Chapter 7

High-Technology Industries

...those in which the underlying scientific knowledge that companies in the industry use is advancing rapidly... (as) are the attributes of the products/services that result from its application

This chapter focuses on high-technology for a number of reasons.

1. Technology is accounting for an ever-larger share of economic activity. 2. As technology advances, many low-technology industries are becoming high-tech. 3. High technology products are making their way into a wide range of businesses.

Benefits of standards

A technical standard helps to guarantee compatibility between products and their complements. Having a standard can reduce confusion in the minds of consumers. Having standards can reduce production costs. The emergence of standards can help to reduce the risks associated with supplying complementary products.

a razor and blade strategy

By pricing the product (for example, a razor) low in order to stimulate demand and increase the installed base, and then trying to make high profits on the sale of complements (for example, razor blades)

Disruptive Technology

Clayton Christensen uses the term disruptive technology to refer to a new technology that gets its start away from the mainstream of a market. Its functionality improves over time, and invades the main market. Established companies are often aware of the new technology but do not invest in it because they listen to their customers, who do not want it. Many established companies decline to invest in new disruptive technologies because initially they serve such small market niches that it seems unlikely there would be an impact on the company's revenue and profits. When disruptive technology occurs, a new network of suppliers and distributors typically grow alongside the new entrants.

Strategies for Exploiting First-Mover Advantages

Does the innovating company have the complementary assets to exploit its innovation and capture first-mover advantages? How difficult is it for imitators to copy the company's innovation? In other words, what is the height of barriers to imitation? Are there capable competitors that could rapidly imitate the innovation?

First-Mover Advantages

First to develop/pioneer revolutionary products can lead to enduring competitive advantage

Strategies for Winning a Format War

Format wars depend upon finding ways to make network effects work in a firm's favor and against their competitors. Winning a format war requires a company to build the installed base for its standard as rapidly as possible. It is important to make sure that there is an adequate supply of complements (for example, games for Sony PlayStation 3).

Strategies for Profiting from Innovation

Going it alone Entering into an alliance License the innovation

Disruptive Technologies - Strategic Implications

Having access to the knowledge about how disruptive technologies can revolutionize market is a valuable strategic asset. It is important for established enterprises to invest in newly emerging technologies that may ultimately become disruptive technologies (a strategy used by Cisco Systems). Established companies should separate out the disruptive technology and create an autonomous operating division solely for this new technology.

Costs in High-Technology Industries

In many industries, marginal costs rise as a company tries to expand output (the law of diminishing returns). To produce more of a good, a company must hire more labor and invest in more plants, etc. This law often does not apply in many high-tech settings, such as the production of software. If a company can shift from a cost structure where it encounters increasing marginal costs to one where fixed costs may be high but marginal costs are much lower, its profitability may increase. When a high-tech company faces high fixed costs and low marginal costs, its strategy should be to deliberately drive down prices to increase volume. The strategy of pricing low to drive volume up is central to the business model of Microsoft.

5 key Advantages: First-Mover Advantages

Opportunity to exploit network effects and positive feedback loops Ability to establish significant brand loyalty Ability to ramp up sales volume early Ability to create switching costs for customers Ability to accumulate valuable knowledge ****Being first-mover does not guarantee success. Success depends on the first-mover strategy pursued.

The new entrants have several advantages over established enterprises:

Pressures to continue the existing out-of-date business model do not hamstring new entrants. They do not have to worry about their established customer base, or about relationships with established suppliers and distributors. New entrants can focus all their energies on the opportunities offered by new disruptive technology. New entrants must choose whether to partner with an established company, or go it alone.

Technology is:

Scientific knowledge used in production of goods or services

Strategies for Exploiting First-Mover Advantages 3 strategic options options for exploiting first-mover advantages are

Some first movers have the ability to capitalize on (and reap) substantial first-mover advantages that lead to an enduring competitive advantage (for example, Intel). Develop and market themselves. Develop and market the innovation jointly with other companies through a strategic alliance or joint venture. License the innovation to others and allow them to develop the market.

