Transcript The Co-Evolution of Technologies and Markets

Developing and Managing a
Successful Technology
& Product Strategy
Professor Rebecca Henderson
MIT Sloan School of Management
Phone: (617) 253-6618, Email: [email protected],
http://www.mit.edu/people/rhenders/home.html
Who are you, and why did you come?
Who am I?





Eastman Kodak LFM Professor, MIT Sloan School
SB in Mechanical Engineering, MIT
PhD in Business Economics, Harvard
Research focus: Building on technology to generate
growth: why is it so hard and what can be done?
Work in: Semiconductor capital equipment,
Aerospace, Automotive, Branded Consumer Goods
Pharmaceuticals & Biotech, IT, Telecommunications
What is a “strategy”
anyway?
Effective strategies answer three key
questions:
How will we
Create value?
How will we
How will we
Deliver value? Capture value?

How will we create value?
– How will the technology evolve?
– How will the market change?

How will we capture value?
– How should we design the business model?
– Where should we compete in the value chain?
– How should we compete if standards are important?

How will we deliver value?
– How do we manage the core business and growth
simultaneously?
– How do we use our strategy to drive real resource allocation?
Outline:





Why do I need an innovation strategy?
How will we create value?
How will we capture value?
How will we deliver value?
Doing strategy in practice
Why have a strategy?
Why have a strategy?
1. To make choices
Is This Your Project Pipeline?
Overload at PreQuip
Active Projects
(formal development
projects by number)
1
2
3
4
5
.
.
.
26
27
28
29
30
Resources
Required for
Completion
(months)
Months to
Completion
(desired)
Implied Development Resource
Allocation (months)
This year
Next year
Year after that
54
123
86
286
24
8
24
12
20
4
40
38
50
92
24
14
62
36
172
0
0
23
0
22
0
352
75
215
153
29
36
9
30
18
3
48
62
40
60
29
150
13
80
93
0
120
0
95
0
0
All Other Support Activity
(customer support, troubleshooting)
––
––
430
430
430
Total Development Requirements
––
––
2783
2956
2178
Available Resources (months)
––
––
960
960
960
––
289.9
307.9
Rate of Utilization (percent) ––
226.9
Overcommitment destroys
productivity
Average
100%
Value-Added
Time on
80%
Engineering
Tasks
60%
40%
20%
0%
1
2
3
4
5
6
Number of Projects per
Engineer
The Timing and Impact of Management
Attention
Phases
Knowledge
Acquisition
High
Basic
Design
Prototype
Building
ABILITY
TO INFLUENCE
OUTCOME
Index of
Attention and
Influence
Low
Concept
Investigation
ACTUAL
MANAGEMENT
ACTIVITY
PROFILE
Pilot
Manufacturing
Production
Ramp-Up
Why is it so hard to kill
project #26?



It’s a “good” project!
Good managers can meet stretch goals
(and I’m a good manager)
Making difficult decisions takes time & energy
It’s very hard to kill projects without a strategy
Reasons to have a strategy:
2. To be able to change it
A Key Framework:
The industry life cycle
Era of Ferment/
Discontinuity
“Dominant design”
emerges
Maturity
Incremental
Innovation
The Industry Life Cycle as an S curve
Performance
Maturity
Discontinuity
Takeoff
Ferment
Time
The S-curve Maps Major Transitions
Maturity
Performance
Discontinuity
Takeoff
Ferment
Time
Transitions often challenge existing
organizations severely
Cumulate share of sales of photolithographic alignment
equipment, 1962-1986, by generation
Contact
Cobilt
Kasper
Canon
44
17
Proximity Scanner S&R (1)
<1
8
67
P-Elmer
GCA
Nikon
Total
61
S&R (2)
75
21
7
9
78
10
55
<1
12
70
99+
81
82+
But they also create major opportunity

Corning glass
– Cookware to optical fiber

HP
– Instrumentation to computers

IBM
– Mainframes to PCs to Services

Eli Lilly
– “Random” drug discovery to genetics and genomics
Discontinuities are hard!

