1 7 Strategy in High-Technology Industries

2 $55 for a barrel of crude Demand – price of development  US remains a major NET consumer  China demand rising, in addition to other developing countries  Seasonal pressure – winter is approaching Supply – in unstable areas  Middle East – Iraq, Saudi Arabia  Africa – Nigeria  Gulf of Mexico still not producing Long-term supply Speculative activity

3 Overview Technology  The body of scientific knowledge used in the production of goods or services High-tech industries  Those in which the underlying scientific knowledge that companies in the industry use is advancing rapidly, and by implication so are the attributes of the products and services that result from its application

4 The Importance of High-Tech Technology is accounting for an ever larger share of economic activity Many low-tech industries are becoming more high tech High-tech products are making their way into a wide range of businesses Even in industries not thought of as high tech, technology is changing aspects of the product or production system

5 Technical Standards and Format Wars Technical standards  A set of technical specifications that producers adhere to when making the product or a component of it Format wars  Battles to set and control technical standards The source of product differentiation is based on the technical standard

6 Technical Standards for Personal Computers

7 Benefits of Standards Helps to guarantee compatibility Can help to reduce confusion Can help to reduce production costs Can help to reduce the risks associated with supplying complementary products

8 Establishments of Standards Companies may lobby the government to mandate an industry standard Technical standards are often set by cooperation among businesses  Public domain Standard is often selected competitively by market demand

9 Network Effects and Positive Feedback Network effects  The size of the network of complementary products is a primary determinant of demand for an industry’s products Positive feedback  Reinforcing network effects to encourage adoption of a standard

10 Positive Feedback in the Market for VCRs

11 Lockout and Switching Costs Lockout  Occurs when the market settles on a standard and companies promoting alternate standards are no longer able to compete Switching costs  The costs consumers must bear to switch from a product based on one standard to a product based on another If consumers are unwilling to bear switching costs, a company will be locked out

12 Strategies for Winning a Format War Ensure a supply of complements Leverage killer applications  New technology or products that are so compelling that customers adopt them in droves, killing demand for competing formats Aggressively price and market  Razor and blade strategy: pricing the product low to increase the installed base, then pricing complements high to make profits Cooperate with competitors License the format

13 Cost Structures in High- Technology Industries

14 Strategic Significance of High- Tech Cost Structure If a company can shift from a cost structure with increasing marginal costs to one with high fixed costs but low marginal costs, its profitability may increase When a high-tech company faces high fixed costs and low marginal costs, it should deliberately drive prices down to drive up volume

15 Managing Intellectual Property Rights Intellectual property rights  The product of any intellectual and creative effort  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  Scale of the problem is very large  Legal and technological solutions are required

16 Managing Intellectual Property Rights (cont’d) Strategies for managing digital rights  Recognize that low costs of copying and distributing digital media can be used to the company’s advantage  Take advantage of low costs of copying and distribution to drive down costs of purchasing media (coupled with encryption software)

17 Capturing First-Mover Advantages The company that is first to develop revolutionary new products If the new product satisfies unmet consumer needs and demand is high:  The first mover can capture significant revenues and profits  Revenues and profits signal an opportunity to potential rivals

18 The Impact of Imitation on Profits of a First Move

19 First-Mover Advantages Opportunity to exploit network effects and positive feedback loops Potential to establish significant brand loyalty May be able to reap economies of scale and learning effects May be able to create switching costs for customers May be able to accumulate valuable knowledge

20 First-Mover Disadvantages Bear significant pioneering costs More prone to make mistakes Run the risk of building the wrong resources and capabilities May invest in inferior or obsolete technology

21 Strategies for Exploiting First- Mover Advantages Develop and market the innovation itself Develop and market the innovation jointly with other companies through a strategic alliance or joint venture License the innovation to others and let them develop the market

22 Choosing a Strategy for Exploiting First-Mover Advantages 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?

23 Strategies for Profiting from Innovation

24 Technological Paradigm Shifts When new technologies emerge that  Revolutionize the structure of the industry  Dramatically alter the nature of competition  Require companies to adopt new strategies to survive

25 Paradigm Shifts and the Decline of Established Companies Paradigm shifts are more likely to occur when  The established technology in the industry is mature and approaching its natural limit  A new disruptive technology has entered the marketplace and is taking root in niches that are poorly served by incumbent companies using established technology

26 The Technology S-Curve

27 Established and Successor Technologies

28 Swarm of Successor Technologies

29 Disruptive Technology A new technology that gets its start from the mainstream of a market and then, as its functionality improves over time, invades the main market Revolutionizes the industry structure and competition, often causing the decline of established companies because they listen to customers who say they do not want it Causes a technological paradigm shift

30 Strategic Implications of Paradigm Shifts for Established Companies Having access to knowledge about how disruptive technologies can revolutionize markets is valuable It is important 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

31 Strategic Implications of Paradigm Shifts for New Entrants May be constrained by lack of capital May have to manage the organizational problems associated with rapid growth May need to find a way to take the technology from a small niche into the mass market May need to decide whether to go it alone or partner with an established company