Competition for sustainability in the era of information economy Technology Strategy Competition for sustainability in the era of information economy

Vision of corporation 3M Microsoft GE FedEx Oracle Sheseto Xerox

Align technology with business The price-quality tradeoff The profit-share tradeoff The growth-position tradeoff The pioneer-harvest tradeoff The consistency-diversity tradeoff The enactment-response tradeoff

Clarify the core competence Distinguished, non-imitable, substantial, marketable Complementary technology Critical technology Externally acquired technology Fundamental needed technology Mature technology

Integration considerations Integration for technology exploitation Integration for order fulfillment Integration relevance vs. difficulty Investment vs. controllability Generic vs. specific Modular design vs. integral design

Competitive advantage Absolute advantage Relative advantage Critical to technology exploitation & integration arrangement Clustering the position Relative market power vs. absolute advantage vs. technology maturity

The strategic guide to information economy System products Standard competition Rights management Policy

System products Complementary products Product lines Different manufacturers Strategy for complementors as well as competitors Compatibility as strategic choice Standards and interconnection Hardware/software Client/server Viewer/content Product lines High fixed cost, low incremental cost Leaders to value based pricing Lower quality may be more expensive Proliferation strategy

How Standards Change the Game Expanded network externalities Make network larger, increase value Share info with larger network Attracts more users Reduced uncertainty No need to wait In war, neither side may win Reduced consumer lock-in Netscape’s “Open Standards Guarantee”

Change Game Competition for the market v. competition in the market Buy into an open standard, that becomes closed? Competition on price v features Commoditized products? Competition to offer proprietary extensions Extending a standard Component v systems competition With interconnection, can compete on components

Who wins? Who loses? Consumers Complementors Incumbents Innovators Generally better off But variety may decrease Complementors May serve the brokering role (DVD) Incumbents May be a threat Strategies Deny backward compatibility Introduce its own standard Ally itself with new technology Innovators Technology innovators collectively welcome standards If the group benefits, there should be some way to make members benefit Negotiation costs, opportunistic behavior

Formal Standard Setting Essential patents must be licensed on “fair, reasonable and non-discriminatory” terms ITU, ANSI and ISO What is your goal? National or international? Protecting your interests? What are others goals? Do they really want a standard?

Tactics in Formal Standard Setting Don’t automatically participate If you do, you have to license Keep up momentum Continue R&D while negotiating Look for logrolling Trading technologies and votes Be creative about deals Second sourcing, licensing, hybrids, etc. Beware of vague promises Definition of reasonable Search carefully for blocking patents Patents held by non-participants Preemptively build installed base

Building Alliances Assembling allies Who bears risk of failure? Pivotal customers should get special deals But don’t give your first customers too big an advantage Offer temporary price break Who bears risk of failure? Usually ends up with large firms But bankruptcy favors small firms Government is even better! Smart cards in Europe

Managing Open Standards Standard is in danger if it lacks a sponsor Lessons of Unix Interconnection—searching a migration route Extension of TLC Negotiating a truce Do the benefit cost calculation How to divide a larger pie?

The standards game Player B openness Player A openness

Lessons from standards competition Commoditize technology and complements Competition requires allies How does your standard affect competition? Standards benefit consumers and suppliers, at expense of incumbents and sellers Formal standard setting adds credibility Find natural allies Before a battle, try to negotiate a truce Try to retain control over technology, even when establishing an open standard

Rights Management The characteristics of information The structure of cost Low reproduction cost is two-edged sword Cheap for owners (high profit margin) But also cheap for copiers Maximize value of IP, not protection Examples Library industry Video industry

Information & cost Anything that can be digitized Text, images, videos, music, etc. Unique demand characteristics Expensive to produce, cheap to reproduce High fixed cost, low marginal cost Not only fixed, but sunk No significant capacity constraints Particular market structures Monopoly Cost leadership Product differentiation (versioning)

Policy Understand environment IP regime Price discrimination Illegal if it “effectively lessens competition” Legal arguments that work Can set lower prices resulting from lower costs Set differential prices to meet competition Pricing only questionable if it “lessens competition” Competition policy Regulation Antitrust

Tactics for Lock-In and Switching Costs Systems lock-in: durable complements Hardware, software, and wetware Individual, organizational, and societal Example: Stereos and LPs, Costly switch to CDs Deeply digging the Network Effects Value depends on number of users Positive feedback Indirect network effects Expectations management, preemption Compatibility Backwards & forwards

Classification of Lock-In Durable purchases and replacement: declines with time Brand-specific training: rises with time Information and data: rises with time Specialized suppliers: may rise Search costs: learn about alternatives Loyalty programs: rebuild cumulative usage Contractual commitments: damages

Follow the Lock-in cycle Brand Selection Lock-In Sampling Selects brand: comparison Sampling phase: try the product Entrenchment: makes the durable investments Lock-in: costly to change Entrenchment

Implications for strategy Protects competition as a process Monopoly isn’t illegal, but attempt to monopolize is Monopoly may be inhibited from using strategies that are legal for other firms But even small firms may be accused of antitrust violations Role of treble damages

Information economy is different, but not so different! Key concepts Versioning Lock-in Systems competition Network effects

Beyond technology competition—experience Absorption Entertainment Education Passive participation Active participation Aesthetics Escapism Immersion

Upgrading the technology value high high Demonstration of experience Customization Relevance of demand Differentiation Add-on service Fabrication Commoditization Raw materials low low low Pricing high

Extended readings Porter, Michael (1996), “What is Strategy?” Harvard Business Review, Nov.-Dec. Iansiti, Marco and Jonathan West (1997), Technology Integration: Turning Great Research into Great Products,” Harvard Business Review, May-June. Shapiro, Carl and Hal R. Varian (1998), Information Rule, Harvard Business School Press, Boston. Pine II, B. Joseph, James h. Gilmore (1999), The Experience Economy, Harvard Business School Press, Boston.