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Copyright © Houghton Mifflin Company. All rights reserved. 7 | 1
Theory of Strategic Management with Cases, 8e
Hills, Jones
Chapter Seven Technology
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High-Technology Industries
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
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.
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Technical Standards and Format Wars
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.
Technical standards are a set of technical specifications that producers adhere to when making the product or a component of it.
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 StandardsStandards help: Guarantee compatibility between products and
their compliments Reduce confusion in the minds of consumers Reduce production costs through mass-
production 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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Three Ways Standards Emerge:
1. Companies may lobby the government to mandate an industry standard.
2. Standards are often set by cooperation among businesses or industry forums.
3. Standards are often selected competitively by market demand.
• Network effects• Positive feedback loop • Lockout
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Positive Feedback in the Market for VCRs
Figure 7.2
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Strategies for Winning a Format War
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
Successful strategies revolve around finding ways to make network effects work in their favor and against their competitors:
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Cost Structures in High-Technology Industries
Figure 7.3
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Intellectual property rights apply to the product of any intellectual and creative efforts.
Managing Intellectual Property Rights
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
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.
First-mover advantage: the first to develop and pioneer revolutionary new products that can lead to an enduring competitive advantage
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 Mover
Figure 7.4
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5 Sources of First-Mover Advantages
1. Exploit network effects and positive feedback loopsLocking customers into its technology
2. Establish significant brand loyaltyExpensive for later entrants to break down
3. Enable economies of scale and learning effectsSo 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 knowledgeRegarding customers, distribution, and technology that late entrants will find difficult or expensive to match
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First-Mover Disadvantages1. Pioneering costs
To develop technology and distribution channels and to educate the customersLater entrants ‘free-ride’ on first-mover’s investments
2. More prone to make mistakesBecause of the uncertainties in a new marketLater entrants learn from the mistakes of first-movers
3. Risk of building the wrong resources and capabilitiesMass-market may differ from the needs of early adoptersFirst-movers risk ‘Plunging into the chasm’
4. May invest in inferior or obsolete technologyIf the underlying technology is advancing rapidlyLate 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 companies3. License the innovation to others Let them develop the marketKey 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 ShiftsOccur 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-CurveFigure 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
Revolutionizes the industry structure and competition
Causes a technological paradigm shift
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.
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
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.
Advantages:
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
Challenges:
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