Answers to the key strategic questions:
– How do we create value?
– How do we capture value?
– How do we deliver value?

CHANGE!
Course Outline:

First Day:
– How will we create value?
• How will the technology evolve?
• How will the market change?
– How will we capture value?
• How should we design the business model?
• Where should we compete in the value chain?
• How should we compete if standards are important?

Second Day:
– How should we deliver value?
• How do we manage the core business and real growth
simultaneously?
• How do we use our strategy to drive real resource allocation?
How shall we create value?
The first of 3 key questions
How will we
Create value?
How will we
How will we
Deliver value? Capture value?
Creating Value:

Understand how technologies will evolve
– (Both your own and those on which you rely)

Understand how customer needs will evolve

Develop world class products and services that meet
customer needs
Agenda

Predicting Technological Change
– The Delphi Model
– Trend extrapolation

Predicting the Evolution of Customer Needs
– Basic segmentation
– Crossing the chasm
– New technologies, new needs
Can one forecast the path of
technological change?

No
But
 Delphi models
 Forecasting by analogy
 Trend extrapolation
Delphi Models

Ask the experts!
– A committee?
– Structured questionnaires?

Pros
– Field experts are often years ahead of day to day
practice: technologies do not “come from no where”

Cons
– They sometimes have little knowledge of possible
applications
– They can be enthusiastic
Forecasting by Analogy
The Internet will be like:
Personalized medicine will be like:
The Xbox will be like:
Forecasting by Analogy


Is nanotechnology like semiconductors?
Or like biotechnology?

Or like something else altogether?
Dimensions in Silicon and redinbloodBiology
cell
~5 m (SEM)
DNA
proteins
nm
Simple
molecules
<1nm
diatom
30 m
bacteria
1 m
10-10
10-9
10-8
10-7
10-6
m
10-5
10-4
10-3
10-2
SOI transistor
width 0.12m
semiconductor
nanocrystal (CdSe)
Nanometer memory element
5nm
(Lieber)
1012 bits/cm2 (1Tbit/cm2)
control biological machines
Circuit design
Copper wiring
width 0.2m
IBM PowerPC 750TM
Microprocessor
7.56mm×8.799mm
6.35×106 transistors
Is nanotechnology like biotechnology?
Patents
10000
9000
8000
7000
6000
5000
Semiconductors
Biotechnology
4000
Nanotechnology
3000
2000
1000
0
0
2
4
6
8
10
Ye a r s
12
14
16
18
20
Is nanotechnology like biotechnology?
Trend analysis

The future is often much like the past, only more so
Trend extrapolation: Semiconductors
600
10
9
8
7
400
6
300
5
4
200
3
2
100
1
0
1984
1986
1988
1990
1992
Year
1994
1996
1998
0
2000
# Transistors (m)
Frequency (MHz)
500
Frequency (M Hz)
# transistors(m)
Issues in Trend Extrapolation




