Hill 8e Basic Ch07

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Theory of Strategic Management with Cases, 8e

Hills, Jones

Chapter Seven Technology


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.


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.


Technical Standards for Personal Computers

Figure 7.1


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.


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


Positive Feedback in the Market for VCRs

Figure 7.2


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:


Cost Structures in High-Technology Industries

Figure 7.3


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


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.


The Impact of Imitation on Profits of a First Mover

Figure 7.4


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


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


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?


Strategies for Profiting from Innovation

Table 7.1


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


The Technology S-CurveFigure 7.5


Established and Successor Technologies

Figure 7.6


Swarm of Successor Technologies

Figure 7.7


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.


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.


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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Hill 8e Basic Ch07