Transcript 10.Technology Strategy

Technology Strategy
Competition for sustainability in
the era of information economy
Vision of corporation
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3M
Microsoft
GE
FedEx
Oracle
Sheseto
Xerox
Align technology with business
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The
The
The
The
The
The
price-quality tradeoff
profit-share tradeoff
growth-position tradeoff
pioneer-harvest tradeoff
consistency-diversity tradeoff
enactment-response tradeoff
Clarify the core competence
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Distinguished, non-imitable, substantial,
marketable
Complementary technology
Critical technology
Externally acquired technology
Fundamental needed technology
Mature technology
Integration considerations
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Integration for technology exploitation
Integration for order fulfillment
Integration
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relevance vs. difficulty
Investment vs. controllability
Generic vs. specific
Modular design vs. integral design
Competitive advantage
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Absolute advantage
Relative advantage
Critical to technology exploitation &
integration arrangement
Clustering the position
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Relative market power vs. absolute
advantage vs. technology maturity
The strategic guide to
information economy
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System products
Standard competition
Rights management
Policy
System products
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Complementary products
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Different manufacturers
Strategy for complementors as well as competitors
Compatibility as strategic choice
Standards and interconnection
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Hardware/software
Client/server
Viewer/content
Product lines
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High fixed cost, low incremental cost
Leaders to value based pricing
Lower quality may be more expensive
Proliferation strategy
How Standards Change the
Game
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Expanded network externalities
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Make network larger, increase value
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Reduced uncertainty
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Share info with larger network
Attracts more users
No need to wait
In war, neither side may win
Reduced consumer lock-in
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Netscape’s “Open Standards Guarantee”
Change Game
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Competition for the market v. competition in
the market
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Competition on price v features
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Commoditized products?
Competition to offer proprietary extensions
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Buy into an open standard, that becomes closed?
Extending a standard
Component v systems competition
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With interconnection, can compete on components
Who wins? Who loses?
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Consumers
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Complementors
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Generally better off
But variety may decrease
Generally better off
May serve the brokering role (DVD)
Incumbents
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May be a threat
Strategies
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Deny backward compatibility
Introduce its own standard
Ally itself with new technology
Innovators
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Technology innovators collectively welcome standards
If the group benefits, there should be some way to make members benefit
Negotiation costs, opportunistic behavior
Formal Standard Setting
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Essential patents must be licensed on “fair,
reasonable and non-discriminatory” terms
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What is your goal?
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ITU, ANSI and ISO
National or international?
Protecting your interests?
What are others goals?
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Do they really want a standard?
Tactics in
Formal Standard Setting
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Don’t automatically participate
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Keep up momentum
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Definition of reasonable
Search carefully for blocking patents
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Second sourcing, licensing, hybrids, etc.
Beware of vague promises
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Trading technologies and votes
Be creative about deals
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Continue R&D while negotiating
Look for logrolling
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If you do, you have to license
Patents held by non-participants
Preemptively build installed base
Building Alliances
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Assembling allies
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Pivotal customers should get special deals
But don’t give your first customers too big an
advantage
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Offer temporary price break
Who bears risk of failure?
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Usually ends up with large firms
But bankruptcy favors small firms
Government is even better!
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Smart cards in Europe
Managing Open Standards
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Standard is in danger if it lacks a sponsor
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Interconnection—searching a migration
route
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Lessons of Unix
Extension of TLC
Negotiating a truce
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Do the benefit cost calculation
How to divide a larger pie?
The standards game
Player B
Player
A
openness
Play in the Willing
backyard to fight
Wants
standard
Willing
to fight
Attempt to
block
openness
Wants
standard
War
Attempt to Voluntary
block
standard
Lessons from standards
competition
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Commoditize technology and complements
Competition requires allies
How does your standard affect competition?
Standards benefit consumers and suppliers, at
expense of incumbents and sellers
Formal standard setting adds credibility
Find natural allies
Before a battle, try to negotiate a truce
Try to retain control over technology, even when
establishing an open standard
Rights Management
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The characteristics of information
The structure of cost
Low reproduction cost is two-edged sword
 Cheap for owners (high profit margin)
 But also cheap for copiers
Maximize value of IP, not protection
Examples
 Library industry
 Video industry
Information & cost
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Anything that can be digitized
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Text, images, videos, music, etc.
Unique demand characteristics
Expensive to produce, cheap to reproduce
High fixed cost, low marginal cost
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Not only fixed, but sunk
No significant capacity constraints
Particular market structures
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Monopoly
Cost leadership
Product differentiation (versioning)
Policy
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Understand environment
IP regime
Price discrimination
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Illegal if it “effectively lessens competition”
Legal arguments that work
 Can set lower prices resulting from lower costs
 Set differential prices to meet competition
 Pricing only questionable if it “lessens competition”
Competition policy
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Regulation
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Antitrust
Tactics for Lock-In and
Switching Costs
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Systems lock-in: durable complements
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Hardware, software, and wetware
Individual, organizational, and societal
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Deeply digging the Network Effects
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Example: Stereos and LPs, Costly switch to CDs
Value depends on number of users
Positive feedback
Indirect network effects
Expectations management, preemption
Compatibility
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Backwards & forwards
Classification of Lock-In
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Durable purchases and replacement:
declines with time
Brand-specific training: rises with time
Information and data: rises with time
Specialized suppliers: may rise
Search costs: learn about alternatives
Loyalty programs: rebuild cumulative usage
Contractual commitments: damages
Follow the Lock-in cycle
Brand Selection
Sampling
Lock-In
Entrenchment
Implications for strategy
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Protects competition as a process
Monopoly isn’t illegal, but attempt to
monopolize is
Monopoly may be inhibited from using
strategies that are legal for other firms
But even small firms may be accused of
antitrust violations
Role of treble damages
Information economy is
different, but not so different!
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Key concepts
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Versioning
Lock-in
Systems competition
Network effects
Beyond technology
competition—experience
Absorption
Passive
participation
Entertainment
Aesthetics
Education
Escapism
Immersion
Active
participation
Upgrading the technology
value
high
high
Differentiation
Add-on service
Fabrication
Relevance of demand
Demonstration
of experience
Raw materials
low
low
low
Pricing
high
Extended readings
Porter, Michael (1996), “What is Strategy?” Harvard
Business Review, Nov.-Dec.
 Iansiti, Marco and Jonathan West (1997),
Technology Integration: Turning Great Research into
Great Products,” Harvard Business Review, MayJune.
 Shapiro, Carl and Hal R. Varian (1998), Information
Rule, Harvard Business School Press, Boston.
 Pine II, B. Joseph, James h. Gilmore (1999), The
Experience Economy, Harvard Business School Press,
Boston.
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