How and Why Strategy Differs in High Technology Industries:

Technical Standards/Format Wars Cost Structures in High-Tech Industries First Mover Strategies/Implications Technological Paradigm Shifts Disruptive Technologies

Paradigm shifts appear to be more likely to occur in an industry when one, or both, of the following conditions are in place:

The established technology in the industry is mature and approaching or at 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.

first-mover disadvantages

The first mover has to bear significant pioneering costs that later entrants do not. The first mover must develop distribution channels, and educate customers about the nature of the product. The first mover runs the risk of building the wrong resources and capabilities.

The Natural Limit to Technology

The silicon-based semiconductor chip may be approaching its natural limit because we are approaching limits to the ability to shrink the width of lines on a chip that allows the manufacturer to add more transistors on a chip. It is more likely that manufacturers will find another technology to replace silicon-based computing and enable them to continue building smaller, faster, cheaper computers. Foster noted that initially the contenders for the replacement technology are not as effective as the established technology. He further noted that established companies and their customers often make the mistake of dismissing the new technology, only to be surprised by its rapid performance improvement. Foster pointed out that there is not one potential successor technology, but a swarm of them.

Standards emerge within industry in three primary ways:

When the benefits of establishing a standard are recognized, companies in an industry might lobby the government to mandate an industry standard. Technical standards are often set by cooperation among businesses. The standard is set by market demand.

General principle:

When two or more companies are competing with each other to get technology adopted as a standard in an industry, the company that wins the format war will be the one whose strategy best exploits positive feedback loops.

positive feedback loops

When two or more companies are competing with each other to get technology adopted as a standard in an industry, the company that wins the format war will be the one whose strategy best exploits.....

chosen to join forces

When two or more competitors are close to simultaneously introducing competing and incompatible technology standards, some firms have chosen to join forces to make and market the product (Sony and Phillips joined forces to make CD players).

When a standard becomes public domain

any company can freely use the technology.

Technical standards

are a set of technical specifications that producers adhere to when making the product, or a component of it.

Killer applications

are applications or uses of new technology or products that are so compelling that they persuade customers to adopt the new format. The theory is to "kill" demand for competing formats. E-mail, chats, and Web browsing gave AOL killer applications that attracted consumers.

Are there capable competitors that could rapidly imitate the innovation? Capable competitors

are companies that can move quickly to imitate the pioneering company. In general, the greater the number of capable competitors with access to the R&D skills and complementary assets needed to imitate an innovation, the more rapid imitation is likely to be.

Does the innovating company have the complementary assets to exploit its innovation and capture first-mover advantages? Complementary assets

are the assets required to exploit a new innovation and gain a competitive edge (state-of-the-art manufacturing facilities capable of satisfying demand, marketing know-how).

Network effects

arise in industries where the size of the "network" of complementary products is a primary determinant of demand for a product.

How difficult is it for imitators to copy the company's innovation? In other words, what is the height of barriers to imitation? Barriers to imitation

give an innovator time to establish a competitive advantage and build more enduring barriers to entry in the newly created market (patents).

Aggressive marketing

is a key approach to getting an early lead. Substantial upfront marketing and point-of-sales promotion techniques are used to attract potential early adopters who will bear the switching cost of a new format.

Technological paradigm shifts

occur when: New technologies revolutionize the structure of the industry. It dramatically alters the nature of competition. It requires companies to adopt new strategies to survive.

A dominant design

refers to a common set of features or design characteristics. Most personal computers share a common set of features: RAM, a monitor, keyboard, etc.

The first mover that creates a

revolutionary product is in a monopoly position, thus establishes significant brand loyalty.

Licensing the format

to other enterprises so that those others can produce products based on the format is another strategy often adopted. In addition to producing VCRs at its own factory, Matsushita let a number of other companies produce VHS format players under a license.