Chapter 7 technology and innovation

Competitors' capability to imitate a pioneer's innovation depends primarily on two factors:

(1) R&D skills; and (2) access to complementary assets.

Strategies for Exploiting First-Mover advantages

(1) develop and market the innovation; (2) develop and market the innovation jointly with other companies through a strategic alliance or joint venture; and (3) license the innovation to others and allow them to develop to the market

in many industries, marginal costs rise as a company tries to expand output

(economists call this the law of diminishing returns).

first mover advantages

- opportunity to exploit network effects and positive feedback loops, locking consumers into its technology. - may be able to establish significant brand loyalty, which is expensive for later entrants to break down. -may be able to increase sales volume ahead of rivals and thus reap cost advantages associated with the realization of scale economies and learning effects - may be able to create switching costs for its customers that subsequently make it difficult for rivals to enter the market and take customers away from the first mover. - may be able to accumulate valuable knowledge related to customer needs, distribution channels, product technology, process technology, and so on.

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

-First, the established technology in the industry is mature, and is approaching or at its "natural limit." -Second, a new "disruptive technology" has entered the marketplace and is taking root in niches that are poorly served by incumbent companies using established technology

STRATEGIES FOR wINNING A FORmAT wAR

-ensure a supply of complements -leverage Killer applications -aggressive Pricing and Marketing -cooperate with competitors -license the Format

First-Mover Disadvantages

-first mover has to bear significant pioneering costs that later entrants do not. -more prone to make mistakes because there are so many uncertainties in a new market. -risk of building the wrong resources and capabilities because they focus on a customer set that is not characteristic of the mass market. "crossing the chasm" - may invest in inferior or obsolete technology.

benefits of standards

-helps to guarantee compatibility between products and their complements. -reduces confusion - help reduce production costs. -help reduce the risks associated with supplying complementary products, and thus increase the supply for those complements.

Standards emerge in an 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, without government help, and often through the medium of an industry association, as the example of the DVD forum illustrates. -

Three Innovation Strategies

1.complementary assets 2.height of barriers to imitation 3.capability of competitors

first mover

A firm that pioneers a particular product category or feature by being first to offer it to market.

technical standards

A set of technical specifications that producers adhere to when making a product or component.

killer applications

Applications or uses of a new technology or product that are so compelling that customers adopt them in droves, killing competing formats.

format wars

Battles to control the source of differentiation, and thus the value that such differentiation can create for the customer

Dominant design

Common set of features or design characteristics.

PCs Most share a common set of features: an Intel or Intel- compatible microprocessor, random access memory (RAM), a Microsoft operating system, an internal hard drive, a DVD drive, a keyboard, a monitor, a mouse, a modem, and so on.

Dominant design

network effects

Government- or association-set standards of knowledge or technology that any company can freely incorporate into its product.

razor and blade strategy

Pricing the product low in order to stimulate demand, and pricing complements high.

technological paradigm shift

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

disruptive technology

a new technology that originates away from the mainstream of a market and then, as its functionality improves over time, invades the main market.

Especially in high-tech industries, ownership of technical standards

can be an important source of competitive advantage. In many cases product differentiation is based on a technical standard. Often, only one standard will dominate a market, so many battles in high-tech industries involve companies that compete to set the standard. For example, for the last three decades, Microsoft has controlled the market as the dominant operating system for personal computers (PCs), sometimes exceeding a 90% market share. Notably, however, Microsoft held very small shares of the tablet (roughly 4.8%) and smartphone (roughly 3.6%) operat- ing system markets in 2014, suggesting the possibility of turbulent times ahead for the

For example, the demand for automobiles early in the 20th century was an increasing function of the network of paved roads and gas stations. S

network effects

1. Technical standards are important in many high- tech industries. They guarantee compatibility, reduce confusion in the minds of customers, allow for mass production and lower costs, and reduce the risks associated with supplying com- plementary products. 2. Network effects and positive feedback loops often determine which standard will dominate a market. 3. Owning a standard can be a source of sustained competitive advantage. 4. Establishing a proprietary standard as the industry standard may require the company to win a format war against a competing and incompatible standard. Strategies for doing this include producing complementary products, leveraging killer applications, using aggressive pricing and marketing, licensing the technology, and cooperating with competitors. 5. Many high-tech products are characterized by high fixed costs of development but very low or zero marginal costs of producing one extra unit of output. These cost economics create a presumption in favor of strategies that emphasize aggressive pricing to increase volume and drive down average total costs. 6. It is very important for a first mover to develop a strategy to capitalize on first-mover advantages. A company can choose from three strategies: develop and market the technology itself, do so jointly with another company, or license the technology to existing companies. The choice depends on the complementary assets required to capture a first-mover advantage, the height of barriers to imitation, and the capability of competitors. 7. Technological paradigm shifts occur when new technologies emerge that revolutionize the structure of the industry, dramatically alter the nature of competition, and require companies to adopt new strategies in order to succeed. 8. Technological paradigm shifts are more likely to occur when progress in improving the established technology is slowing because of diminishing returns and when a new disruptive technology is taking root in a market niche. 9. Established companies can deal with paradigm shifts by investing in technology or setting up a stand-alone division to exploit techchnology

true

nearly 25% of growth in domestic product was accounted for by information technology industries.

true

the company whose strategy best exploits positive feedback loops wins the format war.

true