STRATEGY AND TECHNOLOGY

Learning Objectives
Understand the tendency toward standardization in
hi-tech markets
Describe strategies used to establish a technology as
the standard
Explain the cost structure of hi-tech firms and
articulate strategic implications
Explain nature of technological paradigm shifts and
their implications
7-2
Whoever is first in the field and
awaits the coming of the enemy, will
be fresh for the fight; whoever is
second in the field and has to hasten
to battle will arrive exhausted.
7-3
- Sun-Tzu
High-Technology Industries
Technology is:
Scientific knowledge used in production of goods or services
High-technology is:
Accounting for a larger share of economic activity
Revolutionizing the product or production system in industries
not thought of as high-tech
Retailing going online
Production of food products applying biotechnology and genetic
engineering
7-4
those in which the underlying scientific
knowledge that companies in the industry use is
advancing rapidly (as) are the attributes of the
products/services that result from its application
are also advancing rapidly.
Examples of High-Tech Industries
Computer Industry
PC and software
Telecommunications
Wireless and Internet
Digital
DVD players, gaming terminals, camera
Pharmaceutical
Cell biology, recombinant DNA, genomics
Power Generation
Fuel cells, aerospace
7-5
Technical Standards and Format Wars
Format wars
One standard will come to dominate a market.
Many battles in high-tech industries are companies
competing to set standard.
Battle over which smartphone operating system will
become the standard (Symbian, Microsoft, Google, Apple)

7-6
standards are a set of technical specifications
that producers adhere to when making the
product or a component of it.
Product differentiation and competitive
advantage are based on a technical standard.
Technical Standards for Personal
Computers
7-7
Figure 7.1
Benefits of Standards
Guarantee compatibility between products &
complements
Reduce consumer confusion (Ex. DVD players
and disks)
Reduce production costs - economies of scale
Reduce risks associated with supplying
complementary products (Operating system for
PC)
7-8
Standards lead to low-cost and
differentiation advantages for companies.
3 Ways Standards Emerge:
1. Firms lobby the government to mandate industry standard-
public domain.
2. Standards often set by cooperation among firms through
industry forums.
3. Standards often selected by market demand:
Network effects
Size of complementary products network is primary
determinant of demand
Positive feedback loop
The greater the value of the product, the greater the demand
(VHS player)
Lockout
Alternative standards become locked out of the market
because of switching costs
7-9
Positive Feedback in VCR Market
7-10
Winning a Format War
Ensure supply of complement
Diversify into the production of complements
Create incentives for supplier of complements
Killer applications-
New products so compelling customers adopt rapidly killing
demand for competition
Aggressively price/market- razor and blade strategy
Price product low to increase installed base, price complements
high for profits
Cooperate with competitors
Sony cooperating with Philips on developing laser technology
License format
Reduce incentive for competitors to develop own
7-11
Successful strategies revolve around finding ways to make
network effects work in their favor and against their
competitors:
Cost Structures in High-Tech
Industries
7-12
Law of
Diminishing Returns
To produce more of a good, a
company hires more labor invests
in more plant/machinery
additional resources are not as
productive increasing marginal
costs.

7-13
Strategic Significance of
High-Tech Cost Structure
If can shift from cost structure with
increasing marginal costs to a
structure with high fixed costs but
low marginal costs = profitability
may increase.
When company faces high fixed
costs/low marginal costs, it should
drive prices down to drive up
volume.
7-14
Fixed costs of developing product are very high, but
costs of producing additional units are low:
Strategy of pricing low to drive volume to reap wider
profit margins is central to business model of some
successful high-tech companies.
Impact of Imitation on First Mover
Profits
7-15
First-Mover Advantages
5 key Advantages:
Opportunity to exploit network effects and positive
feedback loops
Ability to establish significant brand loyalty
Ability to ramp up sales volume early and have cost
advantages due to learning effects and scale economies
Ability to create switching costs for customers
Ability to accumulate valuable knowledge

