1. 1 Strategy in High- Technology Industries Lecture 9

2. 2 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 Examples Computer, communications, biotech, aerospace, defense

3. 3 The Importance of High-Tech Technology is accounting for an ever larger share of economic activity (15% of GDP is IT) Many low-tech industries are becoming more high tech (e.g. agriculture) High-tech products are making their way into a wide range of businesses (e.g. cars) Even in industries not thought of as high tech, technology is changing aspects of the product or production system (e.g. retail)

4. 4 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 Examples: QWERTY keyboard, rail gauges

5. 5 Technical Standards for Personal Computers

6. 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. 7 Establishments of Standards Companies may lobby the government to mandate an industry standard (de jure standard) Technical standards are often set by cooperation among businesses (IEEE 802.3 ethernet) In theory, standards are in the public domain and no company can profit by controlling the standard (or can they) Standard is often selected competitively by market demand (de facto standard) Impact of open source on standards?

8. 8 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 (Example: VHS vs. Betamax) Positive feedback Reinforcing network effects to encourage adoption of a standard

9. 9 Positive Feedback in the Market for VCRs

10. 10 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

11. 11 Strategies for Winning a Format War Ensure a supply of complements E.g. games for Playstation were pre- developed Leverage killer applications New technology or products that are so compelling that customers adopt them in droves, killing demand for competing formats (e.g. spreadsheet/word processing in early computers, handwriting recognition on Palm)

12. 12 Format war strategies ctd. Aggressively price and market Razor and blade strategy: pricing the product low to increase the installed base, then pricing complements high to make profits Inkjet printers and cartridges Game consoles and games Vaporware/Building anticipation Cooperate with competitors Some standard is better than no standard License the format e.g. Dolby noise reduction free for media, licensed for players

13. 13 Cost Structures in High- Technology Industries

14. 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 But what if they all think the same way? Is giving away the product sensible (Adobe Reader, Netscape, Java)? Is paying people to adopt the product sensible?

15. 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. 16 Managing Intellectual Property Rights (cont’d) Strategies for managing digital rights Why have record sales declined? Why does i-Tunes have power? What is the logic of DRM-free downloads? How big a problem will piracy be? How can record labels raise the cost of piracy (including transaction costs) and lower the benefits? Which business models will prevail? Ala carte (purchase of single songs or albums) Subscription (unlimited physical downloads – rights expire after a month – need to re-authorize) Streaming (unlimited live downloads – no saving)

17. 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 But, revenues and profits signal an opportunity to potential rivals Concept of first mover disadvantages

18. 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 The amount of lead time becomes important in being able to establish these advantages

19. 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 Example: Apple Newton

20. 20 Strategies for Profiting from Innovation

21. Uncertainty & Risk Management in Tech-based Industries Sources of uncertainty Technological uncertainty Selection process for standards and dominant designs emerge is complex and difficult to predict, e.g. future of 3G Customer acceptance and adoption rates of innovations notoriously difficult to predict, e.g. PC, Xerox copier, Walkman Market uncertainty Strategies for managing risk Cooperating with lead users early identification of customer requirements –assistance in new product development Flexibility —keep options open —use speed of response to adapt quickly to new information —learn from mistakes Limiting risk exposure —avoid major capital commitments (e.g. lease don’t buy) —outsource —alliances to access other firms’ resources & capabilities —keep debt low

22. 22 Innovation/Organization While invention depends upon creativity, successful innovation requires integrating new knowledge with multiple business functions. Need to link R&D departments with other functions (the problem of Xerox’s PARC) The role of cross-functional new product development teams as vehicles for integration The role of product champions--in achieving integration and counteracting organizational inertia.

23. 23 Raisio Case What are the sources of the problems that the Benecol launch has encountered? Could these problems have been anticipated? How is Raisio reformulating its strategy for Benecol and stanol ester? What advice would you offer Raisio concerning its new strategy?