1. Chapter 7: Strategy in High-Technology Industries
BA 469 Spring Term, 2007
Prof. Dowling

2. Overview Technology High-tech industries
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

3. 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

4. Technical Standards and Format Wars
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

5. Technical Standards for Personal Computers

6. 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

7. 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

8. Network Effects and Positive Feedback
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

9. Positive Feedback in the Market for VCRs

10. Lockout and Switching Costs
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

11. 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

12. Cost Structures in High-Technology Industries

13. 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

14. Managing 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

15. 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)

16. 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

17. The Impact of Imitation on Profits of a First Move

18. 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

19. 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

20. 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

21. 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?

22. Strategies for Profiting from Innovation

23. 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

24. 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

25. The Technology S-Curve

26. Established and Successor Technologies

27. Swarm of Successor Technologies

28. 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

29. 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

30. 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