7-16
First to develop/pioneer revolutionary products
can lead to enduring competitive advantage
Being first-mover does not guarantee success.
Success depends on first-mover strategy pursued.
First-Mover Disadvantages
1. Pioneering cost
develop technology & distribution channels
educate customer
2. Prone to mistakes
uncertainties in new market
3. Risk building wrong resources & capabilities
mass-market may differ from the needs of early
adopters
4. May invest in inferior/obsolete technology
if underlying technology advancing rapidly
7-17
Exploiting First-Mover Advantages
Strategies
1. Going it alone- develop/market innovation

2. Strategic alliance/joint venture- develop/market
innovation with other companies

3. License innovation- let them develop the market
Choosing strategy:
? Does company have complementary assets to exploit
innovation?
? How difficult for imitators to copy innovation?
? Are there capable competitors who could rapidly
imitate innovation?

7-18
Strategies for
Profiting from Innovation
7-19
Ethical or not?
Your company is in a race with two other companies to
develop a standard for streaming high definition video over
the internet. You know that your technology is significantly
inferior to your rivals, but will likely be the first to market.
Moreover, you know that bundling your product with a very
popular system that your company already sells should ensure
widespread early adoption.
Because your company makes from its other products,
you consider initially pricing the new product at zero to
ensure rapid take-up to shut out your rivals. Once the market
locked into your offering, you can raise the price. One of your
colleagues suggests it is unethical to use financial muscle and
bundling strategies to lock out superior technology. Do you
agree with him? Why? Can you think of real-world situation
that is similar to this case?
7-20
Technological Paradigm Shifts
More likely to occur with:
Natural limits to technology- established technology is
mature & approaching natural limit where further
advances are not possible (Ex. Boeing 747)
New disruptive technology- entered marketplace and
taking root in niches poorly served by firms using
established technology
7-21
New technologies
emerge that:
Revolutionize structure of
industry
Dramatically alter nature
of competition
Requires firms adopt new
strategies
Technology S-Curve
7-22
Figure 7.5
Established and
Successor Technologies
7-23
Swarm of
Successor Technologies
7-24
Disruptive Technology
Revolutionizes industry structure &
competition
Causes technological paradigm shift
7-25
new technology that gets its start away from
mainstream of market and invades
main market as functionality improves...
Often causes decline of established companies
- because they listen to customers who say
they do not want it; ignore small market niches;
and new suppliers navigate to new entrants
Implications of Paradigm Shifts-
Established Companies
Knowledge about how disruptive technologies can
revolutionize markets is valuable asset.
Ask customers, Would you be interested in the new technology
if it improves its functionality over time?
Important for established firms to invest in newly
emerging technologies that may become disruptive.
Better to develop technology and cannibalize its existing sales
base than be taken away by new entrants
Commercialization may require different value
chain & cost structure.
7-26
Chances of success in developing & commercializing
disruptive technology will be enhanced if it is placed in
its own autonomous division
Implications of Paradigm Shifts-
New Entrants
Advantages:
No pressure to continue out-of-date business .
No worries on product cannibalization issues
No worry about established customer base, distribution
channels, or suppliers.
7-27
Challenges:
o Constrained by lack of capital
o Need to manage organizational problems from rapid growth
o Find way to take technology from small niche to the mass-
market
o Go it alone or partner with established company
The Five Most Disruptive
Innovations at CES 2014
Embedded sensors
Wearables: The Internet of You - new products have that
collect information about you and your body
Exponential Energy - explosion of new portable energy
technologies are appearing to help keep our growing supply
of rechargeable mobile devices and other electronics
running for longer periods away from a plug.
Driverless vehicles
Immersive Interfaces - the most promising include eye
tracking technologies that allow users to work with
computers without relying so heavily on their hands.
7-28
A businesss flexibility in adapting to
change and market dynamics will
mark the winners and losers in this
fast-changing Internet Age.
7-29
- Michael Dell
The guy with the competitive
advantage is the one with the
best technology.
- Walter Wriston
7-30
The Kolibree toothbrush
collects data on your brushing
habits including duration,
frequency, and neglected
zones in your mouth and then
communicates with your iOS
or Android smartphone thanks
to Bluetooth technology.