STRATEGY AND TECHNOLOGY

Learning Objectives• Understand the tendency toward

standardization in hi-tech markets• Describe strategies used to establish a

technology as the standard• Explain the cost structure of hi-tech firms and

articulate strategic implications• Explain nature of technological paradigm

shifts and their implications

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“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.

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- Sun-Tzu

High-Technology Industries

Technology is:Scientific knowledge used in production of goods or

servicesHigh-technology is:Accounting for a larger share of economic activityRevolutionizing the product or production system in

industries not thought of as high-tech Retailing going online Production of food products applying biotechnology and

genetic engineering7-4

“…those in which the underlying scientific knowledge that companies in the industry use is advancing rapidly… (as) are the attributes of the products/services that result from its application

are also advancing rapidly.”

Examples of High-Tech IndustriesComputer Industry

PC and softwareTelecommunications

Wireless and InternetDigital

DVD players, gaming terminals, cameraPharmaceutical

Cell biology, recombinant DNA, genomicsPower Generation

Fuel cells, aerospace7-5

Technical Standards and Format Wars

Format warsOne standard will come to dominate a market.Many battles in high-tech industries are

companies competing to set standard. Battle over which smartphone operating system will

become the standard (Symbian, Microsoft, Google, Apple)

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“…standards are a set of technical specifications that producers adhere to when making the

product or a component of it.

Product differentiation and competitive Product differentiation and competitive advantage are based on a technical standard.advantage are based on a technical standard.

Technical Standards for Personal Computers

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Figure 7.1

Benefits of Standards Guarantee compatibility between products &

complements Reduce consumer confusion (Ex. DVD

players and disks) Reduce production costs - economies of scale Reduce risks associated with supplying

complementary products (Operating system for PC)

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Standards lead to low-cost and Standards lead to low-cost and differentiation advantages for companies.differentiation advantages for companies.

3 Ways Standards Emerge:1. Firms lobby the government to mandate industry

standard- public domain.2. Standards often set by cooperation among firms

through industry forums.3. Standards often selected by market demand:

Network effects Size of complementary product’s network is

primary determinant of demand Positive feedback loop

The greater the value of the product, the greater the demand (VHS player)

Lockout Alternative standards become locked out of the

market because of switching costs 7-9

Positive Feedback in VCR Market

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Winning a Format War

Ensure supply of complementDiversify into the production of complementsCreate incentives for supplier of complements

Killer applications-New products so compelling customers adopt rapidly

killing demand for competition Aggressively price/market- razor and blade strategy

Price product low to increase installed base, price complements high for profits

Cooperate with competitorsSony cooperating with Philips on developing laser

technology License format

Reduce incentive for competitors to develop own 7-11

Successful strategies revolve around finding ways to make Successful strategies revolve around finding ways to make network effects work in their favor and against their network effects work in their favor and against their

competitors:competitors:

Cost Structures in High-Tech Industries

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Law ofDiminishing Returns

“To produce more of a good, a company… hires more labor…

invests in more plant/machinery… additional resources… are not as productive… increasing marginal

costs.”

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Strategic Significance of High-Tech Cost Structure

If can shift from cost structure with increasing marginal costs to a structure with high fixed costs but low marginal costs = profitability may increase.

When company faces high fixed costs/low marginal costs, it should drive prices down to drive up volume.

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Fixed costs of developing product are very high, but Fixed costs of developing product are very high, but costs of producing additional units are low:costs of producing additional units are low:

Strategy of Strategy of pricing lowpricing low to drive volumeto drive volume to reap wider to reap wider profit margins is central to business model of some profit margins is central to business model of some

successful high-tech companies. successful high-tech companies.

Impact of Imitation on First Mover Profits

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First-Mover Advantages

5 key Advantages: Opportunity to exploit network effects and positive

feedback loops Ability to establish significant brand loyalty Ability to ramp up sales volume early and have cost

advantages due to learning effects and scale economies

Ability to create switching costs for customers Ability to accumulate valuable knowledge

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First to develop/pioneer revolutionary products First to develop/pioneer revolutionary products can lead to enduring competitive advantagecan lead to enduring competitive advantage

Being first-mover does not guarantee success. Being first-mover does not guarantee success. Success depends on first-mover strategy pursued. Success depends on first-mover strategy pursued.

