Strategic Management Chapter 7

Winning a Format War Requires

A company to build the installed base for its standard as rapidly as possible, thereby leveraging the positive feedback loop, inducing consumers to bear switching costs and ultimately locking the market into its technology The company to jup-start and then accelerate demand for its technological standard or format such that it becomes established as quickly as possible as the industry standard, thereby locking out competing formats

Disruptive Technologies Advances

Advances that will transform life, business and the global economy Advancing quickly or accelerating at rapid pace Broad applicability to transform multiple industries Transformative impact or potential to change industry structure and profit pools Potential for large economic impact

Lockout

Alternative standards get "locked out" as consumers are unwilling to bear the switching costs

Public Domain

Any company can freely incorporate the knowledge and technology based on the standard into its product or service

Killer Applications

Are applications or uses of a new technology or product that are so compelling that they persuade customers to adopt the new format or technology in droves, thereby killing demand for competing formats Often help to jump start demand for a new standard

Format Wars

Are battles to control the source of differentiation and thus the value that such differentiation can create for the customer Is setting and controlling standards

Capable Competitors

Are companies that can move quickly to imitate the pioneering company The fewer capable competitors there are, the less likely it is that any one of them will succeed in finding a way around barriers to imitation and quickly imitating the innovation

Height of Barriers to Imitation

Are factors that prevent rivals from imitating a company's distinctive competencies and innovations The higher the barrier, the longer it takes for rivals to imitate the innovation and the more time the first mover has to build an enduring competitive advantage Give the innovator time to establish a competitive advantage and build enduring barriers to entry through brand loyalty or experience-based cost advantages

Complementary Assets

Are the assets required to exploit a new innovation and gain a competitive advantage Allow rapid development and promotion of the innovation

The Contenders for the Replacement Technology are Not as Effective as What?

As the established technology in producing the attributes and features that consumers demand in a product

Strategic Implications for Established Companies

Aware about how disruptive technologies may revolutionize markets Invest in emerging technologies that may become disruptive. Create autonomous operating division for disruptive technology (may require different value chain and cost structure)

Final Points about Technology S-Curve

Because the successor technology is initially less efficient than the established technology, established companies and their customers often make the mistake of dismissing it, only to be surprised by its rapid performance improvement Often there is not one potential successor technology but a swarm of potential successor technologies, only one of which might ultimately rise to the front When this is the case, established companies are put at a disadvantage

Why do Standards Emerge?

Because there are economic benefits associated with them

Why are Technologies Disruptive?

Because they revolutionize industry structure and competition, often causing the decline of established companies

Architectural

Builds new product with known components Uses existing technologies Reconfigures in a novel way for creating new markets

Incremental Innovation

Builds on established knowledge base Steadily improves the product or service Targets existing markets using existing technology

First-Mover Disadvantages

Competitive disadvantages associated with being first Significant pioneering costs More prone to making mistakes in new market Risk of building wrong resources or capabilities (crossing the chasm) May invest in inferior or obsolete technology (if underlying technology is changing rapidly)

What is the Most Important Complementary Asset?

Competitive manufacturing facilities capable of handling rapid growth in customer demand while maintaining high product quality

What is One of the Key Determinants of the Rate of Imitation

Complementary assets, or the access that rivals have to marketing, sales knowhow and manufacturing capabilities

Dominant Design Examples

Computer keyboard Personal computer Shipping containers

Suppliers and Distributors Ignoring Disruptive Technology

Creates an opportunity for new suppliers and distributors to enter the market to sever the new entrants As the new entrants grow, so does the associated network The new entrants and their network may replace not only established enterprises, but also the entire network of suppliers and distributors associated with established companies

Association Example

DTV (digital television broadcasts)

Strategies for Exploiting First-Mover Advantages

Develop and market the innovation Develop and market the innovation jointly with other companies through a strategic alliance or joint venture License the innovation to other and allow them to develop the market

Complementary Assets Disadvantage

Developing complementary assets can be very expensive

The Optimal Choice of Strategy Depends on the Answers to Three Questions

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? - What is the height of barriers to imitation? Are there capable competitors that could rapidly imitate the innovation?

Radical Innovation

Draws on novel materials and methods Derived from entirely new knowledge or recombination of existing knowledge base with a new stream of knowledge Targets new markets with new technologies

Technology S-Curve

Early in its evolution, R&D investments in a new technology tend to yield rapid improvements in performance as basic engineering problems are solved After a time, diminishing returns to cumulative R&D begin to set in, the rate of improvement in performance slows and the technology starts to approach its natural limit, where further advances are not possible

Strategies for Winning a Format War

Ensure a supply of complements Leverage killer applications Aggressive pricing and marketing Cooperate with competitors License the format

Disruptive Technologies and what Established Companies Do

Established companies are often aware of the new technology but do not invest in it because they listen to their customers, and their customers do not want it Of course, this arises because the new technology is early in its development and only at the beginning of the S-curve for that technology once the performance of the new technology improves, customers will want it, but by this time it is new entrants (as opposed to established companies), that have accumulated the required knowledge to bring the new technology into the mass market

Steps Companies Take to Ensure an Adequate Supply of Complements

First, they may diversify into teh production of complements and seed the market with sufficient supply to help jump-start demand for their format Second, companies may create incentive or make it easy for independent companies to produce complements

how do Standards Emerge in an Industry

Government Industry association Market demand

Benefits of Standards

Guarantees compatibility between products and complements which reduce costs Reduces confusion in the minds of consumers Helps to reduce production costs Reduces risks associated with supplying complementary products and thus increase the supply for those complements Leads to low‐cost and/or differentiation advantages for individual companies Helps raise the level of industry profitability