Which parameter shall I predict?
Do all good things come to an end?
Exploring the difference between progress as a result
of the passage of time, and progress as the result of
returns to effort
Predicting progress in complementary technologies
Do all good things come to an end?
Technological exhaustion
Physical limit?
Performance
Performance is ultimately constrained
by physical limits
E.g.:
Sailing ships & the power of the wind
Copper wire & transmission capability
Semiconductors & the speed of the electron
Time
Evolution of Measurement-While-Drilling tools
S-Curve
Performance = Data Transmission Rate (bit per second)
15
Physical limit: signal attenuation
14
13
12
11
10
9
8
7
6
5
4
Shallow wells only
All well conditions
3
2
Dominant Design = Continuous
Mud Pulse Telemetry
1
0
1
2
3
4
5
6
7
R&D Effort (measured in Generations = +/- 3 years )
8
9
Improvements in Modem Speed
60000
Modem Speed, Bps
50000
40000
30000
20000
10000
0
1960
1965
1970
1975
1980
Time
1985
1990
1995
2000
The Evolution of Palomar’s Products:
Laser Based Skin Treatment
E2000
Ruby Laser
LightSheer
400 pounds
MediLux
48 pounds
120 Pounds
Product
EpiLaser™
E2000™
LightSheer™
SLP1000™
EsteLux™
MediLux™
NeoLux™
StarLux™
Lux Handpieces
Home Devices
Material
Price
Cost
$150K
$80K
$130K
$60K
$100K
$40K
$65K
$25K
$40K
$ 4K
$50K
$ 4K
$30K
$ 4K
$80K
$ 5K
$10K
$ 1K
?
?
Year
1996
1997
1998
2000
2001
2003
2003
2004
2002-4
?
Year
1994
0
1996
1998
2000
2002
2004
2006
20
Price, Cost $000
40
60
80
100
120
140
160
Price
Cost
Moore’s Law at Work
$1,000,000,000.00
10x reduction
every 7.5 years
$100,000,000.00
$10,000,000.00
Dollars per MIP
$1,000,000.00
$100,000.00
10x reduction every
4.25 years
$10,000.00
$1,000.00
$100.00
$10.00
$1.00
$0.10
$0.01
1959
1969
1979
1989
1999
[Source: Hans P. Moravec 1998-2003]
2009
Semiconductor Performance: Minimum Line Width over Time
Year
1960
0
2
Minimum Feature Size
4
6
8
10
12
14
16
1965
1970
1975
1980
1985
1990
1995
2000
2005
Semiconductor Performance: Minimum Line Width over Time
Year
0.1
Minimum Feature Size
1960
1
10
100
1965
1970
1975
1980
1985
1990
1995
2000
2005
Modeling the returns to effort vs. time
Performance
Performance may be a non linear
function of effort expended: in
mature industries more and more
effort may lead to less and less
progress, while progress in emerging
industries may be “surprisingly” fast
Effort
Semiconductors: Minimum feature size vs "effort"
Cumulative commerical patents
Minimum feature size
0.1
0
1
10
10000
20000
30000
40000
50000
60000
Reflections on the S Curve

Which unit of analysis?
– Industry? Firm? Technology? Product?



Which dimension of performance?
Effort vs. time?
Can performance limits be predicted?
The S curve is best viewed as a tool for triggering
discussion, not as a “scientific reality”
The Evolution of Markets
or
Predicting the pattern of
customer needs
Market Evolution over the Life Cycle



Market segmentation
Crossing the chasm
New markets, new needs:
– The Innovator’s Dilemma
The Key Question:
Who buys a technology as it evolves?
Performance
Time
Understanding market dynamics:
Basic segmentation (Rogers)
Units
Bought
Early
Majority
Late
Majority
Early
Adopters
Innovators
Laggards
Time
Adopters differ by, for example, social, economic status -particularly resources, affinity for risk,
knowledge, complementary assets, interest in the product
Understanding market dynamics:
Crossing the chasm: (Moore)
Units
Bought
Crossing the chasm?
Early
Majority
Late
Majority
Early
Adopters
Innovators
Laggards
Time
Making the transition from “early adopters” to “early majority” users often
requires the development of quite different competencies: e.g. service,
support capabilities, much more extensive training.
Managing customers at moments
of discontinuity
Who buys a technology
when it is first
introduced?
Performance
New technologies sell to:
- New customers
- With new needs
- Often at lower margins
Time
The Innovator’s Dilemma: “Disruptive”
technologies may threaten established firms
Established technology
Performance
Mainstream customer needs
Invasive Technology
Niche customer needs
Time
Clay Christensen: The Innovator’s Dilemma
Unpacking the Innovator’s Dilemma:
The case of the power bar
Step & Repeat aligners initially sold to
customers with different needs:
Speed
Scanning Projection
Aligners
Step & Repeat
Aligners
Yield
But then they improved enough to take the
whole market
Speed
Scanning Projection
Aligners
Step & Repeat
Aligners
Yield
Changing Tradeoffs in Photolithography
140
S&R 2
120
Scanning
Projection
Aligners
Speed (wafers/ming)
100
80
60
40
S&R 1
20
0
0
1
2
3
Yield
4
5
6
Initially, PDAs did not seem to be a
threat to PCs:
Speed,
Power,
Memory
PCs
?
PDAs
Time
PDAs sold to customers with different
needs:
Speed,
Power,
Memory
PCs
PDAs
Weight/cost
But as PDAs improve they may come to
challenge PCs
?
Speed,
Power,
Memory
PCs
PDAs
Weight/cost
Or consumer preferences may change
Speed,
Power,
Memory
PCs
?
PDAs
Weight/cost
Exercise: Industry Evolution


