1. Strategy in High-Technology Industries
Chapter Seven
Strategy in High-Technology Industries

2. High-Technology Industries
High-tech industries are those in which the underlying scientific knowledge that companies in the industry use is advancing rapidly.
By implication, the attributes of the products and services that result from its application are also advancing rapidly.
Technology is:
The body of scientific knowledge used in the production of goods or services
Accounting for an even larger share of economic activity
Revolutionizing aspects of the product or production system in industries not thought of as high-tech
Copyright © Houghton Mifflin Company. All rights reserved.

3. Technical Standards and Format Wars
Technical standards are a set of technical specifications that producers adhere to when making the product or a component of it.
Format wars
Often, only one standard will come to dominate a market.
Many battles in high-tech industries revolve around companies competing to be the one that sets the standard.
The source of product differentiation and competitive advantage is based on the technical standard.
Copyright © Houghton Mifflin Company. All rights reserved.

4. Technical Standards for Personal Computers
Figure 7.1
Copyright © Houghton Mifflin Company. All rights reserved.

5. Copyright © Houghton Mifflin Company. All rights reserved.
Benefits of Standards
Standards emerge because there are economic benefits associated with them.
Standards help:
Guarantee compatibility between products and their compliments
Reduce confusion in the minds of consumers
Reduce production costs through mass-production
Reduce the risks associated with supplying complementary products and help
Standards lead to both low-cost and differentiation advantages for individual companies.
Copyright © Houghton Mifflin Company. All rights reserved.

6. Establishments of Standards
Standards emerge in one of three ways:
Companies may lobby the government to mandate an industry standard.
Standards are often set by cooperation among businesses or industry forums.
May become part of the public domain
Standards are often selected competitively by market demand.
Network effects – size of the network for complementary products determines industry demand
Positive feedback loop – increase in demand further increases the value of owning a product
Lockout – from the market occurs for companies promoting alternate standards when consumers are unwilling to bear the switching costs (unless benefits outweigh costs of switching)
Copyright © Houghton Mifflin Company. All rights reserved.

7. Positive Feedback in the Market for VCRs
Figure 7.2
Copyright © Houghton Mifflin Company. All rights reserved.

8. Strategies for Winning a Format War
Successful strategies revolve around finding ways to make network effects work in their favor and against their competitors:
Ensure a supply of complements.
In addition to the product itself
Leverage killer applications.
New products that are so compelling that customers adopt them in droves, killing demand for competing formats
Aggressively price and market.
Pricing the product low to increase the installed base, then pricing complements high to make profits
Cooperate with competitors.
To speed up adoption of the technology
License the format.
Reduce financial incentive for competitors to develop their own
Copyright © Houghton Mifflin Company. All rights reserved.

9. Cost Structures in High-Technology Industries
Figure 7.3
Copyright © Houghton Mifflin Company. All rights reserved.

10. Managing Intellectual Property Rights
Intellectual property rights apply to the product of any intellectual and creative efforts.
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
Large scale problem with high piracy rates
Legal and technological solutions are required
Strategies for managing digital rights
Low costs of copying and distributing digital media
Can be used to the company’s advantage
Drive down costs of purchasing media
Encryption software
Vigorous defense of intellectual property rights
Copyright © Houghton Mifflin Company. All rights reserved.

11. Capturing First-Mover Advantages
First-mover advantage: the first to develop and pioneer revolutionary new products that can lead to an enduring competitive advantage
If the new product satisfies unmet consumer needs and demand is high:
First mover may be in a monopoly position to capture significant revenues and profits.
Strong revenues and profits signal an opportunity to potential rivals.
Rival imitators may enter market in the absence of strong barriers to imitation resulting in lower market returns.
Being a first-mover does not guarantee success. Success depends on the first-mover strategy that is pursued.
Copyright © Houghton Mifflin Company. All rights reserved.

12. The Impact of Imitation on Profits of a First Move
Figure 7.4
Copyright © Houghton Mifflin Company. All rights reserved.

13. First-Mover Advantages
The five main sources of first-mover advantages:
Exploit network effects and positive feedback loops
Locking customers into its technology
Establish significant brand loyalty
Expensive for later entrants to break down
Enable economies of scale and learning effects
So first-mover has cost advantage and can respond to new entrants by cutting price to maintain market share
Create switching costs for customers
Making it difficult for rivals to take customers away
Accumulate valuable knowledge
Regarding customers, distribution, and technology that late entrants will find difficult or expensive to match
Copyright © Houghton Mifflin Company. All rights reserved.

14. First-Mover Disadvantages
Pioneering costs
To develop technology and distribution channels and to educate the customers
Later entrants ‘free-ride’ on first-mover’s investments.
More prone to make mistakes
Because of the uncertainties in a new market
Later entrants learn from the mistakes of first-movers.
Risk of building the wrong resources and capabilities
Mass-market may differ from the needs of early adopters
First-movers risk ‘Plunging into the chasm’.
May invest in inferior or obsolete technology
If the underlying technology is advancing rapidly
Late entrants may be able to ‘leap frog’ the technology.
Copyright © Houghton Mifflin Company. All rights reserved.

15. Strategies for Exploiting First-Mover Advantages
Going it alone
Develop and market the innovation itself.
Strategic alliance or joint venture
Develop and market the innovation jointly with other companies.
License the innovation to others
Let them develop the market.
Key questions in choosing a strategy:
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?
Copyright © Houghton Mifflin Company. All rights reserved.

16. Strategies for Profiting from Innovation
Table 7.1
Copyright © Houghton Mifflin Company. All rights reserved.

17. Technological Paradigm Shifts
Occur when new technologies emerge that:
Revolutionize the structure of the industry
Dramatically alter the nature of the competition
Requires companies to adopt new strategies to
survive
Paradigm shifts are more likely to occur with:
Natural limits to technology
The established technology in the industry is mature and approaching its natural limit.
New disruptive technology
Has entered the marketplace and is taking root in niches that are poorly served by incumbent companies using established technology.
Copyright © Houghton Mifflin Company. All rights reserved.

18. The Technology S-Curve
Figure 7.5
Copyright © Houghton Mifflin Company. All rights reserved.

19. Established and Successor Technologies
Figure 7.6
Copyright © Houghton Mifflin Company. All rights reserved.

20. Swarm of Successor Technologies
Figure 7.7
Copyright © Houghton Mifflin Company. All rights reserved.

21. Disruptive Technology
Disruptive technology is a new technology that gets its start away from the mainstream of a market and invades the main market as its functionality improves over time.
Revolutionizes the industry structure and competition
Causes a technological paradigm shift
Disruptive technology often causes the decline of established companies –because they listen to customers who say they do not want it.
Copyright © Houghton Mifflin Company. All rights reserved.

22. Strategic Implications of Paradigm Shifts for Established Companies
Having access to knowledge about how disruptive technologies can revolutionize markets is in itself a valuable asset.
It is important for established enterprises 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.
Internal forces suppress change.
Chances of success in developing and commercializing disruptive technology will be enhanced if it is placed in its own organization.
Copyright © Houghton Mifflin Company. All rights reserved.

23. Strategic Implications of Paradigm Shifts for New Entrants
New entrants, or attackers, have several advantages over established enterprises:
Pressure to continue the out-of-date existing business model does not hamper new entrants.
New entrants need not worry about established customer base, distribution channels, or suppliers.
But new entrants face important new issues:
May be constrained by lack of capital
Need to manage the organizational problems associated with rapid growth
Find a way to take the technology from a small niche into the mass-market
Decide whether to go it alone or partner with an established company
Copyright © Houghton Mifflin Company. All rights reserved.