1. Principle of Innovation and Entrepreneurship
Charatpong Chotigavanich
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2. Today…
Standard War
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3. Nature of Hi-Tech Industry
In hi-tech business especially with high externalities, winner usually takes all (or majority) of market share and become standard.
Loser ends up being bought or goes out of business.
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4. Externality
“In economics, an externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit.”
Wikipedia
Example…
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5. Example Search: AltaVista  Yahoo  Google
Messenger: ICQ  AOL  MSN  BBM Whatsapp  Line,WeChat
Electricity: DC electricity  AC electricity
Video tape: Betamax  VHS
DVD: HD DVD  BlueRay
Cellular network: CDMA vs GSM
Web animation: Shockwave vs Flash vs HTML5
Phone: iOS vs Android
Browser: Netscape  Microsoft IE  Chrome
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6. Why do we need a standard?
Benefits of Standards
Why do we need a standard?
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
Standard maybe different from countries to countries:
E.g. electric outlet
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8. Mutually agreed by several organizations Market (De-facto standard)
How a standard is set?
Government mandate
Government bodies enact law to mandate the standard.
Mutually agreed by several organizations
Companies get together to form a standard
Market (De-facto standard)
Consumers instinctively choose themselves by market share.
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9. Government mandate in Thailand:
Example
Government mandate in Thailand:
Thailand simply adopted 220V AC
Drivers drive on the left side (same as UK)
Size of the railroad width is 1 meter (the majority of other countries use 1.435m)
Corporation
WWW consotium
International Standard Organization
Market
Windows vs MacOS
iOS vs Android
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10. When there is lack of government intervention…
There are a few outcomes:
End in truce: companies agree to form a standard organization (e.g. WWW Consortium)
End in duopoly or oligopoly: Browser wars, iOS vs Android
Fight to death:
VHS vs Betamax
North America and South America’s railroad width (after the North won the war, the South had to convert)
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11. Let’s look at some example (AC vs DC around 1890)
Edisons DC - First Mover Advantage
Restricted range due to voltage drops, 1 mile limit between generation plant and user.
Westinghouse AC – Technically Best Choice.
Can Transmit Power efficiently across vast distances due to Transformers that convert low voltage to high voltage for transmission and down to low voltage again for distribution
What do you think Edison did?
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12. AC vs DC Tactics
Edison moved first with infringement actions which forced Westinghouse to invent around Edison Patents.
Edison went to great lengths to convince public that AC was unsafe.
Going so far to invent the electric chair, which used AC.
Convinced State of New York to Execute condemned prisoners using it.
Edison went so far as to coin the term “to Westinghouse” with regard to electrocution.
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13. AC won because of far superior technology advantage.
Results
AC Won the Battle
Polyphase AC far more efficient method of generating, transmitting and distributing electric power.
Rotary converter allowed DC systems to be integrated with AC systems.
Edison sold his interests leading to the formation of the General Electric Company.
AC won because of far superior technology advantage.
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14. Classification of Standard Wars (cont)
Evolution Strategy - new technology compatible with the old; superior performance with little switching costs.
Revolution Strategy - incompatibility with the old technology; compelling performance so customers do not mind incurring switching costs.
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15. Classification of Standard Wars (cont)
Rival Evolutions - competitors technologies are compatible with their own old technologies, but incompatible with each other, e.g. DVD vs. Divx (both play CDs).
Evolution vs. Revolution - your technology offers backward compatibility and the rival’s does not. Compatibility vs. Superior performance.
Rival Revolutions - competitors technologies are not compatible with the old technologies, e.g. Nintendo 64 & Sony Playstation.
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16. Classification of Standard Wars (cont)
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17. Betamax and VHS
The first video cassette recorder (VCR) to become available was the U-matic system, released in September U-matic was designed for commercial or professional television production use, and was not affordable or user-friendly for home videos or home movies.
The first consumer-grade VCR to be released was the Philips N1500 VCR format in 1972, followed in 1975 by Sony's Betamax. This was quickly followed by the competing VHS (Video Home System) format from JVC, and later by Video 2000 from Philips. Subsequently, the Betamax–VHS format war began in earnest. Other competitors, such as Sanyo's V-Cord and Quasar's "Great Time Machine" quickly disappeared.
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18. What happened…
In class discussion…
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19. Strategy to win the standard war
Key assets:
Control over an installed base
Intellectual property rights
Ability to innovate
First-mover advantages
Manufacturing ability
Strength in complements
Reputation and brand name

20. Expectations management
Two Basic Tactics
Preemption
Build installed base early
But watch out for rapid technological progress
Expectations management
Manage expectations
But watch out for vaporware
(what is vaporware?)

21. Notes on First’s Move 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
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22. Profit of First Move’s Advantage
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23. 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
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24. 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
Copyright © Houghton Mifflin Company. All rights reserved.

25. Offer a migration path to fend off challenges
Once You’ve Won
Stay on guard
Netscape vs Microsoft vs Opera vs Google
Offer a migration path to fend off challenges
Commoditize complementary products
Early WinIntel and Macintosh
Competing against your own installed base
Intel again (continuous improvement of its products)

26. Attract important complementary products Leverage installed base
Once You’ve Won…
Attract important complementary products
Leverage installed base
Expand network geographically
Stay a leader
Develop proprietary extensions to lock in your customers

27. What if You Fall Behind?
Adapters and interconnection (with larger networks)
Wordperfect
Borland v. Lotus
Survival pricing
Hard to pull off
Different from penetration pricing
Legal approaches
Sun v. Microsoft

28. Small network externalites Strategies
Microsoft v. Netscape
Rival evolutions
Low switching costs
Small network externalites
Strategies
Preemption
Penetration pricing
Expectations management
Alliances

29. Lessons 1st mover does not guarantee a win
Superior product quality does not guarantee a win
Understand the type of war
Rival evolution
Rival revolution
Revolution v Evolution
Etc…
Strength depends on 7 critical assets
Preemption is a critical tactic
Expectations management is critical
When you’ve won the war, don’t rest easy
(early Netscape’s success)
If you fall behind, avoid survival pricing

30. Question?
Question ?
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