Consider the two industries:
– Publishing (Books or music)
– Cellular telephony
For each industry:
– Sketch the relevant S curves.
• What are the appropriate (technical) measures of
performance? Are there more than one?
• Where is this industry now? Are there major growth areas
or discontinuities on the horizon?
– Sketch the likely trajectory of customer needs

Choose one industry and be prepared to present your
results to the group
Managing the change in customer
groups may be the hardest task!
Performance
Leading edge customer
focused research may be
a critical capability
Effort
The marketing strategy issue at a major
materials supplier:
SBU 1
CR&D
$100m
Biomaterials
work
?
SBU 2
The
Market
SBU 3
?
What can be done?



“Ready, aim, fire”
Small scale experiments
Market research of all kinds:
–
–
–
–

Conjoint analysis
Direct customer contact
Virtual products
Lead user research
Significant resources required?
Creating Value:


Understand how customer needs will evolve
Understand how technologies will evolve
– (Both your own and those on which you rely)

Develop world class products and services that meet
customer needs
How shall we capture
value?
Uniqueness, Complementary Assets &
the Structure of the Value Chain
The second of two key questions:
How will we
Create value?
How will we
Deliver value?
How will we
Capture value?
How shall we capture value?

How should we design the business model?

Where should we compete in the value chain?

How should we compete if standards are
important?
Or:
What determines the Inventor’s Share?
Suppliers
Imitators,
followers
Customers
Inventor
Is it the case that
great ideas = pots of money?
Value
captured
Coca Cola
Wal Mart
Dell
Xerox (early)
Viagra
Nylon
Apple
Xerox (late)
RC Cola
Value created
(through “raw” invention)
Three key ideas:

Uniqueness
– Controlling the knowledge generated by an innovation

Complementary assets
– Controlling the assets that maximize the profits from
innovating

Understanding the dynamics of the value chain
– Should we buy our suppliers? Distributors?
– Should we outsource our manufacturing…
distribution… sales… capability?
Uniqueness is very important:

If a particular innovation, or the knowledge on which it
rests, can be completely “appropriated” (i.e.,
completely controlled or protected) then the innovating
firm may be able to maintain a unique position. This is
a tremendous source of bargaining power.
Sources of Uniqueness

Intellectual property protection
– Patents
• Finite length
• The right to prohibit “producing”
– Copyrights
• The right to prohibit “copying”

Secrecy
– Trade secrets & non compete clauses
– “Tacit” knowledge

Speed
IP in historical perspective
US Patents granted per 1000 population
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1840
1850
1860
1870
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
The 2003
Intellectual Property Owners Association
Survey on the Strategic Management of
Intellectual Property in America’s Corporations
Iain Cockburn
Boston University and NBER
Rebecca Henderson
MIT and NBER
Survey methodology




Targeted at senior IP managers, typically Chief Patent
Counsel
Depth at the expense of breadth: 18 page
questionnaire, more than 120 questions!
Core sample frame: IPO membership, supplemented
with additional mailing to Delphion list
Response rate: 1/3 of IPO membership, 5% of others.
N=66.
Sample characteristics

Sample of responding companies dominated by large
manufacturing companies
–
–
–
–


Chemicals 22%
IT and communications 44%
Life sciences 15%
Mechanical 16%
Average sales $20bn, 2001 market cap $44bn
Average of 14 full time IP attorneys, 264 patent
applications, $91MM licensing revenue
We found:



Many companies report limits to the effectiveness of
patents: 43% (!) agree that “many of our most important
ideas cannot be effectively protected with patents”
Yet most rate formal IP rights the most important means
of controlling the use of technology
Contract law (NDAs, NCAs etc.) also highly rated
Strategic use of IP?

