Strategic Management – chapter 7

tunderstand the tendency toward standardization in many high technology markets

• Technical standards and format wars
o technical standards
-A set of technical specifications that producers adhere to when making the
product, or a component of it.
-Indeed, in many cases the source of product differentiation is based on the
technical standard.
-Often, only one standard will dominate a market, so many battles in high-tech
industries involve companies that are competing to set the standard.
o Format wars
-Battles to control the source of differentiation, and the value that such
differentiation can create for the customer.
-Because differentiated products often command premium prices.
- and are often expensive to develop, the competitive stakes are
enormous.
- The profitability and survival of a company may depend on the outcome of the
battle.

o Dominant design
- Common set of features or design characteristics.
 BENEFITS OF STANDARDS
1. Guarantees compatibility between products and their complements.
2. Reduces confusion in the minds of consumers.
3. Reduces production costs and risks associated with supplying complementary
products.
4. Leads to low cost and differentiation advantages for individual companies.
5. Helps raise the level of industry profitability.
___________End______
2.Describe the strategies that firms can use to establish their technology as the
standard in a market.
• Establishment of Standards
✓ Standards emerge in an industry in three primary ways.
a. First, Standards emerge in an industry when the benefits of establishing are
recognized.
b. Second, Technical standards are set by cooperation among businesses,
through the medium of an industry association.
c. Third, When the government sets standards they fall into the public domain.
▪ Public domain: Any company can freely incorporate the knowledge
and technology upon which the standard is based into its products
✓ For example,The QWERTY format is not owned by any specific company,
so direct profits from it are not possible.
✓ Hypertext markup language (HTML), the language used for displaying text
and graphics on the Web, is freely available for everyone to use.
✓ TCP/IP, the communication standard used for transmitting data on the
Internet, is also in the public domain.
✓ Industry standards are often determined by customer demand and purchasing
patterns in the marketplace.
✓ The strategy and business model developed by a company to promote its
technological standard are crucial for maintaining a competitive advantage
and superior profitability.
✓ Ownership of an industry-standard protected by patents and copyrights is a
valuable asset.
✓ Companies like Microsoft and Intel have achieved competitive advantage
through their ownership of specific technological standards.
 ✓ Format wars occur when companies compete to establish their designs as the
industry standard.
✓ High-tech industries frequently experience format wars due to the
importance of standards.
✓ The dominance of the Wintel standard for PCs was achieved through format
wars against Apple and IBM.
✓ Mobile payments and smartphones are currently witnessing ongoing format
wars among firms like Apple, Google, Research in Motion, and Microsoft.
• NETWORK EFFECTS, POSITIVE FEEDBACK, AND LOCKOUT
▪ ▪ ▪ Network effects: Network of complementary products as a primary
determinant of the demand for an industry’s product.
✓ Positive feedback loops Increase in demand for a technology.
-that triggers an increase in demand for products that support it.
✓ Alternative standards get locked out as consumers are unwilling to bear the
switching costs.

