ECP 6701 Competitive Strategies in Expanding Markets

1. ECP 6701 Competitive Strategies in Expanding Markets How High-Tech Markets Develop

2. Readings “How High-Tech Markets Develop” in Geoffrey Moore, Paul Johnson and Tom Kippola, The Gorilla Game, Harper Collins Publishers, 1999, pp 21-46.

3. Tornado Theory • The tornado is a compressed period of hyper-growth coinciding with the first surge of mass-market adoption of any new technology. • It puts a company into a position of a dominant competitive advantages • The tornado is related to the existence of network externalities.

4. Discontinuous (drastic) Innovations • In most industries innovations are continuous or incremental. • They build upon the standards and infrastructure already in place. • Examples of continuous innovations are a new car, a new computer, a new TV, quality circle etc.

5. Discontinuous Innovations • From time to time technology breakthroughs bring discontinuous innovations. • These innovations introduced novel benefits that required new infrastructure investment and complementary products. • Examples include the first car, the first PC, Windows, the first fax machine, the internet, the cell phone.

6. The Technology Adoption Life Cycle • This model offers the foundation for understanding how high-tech markets develop. Early Majority Late Majority Early Adopters Laggards Innovators

7. The Technology Adoption Life Cycle • Whenever a market is exposed to a discontinuous innovation, customers will seft-segregate into • Technology enthusiasts (innovators) • Visionaries (Early adopters) • Pragmatists (Early Majority) • Conservatives (Late Majority) • Skeptics (Laggards)

8. Technology Enthusiasts • This type of customer believes in technology • He/she is willing to experiment with discontinuous innovation to explore its properties. • This group includes hackers and independent developers of technology who are exploring the frontiers of the internet and elsewhere. • They are not representatives of the marketplace at large.

9. Visionaries • Highly placed executives interested in leapfrogging the rest of their industry. • Their goal is set themselves apart from the herd. • They love to do things others do not do. • Their endorsement of a technology is not a good predictor of whether a main street market will develop.

10. Pragmatists • These technology users (customers) are the herd. • They adopt the new technology only if and only if everybody else does. • They make or break the success of the new technology. • They create the hyper growth region in the Technology Adoption Life Cycle.

11. Conservatives • These users are much happier to stay with the existing technology than adopt the new one. • Buying late allows them to exploit mature competition and get better prices. • By the time this customer gets into the market the gorilla game (market shares) has been decided. • Instead of hyper growth, conservatives support gorilla earnings

12. Skeptics • They see technology as overpriced and overpromised. • They are significant for their ability to hinder or block the adoption of discontinuous technology. • They prefer low-cost, non-technical solutions.

13. High-Tech Market Evolution • High-tech market development consists of the following phases: • Early market (new entrant) • The Chasm • The Bowling Alley • The Tornado (rising star) • The Main Street (cash flow) • End of Life (extinction)

14. The Early Market • Early market starts with visionaries supported by technology enthusiasts. • Adoption of new technology is based on individual customers (highly placed executives) not market segments. • The early market is a gestation phase for the new company. • It gives the company a chance to prove the feasibility of its technology

15. The Chasm • During the Chasm there is no natural customer for the discontinuous technology. • The Chasm is created because there is a polar opposition between the visionary and the pragmatist. • During the Chasm, visionaries start loosing interest and pragmatists are not ready to adopt the new technology.

16. The Chasm • Incumbent companies unite to expel the intruder by engaging in rent-protection activities. • If the innovator cannot secure a market position relatively quickly, it will die in the chasm. • Examples: Neural networks, pen-based computing, desktop videoconferencing.

17. The Bowling Alley • This phase represents the market penetration phase of the Technology Adoption Life Cycle. • Pragmatists are willing to adopt the new technology. • A subset of pragmatists are facing real problems and the new technology provides the solution (demand meets supply). • The demand for new technology comes from “broken, mission critical business processes”.

18. The Bowling Alley • Examples of niche markets for discontinuous technologies. • Graphic artists for the Macintosh • Pharmaceutical regulatory affairs for Documentum document management systems. • Wall Street traders for Sun workstations and Sybase data bases. • Managers who are under “broken-process” pressure will sponsor a new technology ahead of the herd.

19. The Bowling Alley • During this phase the ongoing market growth for the new technology will be niche to niche. • Each new niche creates a period of micro hyper growth. • Many markets stabilize in a state of “bowling alley forever” (Applied Materials, Lam Research in semiconductors). • These companies do not go to Main Street.

20. The Tornado • It is metaphor for the hyper growth stage when pragmatists adopt the new technology en masse. • It represents the proliferation phase of the life cycle. • It is caused by the same dynamics that creates the chasm operating in reverse. • Here is where the initial phase of network externalities appears.

21. The Tornado • The Tornado has been associated with customer adoption S-curves. • These curves track the proliferation of telephones, TVs, faxes, email, word processors, DVDs, etc. • The Tornado has an impact on market shares and leads to the birth of gorillas (Microsoft, Intel, Cisco, Oracle etc). • The Tornado determines the winners of standards and the standard-setter becomes the gorilla.

22. Main Street • Main Street represents the assimilation phase of the adoption process. • It is characterized by • incremental improvements in technology, • high earnings for the gorilla, • Long time (about 20 years ) as opposed to the Tornado (2-3 years) • Scale economies and scope economies that protect gorilla’s profits.

23. Total Assimilation • This represents the end of the Technology Adoption Life Cycle. • The market becomes a traditional one. • Think of cars, televisions, microwave ovens, and other mature products. • Gorilla’s maintain their market shares during this “end of life” phase.

24. Lessons and Conclusions • Main Street is a very long phase • The power relationships that will govern the market in the long run are established permanently during the Tornado phase. • Like everything else, Main Street ends too. • End of life starts only when an alternative technology enters its Tornado (substitution threat)

25. Lessons and Conclusions • The process of “creative destruction” • PCs have displaced terminals • Windows has displaced the DOS system • World has displaced Word perfect • DVDs have displaced VHS videos • HD DVD will probably displace DVDs.