Standards and Standards Based Competition

8/10/2019 Standards and Standards Based Competition

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Standards and Standards-

based Competition

Leif Hommen

CIRCLE

[email protected]
mailto:[email protected]:[email protected]


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Overview VCR Standards: Beta vs. VHS

Cusumano, M.A, M. Yiorgosand R.S. Rosenbloom .1992. Strategic maneuvering and mass-marketdynamics: The triumph of VHS over Beta. BusinessHistory Review 66 (Spring): 5194.

Competitive Strategy and Standards Hill, C.W.L. 1997. Establishing a standard: Competitive

strategy and standards in winner-take- all industries. TheAcademy of Management Executive 11 (2): 725

Standards Wars Shapiro, C. and H.R. Varian. 1999. The art of standards

wars. California Management Review41 (2): 832.
http://elin.lub.lu.se/elin?func=basicSearch&lang=se&query=au:%22Cusumano%20Michael%20A%22&start=0http://elin.lub.lu.se/elin?func=basicSearch&lang=se&query=au:%22Mylonadis%20Yiorgos%22&start=0http://elin.lub.lu.se/elin?func=basicSearch&lang=se&query=au:%22Mylonadis%20Yiorgos%22&start=0http://elin.lub.lu.se/elin?func=basicSearch&lang=se&query=au:%22Cusumano%20Michael%20A%22&start=0


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VCR Standards (1) One of the classic cases of standards war is the

1970s battle over the VCR market waged betweenSony (Beta) and JVC-Matsushita (VHS)

The facts are simple:

Beta reached the market first, taking 58% of theemerging VCR market in 197577.

However, VHS gained the market lead in 1978.

Over the next years, Betas sales continued toincreasebut market share fell steadily.

In 1984, Beta was outsold by VHS four-to-one, andbegan a rapid decline to extinction.

The second mover, VHS, had managed to turn aslight early lead in sales into a dominant position.


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VCR Standards (2) The decisive factors... were few:

In costandperformance, the two designswere closely comparable (due to a common

heritage in terms of their technical origins). In timing, Sony (Beta) had a clear lead of twoyearsbut moving first was not enough.

In forming alliances, JVC (VHS) was farmore effective than Sony (Beta).

Establishing production capacity(viaMatsushita) was another plus for VHS.

Aggressive marketingby JVC also pre-empted Beta from the lead market Europe.


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VCR Standards (3) A few important moves made the difference:

JVC created a winning alliance of VCR producers inJapan by ... showing humility and versatility, whereasSony pressed commitment and reputation.

Matsushita waited until VHS provided a viablealternative, then abandoned its own design andinvested massively in capacity while pushing to meetRCAs requirement of a longer recording time.

JVC completed the sweep by moving ahead of Sony

to enlist European partners behind VHS. Sony lost out in the race for distribution rights and

remained in a minority position in all 3 major markets.


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VCR Standards (4) The case supports theories of bandwagon effects

and network externalities applied to the emergenceof dominant designsin mass consumer markets.

Bandwagon effect: situations where early sales orlicensing of one product lead to rising interest, and thebuild-up of momentum.

Network externalities: whether or not there is a usage

pattern that depends on a complementary product, aswell as to how and how much customers use it withthe main product.


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VCR Standards (5) In the case of the VCR market, Sonys first mover

advantage was overturned because initial moves byJVC placed VHS in a far better competitive position inrelation to these mass-market dynamics :

A first bandwagon was formed around VHS whendemand grew so rapidly that it outstripped the supplycapacities of any one producerbut not the VHScoalition.

A second VHS bandwagon arose from demand for a

complementary productpre-recorded tapesasretail outlets chose to stock tapes in the most popularformat.


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Competitive Strategy (1) Hill discusses basic competitive strategies

The theoretical point of departure is similar to thatdiscussed in relation to the VCR case: productcompatibility, increasing returns and lock-in.

Compatibility, critical for complementary products towork together, is usually ensured by standards.

In markets where compatibility is important toconsumers, a products value to consumersis thefunction of availability of compatible products.

Availability of compatible products, in turn, isdetermined by the products installed base, which isoften formed by complementary products.