• STRATEGIES FOR WINNING A FORMAT WAR(What strategy should we

pursue to establish our format as the dominant one)
✓ Make network effects work in one’s favor and against competitors.
✓ Build the installed base for the standard as rapidly as possible.
There are a number of key strategies and tactics that can be adopted to try
to achieve this.
 I. Ensure a Supply of Complements
II. Leverage Killer Applications
III. Aggressive Pricing and Marketing
IV. Cooperate with Competitors
V. License the Format
I. Ensure a Supply of Complements
✓ Importance of ensuring a supply of complements
✓ Adequate supply of complements is crucial for product success
✓ Example: Sony PlayStation 3 and the need for games to run on it
✓ Companies take two steps to ensure complement supply:
1. Diversify into complement production and seed the market
2. Create incentives for independent companies to produce complements
II. Leverage killer applications.
✓ ▪ Killer applications : Applications or uses of a new technology or product so
compelling that customers adopt them in droves, killing competing formats.
✓ Killer applications persuade customers to adopt new technology or product.
✓ They "kill" demand for competing formats.
✓ Killer applications jump-start demand for the new standard.
✓ Example: AOL's killer applications in the 1990s were e-mail, chat rooms, and
web browsing
III. Pursue aggressive pricing and marketing.
▪ Razor and blade strategy : Pricing the product low to stimulate demand, and
pricing complements high.
✓ Example: Gillette selling razors at a low price and making profits on razor
blades
✓ Similar strategy used by Hewlett-Packard with printers and cartridges.
✓ Aggressive marketing is crucial for jump-starting demand
✓ Upfront marketing and point-of-sales promotion techniques are used
✓ Aimed at attracting early adopters who bear switching costs
✓ Positive feedback loop can be created if successful
✓ Example: Sony PlayStation's marketing campaign
✓ Nationwide television advertising and in-store displays
✓ Targeted at the primary demographic of 18-34-year-olds
✓ Allowed potential buyers to try games before purchase
IV. Cooperate with competitors
✓ Companies have been close to simultaneously introducing competing and
incompatible technological standards a number of times.
✓ Example: Compact disc (CD) development by Sony, Philips, JVC, and
Telefunken.
✓ Cooperation between Sony and Philips to avoid incompatible technologies.
✓ Sony contributed error correction technology, Philips contributed laser
technology.
✓ Momentum shifted towards the Sony-Philips alliance.
✓ Recording labels announced support for Sony-Philips format.
✓ Telefunken and JVC abandoned their CD technology efforts.
✓ Cooperation reduced confusion and allowed a single format to rise.
✓ Accelerated adoption of CD technology.
✓ Win-win situation for Philips and Sony, eliminating competitors and sharing
success.
V. License the format
✓ Licensing the format allows other enterprises to produce products based on the
format.
✓ Pioneering company gains from licensing fees and increased product supply.
✓ Example: JVC and Matsushita licensing the VHS format for VCRs.
✓ VHS players were more widely available due to licensing.
✓ Sony chose not to license its competing Betamax format.
✓ The appropriate strategy depends on competitive circumstances and likely rival
strategies.
✓ Goal: rapidly increase the installed base of products based on the standard.
✓ Jump-start demand, induce consumers to bear switching costs, leverage positive
feedback.
✓ Avoid strategies that hinder demand growth or benefit aggressive competitors.
✓ High pricing for early adopters can slow demand growth and benefit
competitors.

______________end_________
3.Explain the cost structure of many high technology firms, and articulate the
strategic implications of this structure.
• COSTS IN HIGH TECHNOLOGY INDUSTRIE
✓ Similar cost economics.
✓ Very high fixed costs and very low marginal costs.
✓ Law of diminishing returns Marginal costs rise as a company tries to expand
output.
✓ Profitability increases when a company shifts from a cost structure with
increasing marginal costs to higher fixed costs with lower marginal costs
• Comparative Cost Economics

✓ In many industries, marginal costs rise as a company expands output due to

diminishing returns.
✓ Conventional producers face increasing marginal costs as they hire more labor
and invest in more resources.
✓ However, in high-tech settings like software production or digital
telecommunications, the law of diminishing returns often does not apply.
✓ High-tech producers can have marginal costs that remain constant or close to
zero as output increases.
✓ Company α represents a conventional producer with rising marginal costs, while
company β represents a high-tech producer with flat and low marginal costs.
✓ Company β's flat marginal cost curve allows it to continuously reduce average
costs as it spreads fixed costs over greater volume.
✓ Company α's rising marginal costs result in a U-shaped average cost curve.
✓ Assuming both companies sell at the same price and produce the same quantity,
company β generates significantly higher profits due to lower average costs.
✓ Profit is represented by the shaded area in the graphical illustration.
• Strategic Significance
✓ Shifting from a cost structure with increasing marginal costs to one with lower
marginal costs can increase profitability.
✓ In the consumer electronics industry, the shift from analog to digital technology
reduced marginal costs.
✓ Digital systems, being software-based, have lower marginal costs for producing
recordings.
✓ Music companies were able to lower prices, expand demand, and increase
profitability.
✓ The latest technology for copying music recordings, such as distribution over
the Internet, has even lower marginal costs.
✓ However, widespread illegal file sharing has led to a decline in overall revenues
in recorded music.
✓ This shift is starting to affect other industries as well.
✓ Some companies are building their strategies around exploiting this shift.
✓ When a high-tech company faces high fixed costs and low marginal costs, a
strategy of driving down prices to increase volume can be effective.
✓ Prices can be reduced to stimulate demand, and as long as prices fall less rapidly
than average costs, per unit profit margins expand.
✓ Low marginal costs allow for a low-cost structure option and wider profit
margins.
✓ This pricing strategy is central to the business model of successful high-
technology companies like Microsoft.
 • First-mover advantages

