Running head: FUTURE TECHNOLOGICAL INNOVATION 1

Future Technological Innovation

Hao Liu

University of Toronto Mississauga

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Executive Summary

This report provides insights on key learning points such as disruptive technologies, first-

mover advantages, LIMI products, and coopetition and how Microsoft can apply these concepts

to their business model to counter the threat of disruption in the mixed reality market. Methods

of analysis include looking at Microsoft’s current business models such as creating LIMI

products to complement their product lines for example, the Surface Go to complement the

Surface series; looking at how competitors have created value from network effects for example,

Apple’s wide selection of high quality apps; and looking at how Microsoft has successfully

collaborated with other firms with complementary capabilities. Results of the analysis show that

Microsoft can minimize the negative impacts of disruption by creating the disruption themselves,

being a first-mover in the mixed reality market to deliver HoloLens smart glasses to the mass

market and earning first-mover advantages such as scale economies and network effects.

Recommendations discussed in the report include bringing the HoloLens to the mass market

faster by introducing a LIMI version of their HoloLens at a lower cost to appeal to mass market

consumers, and collaborating with hardware manufacturers such as Samsung and Asus to create

low-cost (relative to quality) units and eyewear company Warby Parker to design a sleeker and

more practical headset for every day use, as collaboration will allow Microsoft to resolve

uncertainties with their collaborators and not have to waste time and resources trying to resolve

them alone.
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Literature Review

Disruptive Technologies

Advancements in technology are moving faster than ever, “[creating] opportunities for

some companies and threats for others” (Afuah, 2014, Chapter 7). These technological

advancements are driving disruption in well-established markets, displacing existing products

from market leaders with highly valuable innovations and creating new markets (Afuah, 2014,

Chapter 7). Clayton Christensen coined the term “disruptive technologies” to describe this

phenomenon.

In 2016, Microsoft launched “the first commercially available mixed reality device called

HoloLens” (Tepper et al., 2017, p. 1066). HoloLens is a mixed reality wearable headset

combining augmented reality (AR) and virtual reality (VR) to project “holographic images,

three-dimensional objects, and two-dimensional windows” in the “user’s visual field, enabling

novel interactive experiences with complex data packets” (Tepper et al., 2017, p. 1067).

HoloLens currently targets customers in healthcare, enterprise, and education but has yet to reach

the mass market.

Plastic surgeons are increasingly using HoloLens in the operating room, to assist with

surgeries, projecting holographic information related to the surgical procedure “as part of pre-

operative planning or intraoperative navigation” (Tepper et al., 2017, p. 1067). The hands-free

nature of HoloLens allows surgeons to use the device in sterile fashion. HoloLens grants greater

access to vital information during surgeries “without interrupting workflow and surgical

efficiency” and “lays the groundwork for improved decision-making” (Tepper et al., 2017, p.

1069).
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HoloLens has applications to streamline workflow and communication in the workplace.

Employees may use HoloLens to “collaborate on projects with employees working in other

locations” (Khakurel, Melkas, & Porras, 2017, p. 802). Users can see things through each other’s

perspectives, allowing for the user giving guidance to interact with and create 3D images in the

environment from the perspective of the user receiving guidance (Khakurel, Melkas, & Porras,

2017, p. 802). A study has shown that employees using HoloLens while completing procedural

and maintenance work for NASA has “resulted in faster task completion times” as well as

“significantly lower levels of mental and temporal demand” (Braly, Nuernberger, & Kim, 2019,

p. 875).

As disruptive technologies such as automation replaces many human jobs, educational

institutions will need to address the “growing and widespread need for worker retraining”

(Volkow & Howland, 2018, p. 29). Most online learning platforms only offer passive

experiences, watching videos or lecture recordings, which does not allow learners to actively

engage in learning and practicing skills in a safe environment (Volkow & Howland, 2018, p. 29).

This results in many learners feeling “isolation, disconnectedness, and frustration” (Volkow &

Howland, 2018, p. 29). HoloLens can provide a solution to this problem “by allowing people to

come together in an active simulated environment” where they can apply what they learn in a

safe and immersive environment (Volkow & Howland, 2018, p. 29).

First-Mover Advantage vs. Follower Advantage

Firms can achieve a first-mover advantage by being “the first to introduce a new product

in an existing market” or “[creating] a new market” (Afuah, 2014, Chapter 10). However, first-

mover advantage is not granted to every firm that moves first but is earned. As a first-mover, the

firm will have the opportunity to “capture as much of the total available market as possible
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before followers start moving in” (Afuah, 2014, Chapter 10). In the early stages, the first-mover

will be “the only one in the market”, thus they have “100 percent share of the new product”

(Afuah, 2014, Chapter 10). This can potentially grant several first-mover advantages including

scale economies and network effects. Scale economies refers to the phenomenon that occurs

when a firm increasingly produces more of a product, the cost of production per unit decreases as

the “(total) fixed cost […] can be spread over the larger number of units” (Afuah, 2014, Chapter

10). Network effects refers to the value that is created from more people using a product or

service (Afuah, 2014, Chapter 10). An example of this is as more people buy HoloLens, the

market population for HoloLens grows and more developers will see the value in investing and

concentrating on creating software for it. As there are increasingly more developers and apps for

HoloLens, the quality and variety of apps will increase, as will the value of owning a HoloLens.