What results is a set of self-reinforcing relationships:


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Competitive Strategy (2) Increasing Returns in the PC Industry

Size of Installed Base

Availability of

Applications

Software

Value of Machine to

Consumer

Future

Demand

+ +

++


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Competitive Strategy (3) Based on the self-reinforcing relationships

shown above, a firm that succeeds inmaking its product a market standard willbecome even more successfulin future.

Where two or more incompatibletechnologies of this kind compete, smallchanges in initial conditionscan eventuallylead to market dominanceand lock-in

for one of them (not necessarily the best). Naturally, the outcomes of this kind of

competition can be affected by strategy.


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Competitive Strategy (4) Strategic Options (for installed base):

Licensing (and OEM) Agreements E.g., JVC & Matsushita in the VCR case

Entering into Strategic Alliances E.g., Philips & Sony in CD disc players Product Diversification

E.g., Apple saved by complementary products(including Apple laser jet) in desktop publishing

Aggressive Positioning E.g., Philips launch of DCC tapedecks: a failedattempt to lower switching costs and easetransition based on backwards compatibility


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Competitive Strategy (5) Benefits, Costs and Risks

Strategic Options Benefits Costs & Risks

Licensing (& OEM)Agreements

1. Distribution 2. Coop-

tation 3. Expectations

1. Appropriation of

Technology 2. End

Market Competition

Strategic Alliances 1. Distribution 2. Coop-tation 3. Expectations 4.

Superior Technology

1. Appropriation of

Technology 2. End

Market Competition

Product Diver-sification

1. Supply of Comple-mentary Products 2.

Profit from both Core &

Complement. Products

1. Additional CapitalCommitments

Aggressive

Positioning

1. Accelerate Adoption

2. Pre-empt Rivals

1. Loss of Ability to

Skim Market 2. High

Initial Investments


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Competitive Strategy (6) Four factorsor contingenciesdetermine the

appropriate option or mix of options to pursue:

Barriers to Imitation

High barriers favor a gradual approach

Capability of Potential Competitors

Firms with capabable rivals should try to co-opt themthrough licensing or entering into strategic alliances

Complementary Resources of the Firm

Firms without e.g., manufacturing or marketing need

licensing agreements or strategic alliances Supply of Complementary Products

If there are no available suppliers, firms may have todiversify into producing complementary products


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Competitive Strategy (7) Given these contingencies, firms can choose among

four main strategies:

Aggressive Sole Provider

E.g., Xerox in Japan should have adopted a more

aggressive positioning stance to pre-empt rivals

Passive Multiple Licensing

E.g., Dolby in the audio player marketlow feesforestall rivalry & scale of adoption generates profit

Aggressive Multiple Licensing

E.g., JVC-Matsushita and VHS in the VCR case Selective Partnering

E.g., IBMs partnership with Intel and Microsoft todevelop the PC; Philips & Sony in CD disc players


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Competitive Strategies (8)

Strategy Main Features Key Contingencies

Aggressive Sole

Provider

Avoid licensing & alliances;

Pursue aggressive

positioning;Diversify into comple-

mentary products

High barriers to imitation;

Complementary resources;

Complementary productsavailable; No capable

competitors

Passive Multiple

Licensing

License to all comers;

Licensees develop the

market.

Low imitation barriers; No

complementary resources;

Many capable competitors

Aggressive Multi-ple Licensing

License to many firms;

Pursue aggressivepositioning

Complementary resour-

ces; Low imitation barriers;Many capable competitors

Selective

Partnering

Enter into an alliance to

promote standard

Partner has critical

complementary resources;

High imitation barriers;

Partner is a capable rival.


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Standards Wars (1)

Shapiro & Varian cover much of the same

ground as Hill, though they discuss some

different examples (especially older cases).

However, in addition to addressing strategy

and tactics, these authors also take up

some additional questions:

Classification of standards wars

Identification of seven critical assets

Main lessons on standards wars


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Standards Wars (2)

Classification of

standards wars

The Rival Technology

Your Tech-

nology

Compatible Incompatible

Compatible Rival

Evolutions

Evolution vs.

Revolution

Incompatible Revolution vs.