✓ first mover: A firm that pioneers a particular product category or feature by

being first to offer it to market.
- If the new product satisfies unmet consumer needs and demand is
high, the first mover can capture significant revenues and profits.
▪ Figure 7.6 illustrates that without strong barriers to imitation, imitators will
enter the market created by the first mover.
▪ These imitators compete with the first mover, reducing the first mover's
monopoly profits.
▪ As a result, all participants in the market experience lower returns.
▪ The absence of strong barriers to imitation allows competitors to erode the
advantages of the first mover.
▪ This emphasizes the importance of establishing and maintaining barriers to
entry in order to sustain competitive advantages and higher returns.
✓ There are five primary sources of first-mover advantages.
i. Exploiting network effects and positive feedback loops to lock consumers
into the technology.
ii. Establishing significant brand loyalty that is challenging for later entrants to
break down.
iii. Increasing sales volume ahead of rivals, resulting in cost advantages from
scale economies and learning effects.
iv. Creating switching costs for customers, making it difficult for rivals to enter
and attract customers away from the first mover.
v. Accumulating valuable knowledge about customer needs, distribution
channels, product technology, process technology, and more.
• First mover disadvantge
✓ Bear significant pioneering costs.
✓ More prone to making mistakes.
✓ Risk of building the wrong resources and capabilities.
✓ Risk of investing in inferior or obsolete technology

• Strategies for Exploiting First-Mover Advantages

I. Develop and market the innovation.
✓ The competitive strategy of developing and marketing the
innovation alone makes most sense when:
(1) the innovator has the complementary assets necessary to develop the
innovation,
(2) the barriers to imitating a new innovation are high, and
(3) the number of capable competitors is limited.
II. Develop and market the innovation jointly with other companies.
▪ Through a strategic alliance or joint venture.
 ✓ The competitive strategy of developing and marketing the
innovation jointly with other companies through a strategic alliance
or joint venture makes most sense when:
(1) the innovator lacks complementary assets,
(2) barriers to imitation are high, and
(3) there are several capable competitors.
III. License the innovation to others and allow them to develop the market.
Licensing, makes most sense when:
(1) the innovating company lacks the complementary assets,
(2) barriers to imitation are low, and
(3) there are many capable competitors.

• FACTORS TO CONSIDER WHEN SELECTING A STRATEGY

I. Complementary assets
II. Height of barriers to imitation
III. Capable competitors
I.Complementary assets
✓ Complementary assets are essential for leveraging an innovation and gaining
a competitive advantage.
✓ Competitive manufacturing facilities capable of handling rapid growth and
maintaining high product quality are crucial complementary assets.
✓ Required to exploit an innovation and gain a competitive advantage.
✓ Help build brand loyalty and achieve rapid market penetration
✓ State-of-the-art manufacturing facilities allow the first mover to move down
the experience curve quickly and avoid production bottlenecks or quality
issues.
 ✓ Inability to satisfy demand due to production problems creates opportunities
for imitators to enter the market.
✓ Other complementary assets include marketing know-how, a strong sales
force, access to distribution systems, and an after-sales service and support
network.
✓ Developing complementary assets can be costly, requiring significant capital
investment.
✓ Late movers, often large and successful companies from other industries,
have the resources to quickly develop a presence in the new industry, giving
them an advantage over first movers.

II. Height of barriers to imitation

✓ Higher the barriers, longer it takes for rivals to imitate.
✓ Give the innovator more time to build an enduring competitive advantage.
III.Capable competitors
✓ Companies that can move quickly to imitate the pioneering company.
✓ Competitors’ capability depends on their research and development skills and
access to complementary assets.
______________End____________
4.Explain the nature of technological paradigm shifts and their implications
for enterprise strategy.
TECHNOLOGICAL PARADIGM SHIFT
• Shifts in new technologies that:
-revolutionize the structure of the industry.
-dramatically alter the nature of competition.
-require companies to adopt new strategies for survival.
• Occur in an industry when:
- established technology is approaching or is at its natural limit.
- new disruptive technology has entered the marketplace and is invading the
main market
▪ 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.
a) The Natural Limits to Technology
b) disruptive technology