The disadvantages of being the first-mover can also bring advantages to followers. First-

movers often direct a great amount of resources toward R&D to create new products, training

employees, marketing, and resolving uncertainties. Depending on the level of imitability of the

first-mover’s product “and the extent to which the follower has the complementary assets for the

product”, followers may take advantage of first-movers’ deep financial investments and save on

costs from R&D by using the “now available knowledge from first movers’ R&D”, poaching

employees from first-movers, buying from known suppliers, pursuing “proven distribution

channels”, and targeting “customers who may be willing to switch or new ones who are waiting

for a different version of the pioneer’s product” (Afuah, 2014, Chapter 10). As a follower,

Microsoft learned from Google’s mistakes with the failed Google Glass. Microsoft is “taking a

more measured approach with HoloLens”, “targeting the software developers it needs to make

the device useful” rather than over hyping it with consumer marketing (McBride, 2016).
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Analysis and Recommendations

Microsoft is in a race with their biggest competitors, including Google, Facebook,

Amazon, and especially Apple, “to create smart glasses that we wear everywhere and that may

replace our phones” (Haselton, 2019). The mixed reality headsets that are currently available on

the market “are too big, too expensive and simply too weird-looking” for the mass market

(Haselton, 2019). However, technology enthusiasts are hopeful that some day, mixed reality

headsets or “smart glasses” will be affordable, “fashionable and sleek enough to wear all day and

everywhere you go” to be appealing to the mass market, eventually superseding smartphones and

computer screens (Haselton, 2019).

In the fourth quarter of the 2019 fiscal year, Microsoft’s revenues from their personal

computing segment was over $11.2 billion, which is a third of their total revenue (Microsoft,

2019). Current usage scenarios for Microsoft HoloLens are in business, clinical, and educational

applications and has not yet reached the mass market consumer electronics segment due to the

impracticality of the bulky glasses, as well as the high costs. Microsoft stands to lose much of

their revenues from personal computing if one or more of their competitors beats them to

launching affordable, smaller form factor smart glasses for everyday users in the mass market

customer segment. The biggest threat to Microsoft in this regard is Apple, as Apple plans their

new headset to be “an eventual successor to the iPhone” (Gurman, 2019). Apple has already set

the foundation for AR on their iOS platform which boasts thousands of AR apps and it is only a

matter of time when they integrate existing iOS AR apps to their “headset [..] reportedly set to

launch in 2022” (Haselton, 2019). Apple’s headset is “expected to synchronize with a wearer’s

iPhone to display things such as texts, emails, maps, and games over the user’s field of vision”,

integrating well with the rest of the Apple ecosystem of products and services (Gurman, 2019).
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Part of Apple’s success can be attributed to the value they have created through network effects,

as there are many software developers willing to create a wide variety of high quality apps for

Apple devices because they can reach a large userbase to use their apps.

Microsoft can counter the threat of disruption from Apple’s new headset by employing a

LIMI (less-is-more) approach to developing the next iteration of HoloLens, thus becoming the

disruptor rather than reacting to a competitor’s disruption. A LIMI version of the HoloLens will

be “de-emphasized or stripped off” in terms of attributes and specifications compared to the

MIBI (more-is-better) enterprise version of HoloLens (Afuah, 2014, Chapter 6). The two tiers of

HoloLens will have different price points. By performing cost-saving activities such as using less

powerful hardware and simplifying the product relative to the existing HoloLens, the LIMI

HoloLens can be much more affordable than the currently available MIBI HoloLens as

Microsoft can save on costs for production and pass the savings on to consumers. Microsoft can

also reach the market sooner with a LIMI HoloLens in a slim form factor, as it will be easier to

fit the smaller and less powerful hardware internals in a slim form factor headset. Creating a

LIMI HoloLens is a realistic and achievable way for Microsoft to become a first-mover to

deliver mixed reality headsets to the mass market, because Microsoft has the capabilities to do so

as demonstrated by the LIMI products that they have introduced in the past, such as the Surface

Go to complement their Surface series, as well as their Windows operating system which is

separated by a Home version and a Pro version. A LIMI version of HoloLens would have a price

point that is more accessible to a larger portion of the mass market, potentially convincing many

consumers to switch from using their smartphones and personal computers to exclusively using

HoloLens for all their computing needs. Microsoft can re-enter the mobile computing market

with the LIMI HoloLens, after having failed with their Windows mobile operating system and
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exiting from the smartphone market, and recapture some of the market share that they had lost to

iOS and Android. If Microsoft was to pursue a LIMI approach with their next HoloLens, they

can “[create] an uncontested market space in which [they] can sell a product that is low cost and

differentiated” (Afuah, 2014, Chapter 6).