Evolution

Rival

Revolutions


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Standards Wars (3)

The classification shown above yields three

main types:

Rival Evolutions

E.g., DVDvs. Divx(both compatible with CDs)

Evolution vs. Revolution

E.g., Ashton Tates dBase IVvs. Paradoxin

dektop software during the 1980s

Rival Revolutions E.g., Nintendo 64vs. Sony Playstation(or AC vs.

DC, for a more historical example)


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Standards Wars (4)

Seven key assets in network markets:

Control over an installed base of users

Intellectual property rightsAbility to innovate

First-mover advantages

Manufacturing capabilities

Strength in complements

Brand name and reputation


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Standards Wars (5) Control over an installed base of customers (Example:

MicroSoft) Large numbers of loyal or locked-in customers favor an

evolution strategy as well as blocking rivals and forcingthem into risky revolution strategies

Intellectual property rights(Example: Philipss and Sonysrespective patents in DVDs and CDs) Legal protection against imitation by competitors

Ability to Innovate(Example: NBC in color TV) Resources & capabilities that enable the firm to out-

engineer the competition.

First-mover advantages(Example: Netscape in browsers) Technological and market leadership based on previous

product development work.


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Standards Wars (6)

Manufacturing capabilities(Example: Compaq and Dellin computers)

Efficient production can yield critical cost advantages.

Strength in complements(Example: Intels promotionof new standards for PC components in order to sellCPUs)

Acceptance of complementary products stimulatessales in the market in question

Reputation and brand name(Examples: Microsoft, HP,

Intel, Sony, and Sun) Instant credibility in the marketplace


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Standards Wars (7)

Two crucial marketplace tactics: Pre-emption& Expectations Management

Pre-emption is based on an early lead and

positive feedback Techniques: Early product launches, marketing

aimed at pioneers, penetration pricing (belowcost), etc.

Expectations Management is about

establishing credibility with customers Techniques: Announcing upcoming products to

freeze rivals sales; assembling allies and makinggrand claims for your product.


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Standards Wars (8)

Defending a dominant (winning) standard: Stay on your guard(e.g., avoid growing rigidities like those

of Frances Minitel)

Offer customers a migration path(e.g., Microsofts embraceand extend philosophy towards improvements)

Commoditize complementary products(e.g., Intels supportfor innovation in complementary products)

Compete against your own installed base(e.g., Intelsconstant efforts to drive innovation faster)

Protect your position(e.g., Microsofts use of licenseclauses to ensure that OEMs shipped Windows 95)

Leverage installed base(e.g., control over an interface toextend leadership from one side to the other.)

Stay a leader(e.g., Ciscos use of all profits from estabishedproducts to buy up firms developing the next generation)


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Standards Wars (9)

Rear-Guard Actions (for those who fall behind):

These strategies often entail defending remainingniche markets, but they may also involveleapfrogging. In either case, customer management is

a key concern. Adapters and Interconnection

Negotiating access to the larger network is vital. (E.g.,Atari & Nintendo). So is performance (E.g. Digitals Intelemulator for its Alpha chip.)

Survival Pricing

A temptation that should be resisted (E.g., Quattro Provs. Lotus 1-2-3 and Microsoft Excel in 1993)

Legal Actions If all else fails, sue. (E.g. anti-trust action against

Kodak)


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Standards Wars (10)

Summing up:

First, It is important to understand what type ofstandards waryou are waging.

The key factor here is compatibilitybetween new rivaltechnologies and established products

Three main types of standards war:

Rival Evolutions

Evolution vs. Revolution

Rival Revolutions


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Standards Wars (11)

Second, seven critical assetsdetermine the

strength of your position:

Control of an installed base

Intellectual property rights

Ability to innovate

First-mover advantages

Manufacturing abilities Presence in complementary products

Brand name and reputation.


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Standards Wars (12)

Third, some main lessons for strategy and tactics: Assemble your allies beforehand

Consumers, suppliers of complements, even competitors

Pre-emption is a critical tactic Rapid design, early deals, and penetration pricing

Managing consumer expectations is crucial in networkmarkets

Early announcements, prominent alliances, and visiblecommitments to your technology

When you have won, dont rest easy Backward compatibility should not block product improvement

If you fall behind, avoid survival pricing, it just signalsweakness. Instead, establish a performance advantage, or use converters

/ adapters to interconnect with dominant standard.

Documents

Standards and Standards Based Competition