a)The Natural Limits to Technology

✓ Richard Foster has introduced the technology S-curve, which represents the
relationship between the performance of a technology and time.
✓ The S-curve shows the cumulative investments in research and development
(R&D) and the performance or functionality of a technology.
✓ In the early stages of a technology's evolution, R&D investments result in rapid
improvements in performance as basic engineering problems are solved.
✓ As time progresses, cumulative R&D investments start to experience
diminishing returns.
✓ The rate of improvement in performance slows down, and the technology
approaches its natural limit.
✓ At this point, further advances in performance become increasingly difficult or
even impossible to achieve.
✓ Paradigm shifts occur when technology reaches its limits.
✓ Research focuses on alternative technologies.
✓ Probability of a paradigm shift increases over time.
✓ Exotic computing may replace silicon-based computing.
✓ Computer industry could experience a paradigm shift soon.
✓ Established companies might decline during the shift.
✓ New enterprises have a chance to rise to dominance.
c) Disruptive Technology
✓ Occur in an industry when:
- established technology is approaching or is at its natural limit.
-new disruptive technology has entered the marketplace and is invading the main
market
✓ Clayton Christensen's theory of disruptive technology is influential in high-tech
circles.
✓ Disruptive technology starts outside the mainstream market and later invades it.
✓ It revolutionizes industry structure, leading to the decline of established
companies.
✓ Established companies often ignore disruptive technology, listening to their
customers' current preferences.
✓ New entrants accumulate knowledge and bring the technology to the mass
market.
✓ Adoption of disruptive technology is difficult for established companies due to
various factors.
✓ New suppliers and distributors emerge to serve the new entrants, creating a new
network.
✓ Disruptive technologies can lead to the demise of the entire network associated
with established companies.
✓ New entrants have an advantage as they don't face internal inertia and can
optimize the technology to challenge established companies.

▪ Strategic Implications for Established Companies

✓ Being aware of how disruptive technologies can revolutionize markets is a
valuable strategic asset.
✓ Investing in new technologies that may become disruptive technologies.
✓ Creating an autonomous operating division solely for the disruptive technology
Established companies must meet the challenges created by the emergence of
disruptive technologies.
• First, having access to the knowledge about how disruptive
technologies can revo lutionize markets is a valuable strategic asset.
• Second, it is clearly important for established enterprises to invest in
newly emerging technologies that may ultimately become disruptive
technologies.
✓ Christensen's theory of disruptive technology isn't a guarantee that all
established companies will fail.
✓ Established companies must adapt to disruptive technologies.
✓ Access to knowledge about disruptive technologies is a strategic asset.
✓ Companies should ask customers about future technology functionality, not just
current interest.
✓ Investing in emerging technologies is crucial for established companies to
hedge their bets.
✓ Acquiring or forming alliances with emerging tech companies can be a viable
strategy.
✓ Internal forces may suppress commercialization of disruptive technologies
within established companies.
✓ Separate autonomous divisions for disruptive technology can overcome
challenges.
✓ A radically different value chain and business model are often required for
disruptive tech.
✓ Two distinct business models struggle to coexist within the same organization.
✓ Solution: Create autonomous divisions for disruptive tech, as HP did with ink
jet printers.
✓ Placed in separate divisions, disruptive tech has a better chance of success.
✓ Felicitous outcome: HP's ink jet printers cannibalized laser jet sales but resulted
in profitable market niches.
✓ Companies should grant disruptive tech its own mandate and resources for
success.

▪ Strategic Implications for New Entrants

✓ New entrants have advantages over established enterprises when dealing with
disruptive technology.
✓ Do not face pressures to continue the existing out date business model.
✓ Do not have to worry about established:
-customer base
-relationships with suppliers and distributors.
✓ Can focus their energies on the opportunities offered by the new disruptive
technology.
✓ Must decide whether to partner with an established company or go solo
✓ They are not constrained by existing outdated business models or worried about
product cannibalization.
✓ they can focus all their energies on the opportunities offered by the new
disruptive tecnology,
-move along the S-curve of technology improvement,
-and rapidly grow with the market for that technology.
✓ New entrants can solely focus on the opportunities offered by the new
technology and rapidly grow with the market.
✓ Challenges for new entrants include managing organizational problems during
rapid growth and transitioning from niche to mass market.
✓ A critical decision for new entrants is whether to partner with an established
company or go it alone.
✓ Forming a strategic alliance with an established company provides access to
resources that the new entrant may lack.
✓ Similar to first-mover strategies, new entrants have options to go it alone, form
strategic alliances, or license their technology.