimulate demand and increase the installed base, and then trying to make high profits on the sale of complements (razor blades), which are priced relatively high. This strategy owes its name to Gillette, the company that pioneered this strategy to sell its razors and razor blades. Aggressive marketing is also a key factor in jump-starting demand to get an early lead in an installed base. Substantial upfront marketing and point-of-sales promotion techniques are often used to try to attract potential early adopters who will bear the switching costs associated with adopting the format. If these efforts are successful, they can be the start of a positive feedback loop. D. Cooperate with Competitors Companies have been close to simultaneously introducing competing and incompatible technological standards a number of times. They understand that the nearly simultaneous introduction of such incompatible technologies can create significant confusion among consumers, and often lead them to delay their purchases. E.

License the Format Licensing the format to other enterprises so that those others can produce products based on the format is another strategy often adopted. The correct strategy to pursue in a particular scenario requires that the company consider all of these different strategies and tactics and pursue those that seem most appropriate given the competitive circumstances prevailing in the industry and the likely strategy of rivals. Although there is no single best combination of strategies and tactics, the company must keep the goal of rapidly increasing the installed base of products based on its standard at the front of its mind. By helping to jump-start demand for its format, a company can induce consumers to bear the

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switching costs associated with adopting its technology and leverage any positive feedback process that might exist. It is also important not to pursue strategies that have the opposite effect. IV. Costs in High-Technology Industries In most high-tech industries, the fixed costs of product development are very high, but the costs of producing one extra unit of the product are very low. Many other high-technology products have similar cost economics: very high fixed costs and very low marginal costs. Most software products share these features, although if the software is sold through stores, the costs of packaging and distribution will raise the marginal costs, and if it is sold by a sales force direct to end-users, t...