Waging a Standards WarWaging a Standards War

February 14, 2002Prepared by Ken Song

MGT523: Competitive Strategies for Network Economies

Professor Shor

Standards War:Standards War:

Competition in the information age A battle for market dominance between

incompatible technologies A company's success can easily pivot on its

ability to vie a standards war Standards wars are more competitive in

markets with strong network effects Consumers place their value on compatibility Is it coincidence that we have a single worldwide

standard for fax machines?

Standards Wars - ExamplesStandards Wars - Examples

End in a truce: 56k modems & color television

Ultimately common standard was adopted

End in a duopoly: Nintendo and Sony

Fight to death: North vs. South Railroad gauges

Belated victory for the North Southern Railroad had to convert 5'gauge into

the now-standard 4'8 1/2" gauge on more than 11,000 miles of track

Standards Wars – LessonsStandards Wars – Lessons

Lessons from the standard war of railroad gauge Incompatibilities can arise by accident, yet persist

for many years Network markets tend to incline to the leading

player, unless the other players coordinate to act quickly and decisively

Seceding from the standard-setting process can leave the player in a weak market position in the future

A large buyer (the U.S. government) can have more influence than suppliers

Those left with the less popular technology have to cut their losses by employing adapters by writing off existing assets

Standards Wars – ClassificationStandards Wars – Classification

Evolution New technology that is compatible with the old Minimal consumer switching costs

Revolution Incompatible technology with the old Compelling performance with significant switching costs

Rival evolution Incompatible with each other DVD and Divx (both of which will play CDs)

Rival revolution Neither offers backward comparable technology Nintendo & Sony PS

Evolution vs. Revolution One offers backward compatibility and the rival does not Backward compatibility vs. Superior performance

Seven key assetsSeven key assets

Control over an installed base of users MS with loyal locked-in customers

Intellectual property rights Qualcomm’s CDMA

Ability to innovate HP’s engineering skills

First-mover advantages Canon’s personal laser printer

Manufacturing capabilities Low costs and open standard

Strength in complements Intel’s efforts to promote new standards

Brand name and reputation HBS as a top MBA program???

Two main tacticsTwo main tactics

Preemption build an early lead

So positive feedback works for you and against your rival

With learning-by-doing, the positive feedback is through lower costs

Expectations Management Assembling allies and claiming about the

new technology’s current or future popularity Sun has gathered allies in support of Java

Taking out full-page advertisements of the company lists in the Java coalition

HBS’s Case study - HBS’s Case study - Standardization in MBA programStandardization in MBA program

HBS Owen

Customer Control

Strong:- large base of locked-in MBA

programs - Pursue an Evolution strategy - Block rivals from offering compatible

cases- Force rivals to play risky Revolution

strategy

Weak:- Rival evolution?

Intellectual property

rightsYes Yes

Innovation

High:- Ability to publish more cases in the

future puts HBS in a strong position today

High:- EC Strategy- Professor Shor

HBS’s Case study - HBS’s Case study - Standardization in MBA programStandardization in MBA program

HBS Owen

1st mover adv. Yes No

Manufacturing

Yes:- low-cost producer, due to both scale

economies and manufacturing competence (HBS Publisher)

No

Complements

High:- “Information rules” is also published

from HBS- More MBA students will read books

from HBS

Low

Brand equityHigh:- #1 Case study school

Moderate

Hypothetical Scenario – Hypothetical Scenario – Owen’s Case study battleOwen’s Case study battle Preemption

Find the pioneers Mostly keen to try new technology and sign them up swiftly

MBA programs with high attention to eCommerce strategy Pricing below cost, i.e., penetration pricing

Free copies maybe

Assemble allies Support of consumers

MBA programs/Faculties/Students Even from HBS

Expectations Management Strong network effects in MBA programs Engage in aggressive marketing

Make early announcements of Owen Case studies Don’t price to survive

Establish a compelling performance advantage Interconnect with the prevailing standard, HBS Cases