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Strategy in High-Technology Industries

Lecture 7

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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

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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)

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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

Product differentiation can be based on a technical standard (e.g. AACSB, ISO9000)

Examples: QWERTY keyboard, rail gauges

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Technical Standards for Personal Computers

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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

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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)

Open source

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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

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Positive Feedback in the Market for VCRs

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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

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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)

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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

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Cost Structures in High-Technology Industries

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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 is they all think the same way? Is giving away the product sensible (Adobe

Reader, Netscape, Java)? Is paying people to adopt the product sensible?

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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

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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 the price of purchased media (coupled with encryption software and vigorous legal action) See Apple’s iTunes store and new Napster 99¢ cents per song, 200K songs

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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

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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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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

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Strategies for Profiting from Innovation

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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

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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 (e.g. semiconductors)

A new disruptive technology has entered the marketplace and is taking root in niches that are poorly served by incumbent companies using established technology (e.g. microcomputers)

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Established and Successor Technologies

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Disruptive Technology A new technology that gets its start away

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

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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 An ambidextrous organization

Microsoft is very good at this

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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

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Exercises

Orbital Engine Case DVD Burning IBM Case

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Orbital Engine Stock Price History