Our overall impression is that the IP strategy of the
majority of companies is defensive
– Non-confrontational responses to competitors
– Relatively conservative and cautious policies

Companies are ambivalent about the role of IP in
business strategy
– Many report that profitability and returns to R&D are linked
to strong IP positions and aggressive strategic posture, but
few report activity by their company consistent with this…
Competitive interaction in IP

65% of surveyed companies report that the most profitable
companies in their industry “react aggressively to IP activity
by competitors”

But
– Less than 20% would attempt to “fence in” an aggressive
competitor by building IP assets
– More than 90% do not “always evaluate competitor reactions”
when filing patents
– Only 1/3 anticipate triggering an “arms race” if many new
patents are filed
So

It is critically important to proactively develop an IP
strategy that is tightly integrated to the strategic goals
of the business

But…
Uniqueness is powerful but often
difficult to maintain

Legal mechanisms can be costly to create, and then
even more costly to enforce: and sometimes they
require public disclosure
 Secrecy may be difficult to maintain
 Speed is hard work, and sometimes imitable
What are Complementary Assets?


Those assets that allow a firm to make money, even if
the innovation is not unique:
The answer to the question:
– If our innovations were instantly available to our
competitors, would we still make money? Why?
In the best case, complementary assets
should be tightly held

Complementary assets that are tightly held are not
easily available to entrants or to most competitors
Types of Complementary Assets

Things you can do
–
–

Manufacturing capabilities
Sales and service expertise
COMPETENCIES
Things you own
–
–
–
Brand name
Distribution channels
Customer relationships
RESOURCES
In successful firms, competencies
create resources, and vice versa:
Competencies
Resources
Exercise:
Position:
Frozen foods
Publishing
Cell phones
Your industry/firm
Complementary assets are:
Available
Easy to
maintain
Uniqueness is:
Hard to
maintain
Tightly
held
Uniqueness & Complementary Assets
over the Life Cycle:
Uniqueness
Maturity
Takeoff
Ferment
Complementary
Assets
Managing discontinuities means
managing complementary assets:
Maturity
Performance
Takeoff
Discontinuity
Which of my complementary
assets are useful?
Ferment
Time
Uniqueness & Complementary Assets:
Strategic Imperatives



Defend uniqueness if possible and appropriate
Build complementary assets in advance of competition
At moments of discontinuity ask:
– Are my complementary assets useful?
– If so, which ones?
How shall we capture value?

How should we design the business model?

Where should we compete in the value chain?

How should we compete if standards are important?
Power in the Value Chain
Porter’s “5 (actually at least 7) Forces”:
Thinking about the balance of power
“Complementors”
Suppliers
Entrants
Rivals
Substitutes
Political,
regulatory and
institutional
context
Buyers
C.Assets/Uniqueness speak to Rivalry
and the Threat of Entry.
Entrants
Suppliers
Rivals
Substitutes
Buyers
Porter reminds us to think about the
structure of the value chain:
Entrants
Suppliers
Rivals
Substitutes
Buyers
Powerful suppliers and buyers may
constrain profitability
Suppliers
Buyers
Does this mean that if the
money is down (up) stream
we should forwards
(backwards) integrate?
If the money is in lobster
restaurants,
should the lobster fisherman go
into the restaurant business?
Key Questions:

When should an entrepreneurial firm develop it’s own:
–
–
–
–

Manufacturing
Distribution
Sales
…..
capabilities?
When should a mature firm outsource it’s:
–
–
–
–
Manufacturing
Distribution
Sales
…..
capabilities?
Exercise:

Under what conditions should an entrepreneurial firm
develop it’s own:
–
–
–
–

Manufacturing
Distribution
Sales
…..
capabilities?
And when should it subcontract/partner for them?
Comparing “make” vs. “buy”
Startup
Startup
Asset
Asset
Supplier
Supplier
Key Considerations:

How easy is it to write contracts?
– How tight is the IP regime?
– How much uncertainty is there?
– “Specificity” of the asset – how “thick” is the market?

