CHAPTER 7

STRATEGY AND TECHNOLOGY

[Contents]
1) Technical Standards and Format Wars
2) Strategies for Winning a Format War
3) Costs in High-Technology Industries
4) Capturing First-Mover Advantages
1

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 LEARNING OBJECTIVES

Understand the tendency toward standardization in many high-

technology markets
Describe the strategies that firms can use to establish their
technology as the standard in a market
Explain the cost structure of many high-technology firms,
and articulate the strategic
implications of this structure
Explain the nature of technological paradigm shifts and
their implications for enterprise strategy
2

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 [OPENING CASE]
A BATTLE EMERGING IN MOBILE PAYMENTS
Mobile wallets
Card-based payments
Carrier billing (Premium SMS or direct carrier billing)
Contactless payments NFC (Near Field Communication)
Direct transfers between payer and payee bank accounts in near real-time
(i.e) Google, and ISI (AT&T, T-mobile, Verizon)
(i.e) Squre, and Paypal didnt require a smartphone with an NFC chip

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 1) TECHNICAL STANDARDS AND FORMAT WARS

Technical standards
Set of technical specifications that producers adhere to
when making the product, or a component of it

Q. Why are standards so important in high-tech industries?

In high-tech industries, the source of product differentiation is
based on the technical standard
Often, only one standard will dominate a market
Severe competition to set the standard
The development of standards marks an important transition point
in an industry 4

Establishment of standards will draw new entrants

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1) TECHNICAL STANDARDS AND FORMAT WARS

Format wars

Battles to control the source of differentiation, and the

value that such differentiation can create for the customer

Dominant design

Common set of features or design characteristics

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[FIGURE 7.3]
TECHNICAL STANDARDS FOR PERSONAL COMPUTERS

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1) TECHNICAL STANDARDS AND FORMAT WARS

(i.e) QWERTY keyboard format

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 BENEFITS OF STANDARDS

i) Guarantees compatibility between products and their complements

(i.e) containers are used with railcars, trucks/ PCs are used with software application
ii) Reduces confusion in the minds of consumers (i.e) DVD players
iii) Reduces production costs (i.e) Wintel
iv) Reduce risks associated with supplying complementary products
v) Helps raise the level of industry profitability

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BENEFITS OF STANDARDS

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ESTABLISHMENT OF STANDARDS

Standards emerge in an industry when the benefits of esta

blishing are recognized
Technical standards are set by cooperation among busines
ses, through the medium of an industry association
When the government sets standards they fall into
the public domain
Public domain: Any company can freely incorporate the knowledge and
technology upon which the standard is based into its products
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NETWORK EFFECTS, POSITIVE FEEDBACK,
AND LOCKOUT

Network effects: Network of complementary

products as a primary determinant of the demand for
an industrys product
Positive feedback loops - Increase in demand for
a technology that triggers an increase in demand for
products that support it
Alternative standards get locked out as consumers
are unwilling to bear the switching costs 11

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 [FIGURE 7.4 ]
POSITIVE FEEDBACK IN THE MARKET FOR VCRS

The videotape format war : Betamax vs.VHS (1970-80s)

https://www.youtube.com/watch?v=0idmwXRhbdk
https://www.youtube.com/watch?v=r37lG3x6drY

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[FIGURE 7.4 ]
POSITIVE FEEDBACK IN THE MARKET FOR VCRS

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[EXAMPLE] MS OFFICE VS. GOOGLE APPS

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[EXAMPLE] APPLE VS. GOOGLE VS. MICROSOFT:
WHO WILL GET TO THE FUTURE OF PCS FIRST?

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[EXAMPLE] A FORMAT WAR IN CLOUD COMPUTING

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[GROUP ACTIVITY] CLOSING CASE
THE RISE OF CLOUD COMPUTING

1) What are the advantages & disadvantages of using

cloud services for individuals and businesses?
2) How does the adoption of cloud services affect the
revenues for computer & software makers?
Which companies will win and lose if individuals and
businesses continue to shift to using close services?
3) What individual advantages do you think Microsoft,
Amazon, or Google have in promoting their cloud-based
operating systems? 17

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 2) STRATEGIES FOR WINNING A FORMAT WAR

Make network effects work in ones favor and against competitors

i) Ensure a Supply of Complements:
There should be an adequate supply of complements
Build the installed base for the standard as rapidly as possible
(i.e) Sonys PlayStation with videogames

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 2) STRATEGIES FOR WINNING A FORMAT WAR

ii) Leverage killer applications

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

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 2) STRATEGIES FOR WINNING A FORMAT WAR

iii) Pursue aggressive pricing and marketing

Razor and blade strategy: Pricing the product (i.e. razor) low
to stimulate demand, and pricing complements (i.e. razor blades)
high

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 2) STRATEGIES FOR WINNING A FORMAT WAR

iv) Cooperate with competitors

The nearly simultaneous introduction of such incompatible techno
logies can create significant confusion among consumers, often lea
d them to delay their purchases;
(i.e) Sony and Philips; CD player

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 2) STRATEGIES FOR WINNING A FORMAT WAR

v) License the format

Others can produce products based on the format
The company that pioneered the format gains from the licen
sing fess
From the enlarged supply of the product; stimulate demand a
nd accelerate market adoption
(i.e) JVC & Matsushita adopted with its VHS format for the VCR
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[GROUP ACTIVITY] WEEK 11-1

Q.You are working for a small company that has

developed an operating system for PCs that is faster
and more stable than Microsofts Windows operating
system. What strategies might the company pursue
to unseat Windows and establish its own operating
system as the dominant technical standard in the
industry?

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[GROUP ACTIVITY] WEEK 11-2

Q. find an example of an industry that has undergone a

technological paradigm shift in recent years.
1) What happened to the established companies as that
paradigm shift unfolded?
2) What is the dominant product technology used in the
industry (in which your company is based)?
3) Are technical standards important in your industry?
If so, what are they?
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