Transcript Strategic Management 5e. (Hill & Jones)

Strategy in High-Technology
Industries
Lecture 7
1
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
2
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)
3
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
4
Technical Standards for
Personal Computers
5
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
6
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
7
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
8
Positive Feedback in the Market
for VCRs
9
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
10
Strategies for Winning a Format
War
Ensure a supply of complements
 e.g. games for Playstation were predeveloped
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)
11
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
12
Cost Structures in HighTechnology Industries
13
Strategic Significance of HighTech 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?
14
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
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 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
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
 But, revenues and profits signal an
opportunity to potential rivals
 Concept of first mover disadvantages
17
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
18
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
19
Strategies for Profiting from
Innovation
20
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
21
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)
22
Established and Successor
Technologies
23
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
24
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
25
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
26
Exercises
 Orbital Engine Case
 DVD Burning
 IBM Case
27
Orbital Engine Stock Price History
28