First-Mover Disadvantages1. Pioneering cost

develop technology & distribution channels educate customer

2. Prone to mistakes uncertainties in new market

3. Risk building wrong resources & capabilities

mass-market may differ from the needs of early adopters

4. May invest in inferior/obsolete technology if underlying technology advancing rapidly

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Exploiting First-Mover AdvantagesStrategies1. Going it alone- develop/market innovation

2. Strategic alliance/joint venture- develop/market innovation with other companies

3. License innovation- let them develop the marketChoosing strategy:

? Does company have complementary assets to exploit innovation?

? How difficult for imitators to copy innovation?? Are there capable competitors who could

rapidly imitate innovation?

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Strategies forProfiting from Innovation

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Ethical or not?Your company is in a race with two other companies to develop a standard for streaming high definition video over the internet. You know that your technology is significantly inferior to your rivals, but will likely be the first to market. Moreover, you know that bundling your product with a very popular system that your company already sells should ensure widespread early adoption. Because your company makes from its other products, you consider initially pricing the new product at zero to ensure rapid take-up to shut out your rivals. Once the market locked into your offering, you can raise the price. One of your colleagues suggests it is unethical to use financial muscle and bundling strategies to lock out superior technology. Do you agree with him? Why? Can you think of real-world situation that is similar to this case?

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Technological Paradigm Shifts

More likely to occur with:Natural limits to technology- established technology

is mature & approaching natural limit where further advances are not possible (Ex. Boeing 747)

New disruptive technology- entered marketplace and taking root in niches poorly served by firms using established technology

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New technologies New technologies emerge that:emerge that:• Revolutionize structure of Revolutionize structure of industryindustry• Dramatically alter nature Dramatically alter nature of competitionof competition• Requires firms adopt new Requires firms adopt new strategiesstrategies

Technology S-Curve

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Figure 7.5

Established andSuccessor Technologies

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Swarm ofSuccessor Technologies

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Disruptive Technology

Revolutionizes industry structure & competition

Causes technological paradigm shift

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“…“…new technology that gets its start away from new technology that gets its start away from mainstream of market and invades mainstream of market and invades

main market as functionality improves...”main market as functionality improves...”

Often causes decline of established companies Often causes decline of established companies - - because they listen to customers who say because they listen to customers who say

they do not want it; ignore small market niches; they do not want it; ignore small market niches; and new suppliers navigate to new entrantsand new suppliers navigate to new entrants

Implications of Paradigm Shifts- Established Companies

Knowledge about how disruptive technologies can revolutionize markets is valuable asset. Ask customers, “Would you be interested in the new technology if it

improves its functionality over time? Important for established firms to invest in newly

emerging technologies that may become disruptive. Better to develop technology and cannibalize its existing sales base

than be taken away by new entrants Commercialization may require different value chain &

cost structure.

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Chances of success in developing & commercializing Chances of success in developing & commercializing disruptive technology will be enhanced if it is placed in disruptive technology will be enhanced if it is placed in

its own autonomous divisionits own autonomous division

Implications of Paradigm Shifts- New Entrants

AdvantagesAdvantages:: No pressure to continue out-of-date business .

No worries on product cannibalization issues No worry about established customer base,

distribution channels, or suppliers.

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ChallengesChallenges::o Constrained by lack of capitalo Need to manage organizational problems from rapid

growtho Find way to take technology from small niche to the

mass-marketo Go it alone or partner with established company

The Five Most Disruptive Innovations at CES 2014

Embedded sensors Wearables: The Internet of You - new products have

that collect information about you and your bodyExponential Energy - explosion of new portable

energy technologies are appearing to help keep our growing supply of rechargeable mobile devices and other electronics running for longer periods away from a plug.

Driverless vehiclesImmersive Interfaces  - the most promising include

eye tracking technologies that allow users to work with computers without relying so heavily on their hands. 

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““A business’s flexibility in adapting to A business’s flexibility in adapting to change and market dynamics will change and market dynamics will mark the winners and losers in this mark the winners and losers in this fast-changing Internet Age.”fast-changing Internet Age.”

7-29 - Michael Dell- Michael Dell

““The guy with the competitive The guy with the competitive advantage is the one with the advantage is the one with the best technology.”best technology.”

- Walter Wriston- Walter Wriston

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The Kolibree toothbrush collects data on your brushing habits including duration, frequency, and neglected zones in your mouth and then communicates with your iOS or Android smartphone thanks to Bluetooth technology.