What will happen to “entrepreneurial energy”?

What will be the key complementary assets going
forward?
Make vs. Buy over the life cycle
Performance
Mostly Buy?
Mostly Make?
????
????
Time
So “make” (i.e. do it in-house) if:


There are significant IP worries
There are likely to be contractual problems
– We can’t be sure of getting the “fair” price
– We can’t be sure they’ll do the work “right”
– I.e., when market are “thin” or there is limited
information


We have unique competencies that are relevant
And if buying won’t destroy everyone’s incentives to
be creative and energetic
But remember…



One cannot “buy” profit – if everyone knows it is there
– it will be in the price
Besides, shouldn’t we “stick to our knitting”?
Wouldn’t you rather deal with an independent firm,
whom you could fire, than an internal subsidiary?
Make vs. Buy
Entrepreneurial
Drive,
Freedom from
the “old ways”
Make
Buy
Control & Coordination
Standards and Strategy:
Competing in Increasingly
Open Worlds
Professor Rebecca Henderson
MIT Sloan School of Management
Phone: (617) 253-6618, Email: [email protected],
http://www.mit.edu/people/rhenders/home.html
What is a standard?

A standard is a specification that allows for
interoperability

Eg:
–
–
–
–
–
Cups and lids
Pistons and engines
Telephones and sockets
Speakers and amplifiers
Hardware and software
Questions:







What is a standard?
What are switching costs?
What are network effects?
What is positive feedback?
What does increasing returns mean?
What does it means when a market “tips”?
What is lock-in?
What is the significance of “winner-takes-all”?
Answers:








A standard is a particular interface, format or system that allows for
interoperability
Switching costs are incurred when a customer changes from one supplier
or marketplace to another. The greater the costs, the more difficult it is to
switch
A product or technology benefits from network effects or network
externalities if a significant part of its value to a consumer lies in the size of
its (actual or anticipated) installed base, or market share
Positive feedback involves a chain of consequences that produces a
dynamic outcome by feeding off itself – an amplification effect
Success becomes self-reinforcing with increasing returns to scale.
Demand creates further demand
If consumers believe that one standard is going to capture a very large
share of the market, and that a competing standard is not viable, then the
market will “tip” towards the more successful standard
Lock-in occurs once a market has tipped. Switching costs may be high,
and it is therefore difficult to get a market to tip to an alternative standard
The Microsoft operating system monopoly exemplifies “winner-takes-all”
Outline




Moving from “product” to “systems” competition
Coming soon to an industry near you: the push for
public open standards
Will all markets “tip”? – managing the complexity of
standards evolution
Making money in an open world
It’s not just about high technology




Bicycles
Financial services
Health care
Automobiles
The challenge
Performance
Selling
products
Selling (parts of)
interconnected
systems
Time
Selling Products

Customers who care about
products “on their own
terms”: is this the right
product for me?

Build the “best” product
– Best designed
– Lowest cost
– Most reliable
Selling Interconnected
Systems

Customers who care about the
total system experience: will
this connect with the rest of my
world?