LIMI also has the advantage that it is an unexpected innovation strategy so Microsoft will

not have any “head-to-head competition” for their LIMI HoloLens at first, as competitors will

likely be focusing on creating MIBI headsets (Afuah, 2014, Chapter 6). The LIMI HoloLens can

be very profitable for Microsoft as they “can find ways to keep its prices close to customers’

reservation prices […] without fear of driving customers to competitors since there are none”

(Afuah, 2014, Chapter 6). By being a first-mover in the market space, Microsoft has the

opportunity to earn many first-mover advantages, “[putting] itself in a favorable position to fight

competitors that venture into the market space” (Afuah, 2014, Chapter 6). For example,

Microsoft can sell high volumes of their LIMI HoloLens and enjoy scale economies as there are

no direct competitors, so customers only have the one option for smart glasses. By achieving

scale economies, Microsoft can further pass on more savings to customers. Since Microsoft is a

first-mover, they can enjoy the advantage of network effects. Software developers will flock to

creating apps for HoloLens as it will be the only mixed reality headset in the market space that is

targeted towards the mass market, at least until competitors start moving in, and as more

developers support HoloLens and more apps are available on Microsoft’s platform, it creates

immense value for owning a HoloLens and more customers will be drawn to HoloLens for its

diverse selection of high quality apps.

Samsung and Asus are seeking partnerships with Microsoft to “build their own versions

of Microsoft’s HoloLens” (Tibken, 2015). Microsoft has an opportunity to cooperate with

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competing firms such as Samsung and Asus, fostering a symbiotic relationship in which all

cooperating firms can benefit from each other’s unique capabilities to take down their mutual

rival, Apple. Samsung is one of the industry leaders “in sensor chips and processors” while

Microsoft has already established “an industry standard in hololens” (Kim, 2015). It makes sense

for Microsoft to partner up with other firms to prepare themselves against the disruption from

Apple’s headset because Microsoft has historically relied on cooperation with PC hardware

manufacturers to deliver the Windows experience to consumers, so Microsoft evidently has the

capabilities to effectively collaborate. Microsoft’s success in the PC market space is attributed to

their strong cooperative nature in licensing their Windows operating system to various hardware

manufacturers. Three of the leading personal computer vendors that use the Windows operating

system including Lenovo, HP, and Dell, have surpassed Apple in market share (Statista, 2019).

Evidently, Microsoft has demonstrated that their cooperative strategy works well for them and

has created value for the collaborating firms. Collaboration also has the added benefit that

Microsoft can bring a consumer-ready version of HoloLens to the market much sooner than if

they were working alone, as there is a level of uncertainty related to “developing a new product

whose components are also innovations” therefore it is better to cooperate “with suppliers of

such components to resolve product development uncertainties” rather than wasting time trying

to resolve these uncertainties alone (Afuah, 2014, Chapter 9). Facebook is partnering up with

eyewear giant, Luxottica, to develop smart glasses to reach consumers by 2025 (Rodriguez,

2019). Aside from partnering up with technology firms, Microsoft should also seek partnerships

with eyewear companies such as Warby Parker.

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References

Afuah, A. (2014). Business Model Innovation [E-reader version]. New York, NY: Routledge.

Braly, A.M., Nuernberger, B., Kim, S.Y. (2019). Augmented Reality Improves Procedural Work

on an International Space Station Science Instrument. Human Factors: The Journal of

Human Factors and Ergonomics Society, 61(6), 866-878. doi:

10.1177/0018720818824464

Gurman, M. (2019). Apple’s Smart Glasses Could Make 2020 the Year of AR. Bloomberg.

Retrieved from https://www.bloomberg.com/news/articles/2019-10-21/why-2020-is-

looking-great-for-apple-products-and-consumer-gadgets

Haselton, T. (2019). There’s a race to replace our iPhones with smart glasses we wear

everywhere. CNBC. Retrieved from https://www.cnbc.com/2019/11/11/smart-glasses-

that-replace-phones-may-be-the-next-hottest-tech-trend.html

Khakurel, J., Melkas, H., & Porras, J. (2018). Tapping into the wearable device revolution in the

work environment: A systematic review. Information Technology & People, 31(3), 791-

818. doi: 10.1108/ITP-03-2017-0076

Kim, Y. (2015). Samsung seeks partnership with Microsoft for hololens. The Korea Times.

Retrieved from http://www.koreatimes.co.kr/www/news/tech/2015/05/133_178885.html

McBride, S. (2016). With HoloLens, Microsoft aims to avoid Google’s mistakes. Reuters.

Retrieved from https://www.reuters.com/article/us-microsoft-hololens-

idUSKCN0YE1LZ
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Microsoft. (2019). FY19 Q4 – Press Releases – Investor Relations. Retrieved from

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Rodriguez, S. (2019). Facebook working on smart glasses with Ray-Ban, code-named ‘Orion’.

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Tepper, O. M., Rudy, H. L., Lefkowitz, A., Weimer, K. A., Marks, S. M., Stern, C. S., &

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Tibken, S. (2015). Asus mulls HoloLens augmented-reality glasses of its own. CNET. Retrieved

from https://www.cnet.com/news/asus-may-release-hololens-augmented-reality-glasses-

of-its-own/

Volkow, S.W., & Howland, A.C. (2018). The Case for Mixed Reality to Improve Performance.

Performance Improvement, 57(4), 29-37. doi: 10.1002/pfi.21777