February 14, 2002 Prepared by Ken Song Waging a Standards War MGT523: Competitive Strategies for Network Economies Professor Shor February 14, 2002 Prepared by Ken Song

Standards War: Competition in the information age A battle for market dominance between incompatible technologies A company's success can easily pivot on its ability to vie a standards war Standards wars are more competitive in markets with strong network effects Consumers place their value on compatibility Is it coincidence that we have a single worldwide standard for fax machines?

Standards Wars - Examples End in a truce: 56k modems & color television Ultimately common standard was adopted End in a duopoly: Nintendo and Sony Fight to death: North vs. South Railroad gauges Belated victory for the North Southern Railroad had to convert 5'gauge into the now-standard 4'8 1/2" gauge on more than 11,000 miles of track

Standards Wars – Lessons Lessons from the standard war of railroad gauge Incompatibilities can arise by accident, yet persist for many years Network markets tend to incline to the leading player, unless the other players coordinate to act quickly and decisively Seceding from the standard-setting process can leave the player in a weak market position in the future A large buyer (the U.S. government) can have more influence than suppliers Those left with the less popular technology have to cut their losses by employing adapters by writing off existing assets

Standards Wars – Classification Evolution New technology that is compatible with the old Minimal consumer switching costs Revolution Incompatible technology with the old Compelling performance with significant switching costs Rival evolution Incompatible with each other DVD and Divx (both of which will play CDs) Rival revolution Neither offers backward comparable technology Nintendo & Sony PS Evolution vs. Revolution One offers backward compatibility and the rival does not Backward compatibility vs. Superior performance

Seven key assets Control over an installed base of users MS with loyal locked-in customers Intellectual property rights Qualcomm’s CDMA Ability to innovate HP’s engineering skills First-mover advantages Canon’s personal laser printer Manufacturing capabilities Low costs and open standard Strength in complements Intel’s efforts to promote new standards Brand name and reputation HBS as a top MBA program???

Two main tactics Preemption Expectations Management build an early lead So positive feedback works for you and against your rival With learning-by-doing, the positive feedback is through lower costs Expectations Management Assembling allies and claiming about the new technology’s current or future popularity Sun has gathered allies in support of Java Taking out full-page advertisements of the company lists in the Java coalition

HBS’s Case study - Standardization in MBA program Owen Customer Control Strong: large base of locked-in MBA programs Pursue an Evolution strategy Block rivals from offering compatible cases Force rivals to play risky Revolution strategy Weak: Rival evolution? Intellectual property rights Yes Innovation High: - Ability to publish more cases in the future puts HBS in a strong position today EC Strategy Professor Shor

HBS’s Case study - Standardization in MBA program Owen 1st mover adv. Yes No Manufacturing Yes: - low-cost producer, due to both scale economies and manufacturing competence (HBS Publisher) Complements High: “Information rules” is also published from HBS More MBA students will read books from HBS Low Brand equity - #1 Case study school Moderate

Hypothetical Scenario – Owen’s Case study battle Preemption Find the pioneers Mostly keen to try new technology and sign them up swiftly MBA programs with high attention to eCommerce strategy Pricing below cost, i.e., penetration pricing Free copies maybe Assemble allies Support of consumers MBA programs/Faculties/Students Even from HBS Expectations Management Strong network effects in MBA programs Engage in aggressive marketing Make early announcements of Owen Case studies Don’t price to survive Establish a compelling performance advantage Interconnect with the prevailing standard, HBS Cases