Control the architecture
Or
Influence the architecture and
build the best products within it

These transitions raise both strategic
and organizational questions
What strategy
should
we pursue?
Performance
How do we execute it?
Time
The push for public open
standards
The pros and cons of open standards

Pros

Pros

Cons

Cons
Thinking about the dynamics of the
strategic space
Access is:
Open
Public
Details of standards are
available to all: no
single firm has control
over how they evolve:
no charge for their use
E.g. TCP/IP, HTML
Closed
Standards are owned
and controlled by the
public sector but are not
freely available
E.g. Cryptography
Control is:
Private
Details of standard are
made available to all:
but owner has control
over how the standard
evolves and may
charge for use
E.g. Nintendo, Palm OS
Technology may be
standard, but details
are not made available
beyond the firm
E.g. Landmark Graphics,
IBM 360
In practice these boundaries are fuzzy:
Access is:
More
Open
More
Public
Control is:
Linux
Symbian
IBM
360
CDMA
More
Private
More
Closed
Windows
Mercury/
Corba
Conventional logic (1):
What do customers prefer?
Access is:
More
Open
More
Public
Control is:
More
Private
More
Closed
Conventional logic (2):
What do producers prefer?
Access is:
More
Open
More
Public
Control is:
More
Private
More
Closed
Wireless communications in transition
Market Share
Service Provision
T-Mobile Orange NTT DoCoMo
Vodafone
Network Operation
Applications
Series
60-90
Value Share
UI
Nokia
Motorola
Symbian
Siemens Samsung
EMS Players
Device Manufacture
Windows
Microsoft
Windows
Clones and Asians
Sony
Ericsson
BREW
Chipset Design
Chipset Manufacture
UIQ
Microsoft
SavaJe
Microsoft
Linux
Symbian
Symbian Symbian
Operating Systems
Device Design
Series
60-90
Vodafone
Live!Live!
TI
Motorola
Infineon
I-250 and beyond
W-CDMA Qualcomm
Will all markets tip?
Or:
Getting a standard established
Tipping

Markets “tip” when one standard becomes the
preferred choice of nearly every consumer
– VHS
– Windows on the PC

Not all markets tip: in some markets multiple
standards co-exist
–
–
–
–
UNIX vs. Windows on servers
Sony vs. Microsoft in video games
Palm vs. Windows CE in PDAs
Multiple standards in cellular phones
“Great products” vs. “Architectures”
Great Products

Consumers base their
purchase decision on the
intrinsic value of the product
to them

What would this be worth to
me if I were the only buyer in
the world?
Competition on the basis of
features, price etc

Architectures

Consumers base purchase
decisions on the size of the
(actual or projected) installed
base and/or the (actual or
projected) availability of
network externalities

How many other people are
likely to buy this product?

Competition on the basis of
the size of network effects:
installed base, availability of
complementary products etc
With Strong Network Effects Market
Share Itself Creates Value
Value to
consumer
Value of standards
Driven product
Conventional product
Actual (or anticipated) size of the installed base
31
If network effects are important,
markets may “tip”
1
Probability
the next
consumer
chooses to
buy A
0
0
A’s share of installed base
1
28
Probability of Purchase vs Share of sales: Betamax
120
100
Share of sales
80
60
40
20
0
0
20
40
60
Share of installed base
80
100
120
Share of installed base vs purchase probability: VHS
100
90
80
Share of sales
70
60
50
40
30
20
10
0
0
20
40
60
Share of installed base
80
100
Annual Production: VHS vs Beta
50000
45000
40000
Annual Production, Thousands of units
35000
30000
25000
VHS
20000
15000
10000
Betamax
5000
0
1974
1976
1978
1980
1982
Year
1984
1986
1988
1990
Tipping dynamics differ with the
strength of network effects
Products with
extensive N.effects
Value to
consumer
Products with
“threshold”
network effects
Conventional product
Actual (or anticipated) size of the installed base
Markets with moderate network effects only
tip once critical thresholds are reached
1
Probability
the next
consumer
chooses to
buy from
Firm A
0
1
Firm A’s actual or anticipated share of installed base
Will this market tip?
Market Share
Service Provision
T-Mobile Orange NTT DoCoMo
Vodafone
Network Operation
Applications
Series
60-90
Value Share
UI
Microsoft
Linux
Symbian
Symbian Symbian
Operating Systems
Device Design
Nokia
Motorola
Symbian
Siemens Samsung
EMS Players
Device Manufacture
Windows
Clones and Asians
Sony
Ericsson
BREW
Chipset Design
Chipset Manufacture
Series
60-90
Vodafone
Live!Live!
Windows
UIQ
Microsoft
SavaJe
Microsoft
TI
Motorola
Infineon
I-250 and beyond
W-CDMA Qualcomm
How are standards established?