Types of Innovation

Incremental innovation Radical innovation Architectural innovation Disruptive innovation

Market Demand

Industry standard is selected Competitively by the purchasing patterns of customers in the marketplace

Disruptive

Innovates by leveraging new technologies Starts away from the mainstream market Invades existing main market or markets as functionality improves

Strategic Management of Technology

Integration of technology with business strategy as well as functional, global and corporate strategy

Market Demand Example

Intel or Microsoft

Technical Standards

Is a set of technical specifications that producers adhere to when making the product, or a component of it Is a source of differentiation

Organization's Innovative Capability

Is embedded in people, materials, cognitive and physical processes, plant, equipment and tools

Razor and Blade Strategy

Is pricing the product (razor) low in order to stimulate demand and increase the installed base and then trying to make high profits on the sale of complements (razor blades), which are price relatively high

First Mover

Is the pioneer in a product category or feature by being the first to offer it to the market

Ensure a Supply of Complements

It is important for the company to make sure that there is an adequate supply of complements

Leverage Killer Applications

Killer applications

Technology

Knowledge, skills, and artifacts that can be used to develop products and services as well as production, processes and delivery systems

License the Format

Licensing the format to other enterprises so that those others can produce products based on the format is another strategy often adopted The company that pioneered the format gains from the licensing fees that return to it, as well as from the enlarged supply of the product, which can stimulate demand and help accelerate market adoption

What Other Factors Make it Very Difficult for Established Companies to Adopt a new Disruptive Tecnology

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 revenues and profits As the new technology to improve in functionality and invade the main market, their investment can often be hindered by the difficult implementation of a new business model required to eexploit the new technology

What are Some Other Complementary Assets?

Marketing knowhow Adequate sales force Access to distribution systems After-sales service and support network

Which Standard is Predominate

Network effects Positive feedback loop Lockout

Strategic Implications for New Entrants

No pressure to continue out‐of‐date business model No worries about established customer base and relationships with suppliers and distributors May be constrained by lack of capital Must decide to partner with an established company or go it alone

Technological Paradigm Shifts

Occur when new technologies revolutionize the structure of the industry, dramatically alter the nature of competition and require companies to adopt new strategies in order to survive

First Mover Advantages

Potential to capture significant revenues and profits that signals an opportunity to potential rivals Exploit network effects and positive feedback loops, locking consumers into its technology Establish brand loyalty and increase sales ahead of rivals Increase sales volume ahead of rivals and thus reap cost advantages associated with the realization economies of scale and learning effects Create switching costs for customers, which makes it difficult for rivals to enter the market and take customers away from the first mover Accumulate valuable knowledge

Agressive Pricing and Marketing

Pursue aggressive pricing and marketing by pricing the product low to increase the installed base, then pricing complements high

R&D Skills

Refer to the ability of rivals to reverse-engineer an innovation in order to find out how it works and quickly develop a comparable product

Dominant Design

Refers to a common set of features or design characteristics

Disruptive Technology

Refers to 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

Positive Feedback Loop

Reinforce network effects to encourage adoption of a standard; increase in demand in technology triggers an increase in demand for products that support the technology

Competitors Capability to Imitate Pioneer's Innovation Depends on What Two Factors?

Research and development (R&D) skills Access to complementary assets

When a Technology Approaches its natural Limit

Research attention turns to possible alternative technologies and sooner or later one of those alternative might be commercialized and replace the established technology The probability that a paradigm shift will occur increase The contenders for the replacement technology are not as effective as the established technology in producing the attributes and features that consumers demand in a product

Association

Set standards Standards are set by cooperation among businesses, such as through industry associations

Government

Set standards Companies lobby the government to mandate an industry standard when benefits of a standard are recognized

Network Effects

Size of the "network" of complementary products is a primary determinant of demand for an industry's product

Who Else Ignores Disruptive Technologies

Suppliers and distributors

What is the the Technology S-Curve?

The curve show the relationship over time of cumulative investments in R&D and the performance (or functionality) of a given technology)

Technological Paradigm Shifts Occur in an Industry When

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 invading the main market

Licensing Makes Most Sense When

The innovating company lacks the complementary assets Barriers to imitation are low There are many capable competitors

The Competitive Strategy of Developing and Marketing the Innovation Jointly with other Companies through a Strategic Alliance or Joint Venture Makes Most Sense When

The innovator lascks complementary assets Barriers to imitation are high There are several capable competitors

What do Disruptive Technologies Do?

They cause a technological paradigm shift

What is a Common Tactic to Jump-Start Demand?

To adopt a Razor and Blade Strategy

Strategy and Innovation

Understanding key strategic questions in relation to technology and innovation

Cooperate with Competitors

Understanding that the nearly simultaneous introduction of such incompatible technologies can create significant confusion among consumers and often lead them to delay their purchases

The Various Strategies that Companies should Adopt in Order to Win Format Wars are Centered Upon What?

Upon finding ways to make network effects work in their favor and against their competitors

When does the Competitive Strategy of Developing and Marketing the Innovation Alone Make Most Sense?

When the innovator has the complementary assets necessary to develop the innovation The barriers to imitating a new innovation are high The number of capable competitors is limited

Agressive Marketing

is also a key factor in jump-starting demand to get an early lead in an installed based