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Strategy in High-Technology Industries

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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

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The Importance of High-Tech

Technology is accounting for an ever larger share of economic activity

Many low-tech industries are becoming more high tech

High-tech products are making their way into a wide range of businesses

Even in industries not thought of as high tech, technology is changing aspects of the product or production system

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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

The source of product differentiation is based on the technical standard

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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

Technical standards are often set by cooperation among businesses Public domain

Standard is often selected competitively by market demand

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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

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, a company will be locked out.

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Strategies for Winning a Format War

Ensure a supply of complements Leverage killer applications

New technology or products that are so compelling that customers adopt them in droves, killing demand for competing formats

Aggressively price and market Razor and blade strategy: pricing the product low

to increase the installed base, then pricing complements high to make profits

Cooperate with competitors License the format

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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

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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 costs of purchasing media (coupled with encryption software)

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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 Revenues and profits signal an

opportunity to potential rivals

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The Impact of Imitation on Profits of a First Move

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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

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Strategies for Exploiting First-Mover Advantages

Develop and market the innovation itself

Develop and market the innovation jointly with other companies through a strategic alliance or joint venture

License the innovation to others and let them develop the market

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Choosing a Strategy for Exploiting First-Mover Advantages

Does the company have the complementary assets to exploit its innovation?

How difficult is it for imitators to copy the company’s innovation (height of barriers to imitation)?

Are there capable competitors who could rapidly imitate the innovation?

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Strategies for Profiting from Innovation

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Group Exercise

Explain how Dolby became a standard using concepts in the Chapter. (Refer to p. 233)

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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 A new disruptive technology has entered the

marketplace and is taking root in niches that are poorly served by incumbent companies using established technology

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The Technology S-Curve

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Established and Successor Technologies

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Swarm of Successor Technologies

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Group exercise: Closing case

Name the paradigm shifts IBM weathered.

How did they weather these “storms”? Did they plant the seeds for the

eventual destruction of their PC business? Did they have a choice?

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Disruptive Technology

A new technology that gets its start 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

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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