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Overview
Technology The body of scientific knowledge used in the
production of goods or services High-tech industries
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
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
Technical standards A set of technical specifications that
producers adhere to when making the product or a component of it
Format wars Battles to set and control technical standards
The source of product differentiation is based on the technical standard
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Benefits of Standards
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
Companies may lobby the government to mandate an industry standard
Technical standards are often set by cooperation among businesses Public domain
Standard is often selected competitively by market demand
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Network Effects and Positive Feedback
Network effects The size of the network of
complementary products is a primary determinant of demand for an industry’s products
Positive feedback Reinforcing network effects to encourage
adoption of a standard
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Lockout and Switching Costs
Lockout Occurs when the market settles on a
standard and companies promoting alternate standards are no longer able to compete
Switching costs The costs consumers must bear to switch
from a product based on one standard to a product based on another
If consumers are unwilling, a company will be locked out.
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Strategies for Winning a Format War
Ensure a supply of complements Leverage killer applications
New technology or products that are so compelling that customers adopt them in droves, killing demand for competing formats
Aggressively price and market 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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Strategic Significance of High-Tech Cost Structure
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
Intellectual property rights 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 Scale of the problem is very large Legal and technological solutions are required
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Managing Intellectual Property Rights (cont’d)
Strategies for managing digital rights 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
The company that is first to develop revolutionary new products
If the new product satisfies unmet consumer needs and demand is high: The first mover can capture significant
revenues and profits Revenues and profits signal an
opportunity to potential rivals
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First-Mover Advantages
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
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 First-Mover Advantages
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
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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Group Exercise
Explain how Dolby became a standard using concepts in the Chapter. (Refer to p. 233)
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Technological Paradigm Shifts
When new technologies emerge that 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
Paradigm shifts are more likely to occur when 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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Group exercise: Closing case
Name the paradigm shifts IBM weathered.
How did they weather these “storms”? Did they plant the seeds for the
eventual destruction of their PC business? Did they have a choice?
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Disruptive Technology
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
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 structure
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Strategic Implications of Paradigm Shifts for New Entrants
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 company