Transcript BA469 lecture ch7.ppt

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Strategy in High-Technology
Industries
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$55 for a barrel of crude
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Demand – price of development
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Supply – in unstable areas
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US remains a major NET consumer
China demand rising, in addition to other developing
countries
Seasonal pressure – winter is approaching
Middle East – Iraq, Saudi Arabia
Africa – Nigeria
Gulf of Mexico still not producing
Long-term supply
Speculative activity
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Overview
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Technology
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The body of scientific knowledge used in
the production of goods or services
High-tech industries
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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
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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
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Technical standards
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Format wars
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A set of technical specifications that
producers adhere to when making the
product or a component of it
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
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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
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Companies may lobby the government
to mandate an industry standard
Technical standards are often set by
cooperation among businesses
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Public domain
Standard is often selected
competitively by market demand
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Network Effects and Positive
Feedback
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Network effects
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The size of the network of
complementary products is a primary
determinant of demand for an industry’s
products
Positive feedback
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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
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Lockout
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Switching costs
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Occurs when the market settles on a
standard and companies promoting
alternate standards are no longer able to
compete
The costs consumers must bear to switch
from a product based on one standard to
a product based on another
If consumers are unwilling to bear
switching costs, a company will be
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Strategies for Winning a
Format War
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Ensure a supply of complements
Leverage killer applications
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Aggressively price and market
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New technology or products that are so
compelling that customers adopt them in droves,
killing demand for competing formats
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 HighTechnology Industries
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Strategic Significance of HighTech Cost Structure
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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
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Intellectual property rights
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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
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Scale of the problem is very large
Legal and technological solutions are
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Managing Intellectual Property
Rights (cont’d)
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Strategies for managing digital rights
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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
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The company that is first to develop
revolutionary new products
If the new product satisfies unmet
consumer needs and demand is high:
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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
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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
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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 FirstMover Advantages
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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
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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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Technological Paradigm Shifts
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When new technologies emerge that
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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
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Paradigm shifts are more likely to
occur when
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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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Disruptive Technology
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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
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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
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Strategic Implications of
Paradigm Shifts for New
Entrants
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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
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