Standards “win” when a critical mass of consumers
have adopted them

OR:

When a critical mass of key players believe that the
standard will be adopted.
Establishing a standard: Sun


Sun founded in 1982 to focus on the workstation
market
“Open” standard:
– Standard components,
– UNIX operating system
Sun (2)

1980: Apollo founded
 1983: Apollo has $18m in sales, dominates the
workstation market -- uses a proprietary operating
system
 1983: Sun has $1m in sales, mostly to universities
 Lead customer, Computervision “likes the technology
but doesn’t find the company credible” -- “we love your
technology but there is no way you can supply it.
Apollo is the standard in the industry, well financed
and well managed.”
 What should Sun do?
Establishing a standard





Introduce a great “product”
Come to market ahead of competition
Build expectations
Develop, or encourage the development of,
complementary products and services
Give it away: put the standard in the public sector
Making money in
an open world
Where’s the money?
Competition in a closed, private world
Where’s the money?
Competition in an open private world
Where’s the money?
The challenge of an open public world
Making money in an open public world

Competing on a level playing field:
– Do it better, faster, cheaper, in a more integrated way…
– Leverage “complementary assets”

Be part of the evolution of the playing field:
– Exploring “soft” standards
Business models in the different
quadrants
The technology is:
Open
Public
Control is:
Private
Closed
Compete on a
level field
Move to “soft”
standards?
Run hard
Encourage the
Deliver a best in
“ecosystem”
class system
Embrace/extend
Run hard
Run hard
Exploring soft standards
A “soft” standard is a specification that is completely
compatible with current public standards but offers
enhanced functionality and performance
 It offers customers the security of knowing that they
have avoided being “locked in” and an upgrade path
to the public standard
 Plus the functionality and performance of a more finely
“tuned” technology
 May permit significant premium pricing and the
generation of customer loyalty

Soft standards in action:
“Soft” standard
Perf.
Public
standard
Time
Managing soft standards

Maintaining customer trust is critical:
– The instant they come to believe you’re trying to lock
them in, there will be trouble

The technology task is complex. The “soft” standard
must be:
– Better than the public standard
– Compatible with the current version
– Compatible with future versions

Ensuring that the “soft” technology is embodied in
future generations of the technology may be a central
strategic goal
Summary





The move from “product” to “system” competitions raises
both strategic and organizational issues
And increases the force behind the push for open
standards
Not all markets tip: but as network effects (connectivity,
complementary services, tools, products) become more
important, more and more will.
Getting a private standard established in these kinds of
worlds is likely to be very hard
Fortunately, there are ways to make money in an open
world - but managing a “soft” standard requires sustained
attention
Summary
Two day outline:

How will we create value?
– How will the technology evolve?
– How will the market change?

How will we capture value?
– How should we design the business model?
– Where should we compete in the value chain?
– How should we compete if standards are important?

How will we deliver value?
– How do we manage the core business and real growth
simultaneously?
– How do we use our strategy to drive real resource allocation?
Putting the pieces together….
Technology
Competition
Markets
Organization
Maturity
Takeoff
Ferment
Tomorrow:
Organizational Competence & Change
Performance
?
?
Time
For tomorrow: KODAK

Evaluate Kodak’s digital imaging strategy to date
– “B+” or “F”?

How would you evaluate the decision to invest in
digital imaging:
– In the 80s? In the 90s? Now?


Given that they made the decision to invest, how
would you evaluate their execution?
What should Kodak do next?
– Where should they try to play in the digital value chain?
– How should they organize their digital efforts?