1 Complements A complement to one product or service is any other product or service that makes the first one more attractive

2 Classic Example: Computer hardware and software Window 95 is far more valuable on a Pentium-powered machine than on a 486 machine Pentium chip is far more valuable to someone who has Window 95 than to someone who doesn ’ t

3 Other Examples Hot dogs and mustard Cars and auto loans TVs and Videocassette recorders TV shows and TV Guide Fax machines and phone lines Digital Cameras and color printers

4 Complements to Cars Paved roads In 1913 General Motors, Hudson, Packard, and Willys-lights, set up the Lincoln Highway Association to catalyze development of America ’ s first coast-to-coast highway Auto loans Automobile credit companies provide better and cheaper access to car financing General Motors created General Motors Acceptance Corporation in 1919 Ford Motors formed Ford Motor Credit in 1959 Auto insurances

5 Missing Complements – Failure of some businesses Alfa Romeo and Fiat Lack of spare parts and qualified mechanics Sony Betamax videocasette recorder Lack of rental movies in the Betamax format

6 Intel According to Andy Grove: "Microsoft doesn't share the same sense of urgency (to come up with an improved PC). The typical PC doesn't push the limits of our microprocessors.... It's simply not as good as it should be, and that's not good for our customers."

7 If software applications don't push the limits of existing microprocessor chips, then Grove has to find something else that will. Otherwise, his customers won't feel the continued need to upgrade. If they don't keep upgrading, not only will the market become saturated but the other chip manufacturers  AMD, Cyrix, and NexGen  will be able to catch up.

8 Intel This is not a new problem for Intel; processing capabilities have always led the software applications. For example, although 32 ‑ bit processing has been a technological reality since 1985, Microsoft's first 32 ‑ bit processing system  Windows NT  didn't appear until Intel has always been on the lookout for applications requiring massive processing capabilities.

9 New Modes of Competition Grove (1996) contrasts the “ vertical structure ” of the “ old ” computer industry to the “ horizontal structure of the “ new ” one

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13 New Modes of Competition Vertical structure means vertically integrated suppliers e.g. IBM ’ s mainframe business Customers face full-service, all products vendor

14 New Modes of Competition Horizontal structure is characterized by specialized firms e.g. PC business Customers may mix and match from a wide variety of vendors A computer platform is a shared, stable set of hardware, software, and networking technologies on which users build and run computer applications

15 New Modes of Competition A number of firms supply, in the short run, and invent, in the long run, platform components Strategically, firms in different layers share common customers, they have strong reasons to cooperate. At the same time, they have incentive to grab the rents of firms in another layer.

16 - With the popular usage of the Internet (in particular s and the WWW) and the emergence of new Internet-based applications, the vertically related components and layers quickly expanded. The main layers and structures of the computing industry as of the end of the 1990s are given in Figure 3 (taken from a paper written by Timothy Bresnahan of Stanford University). Notice the presence of Microsoft in many different layers.

17 Figure 3. Major Horizontal Layers in Networked Computing.

18 New Modes of Competition Divided technical leadership the supply of key platform components by multiple firms No single vertically integrated firm with control over direction of a platform

19 New Modes of Competition Divided technical leadership enhances competition for control of a platform (Vertical Competition) Technically, there are no given and exogenous boundaries between the layers. Similar technical capabilities enable firms to take over functions performed by others.

20 New Modes of Competition Divided technical leadership offers two kinds of vertical competition: Within an era, there are constant border wars at the boundaries between layers The other suppliers in a platform provide a stock of ready and able entrants to trigger epochal competition