Technology Strategy

1. Technology Strategy Competition for sustainability in the era of information economy

2. Vision of corporation • 3M • Microsoft • GE • FedEx • Oracle • Sheseto • Xerox

3. Align technology with business • The price-quality tradeoff • The profit-share tradeoff • The growth-position tradeoff • The pioneer-harvest tradeoff • The consistency-diversity tradeoff • The enactment-response tradeoff

4. Clarify the core competence • Distinguished, non-imitable, substantial, marketable • Complementary technology • Critical technology • Externally acquired technology • Fundamental needed technology • Mature technology

5. Integration considerations • Integration for technology exploitation • Integration for order fulfillment • Integration • relevance vs. difficulty • Investment vs. controllability • Generic vs. specific • Modular design vs. integral design

6. Competitive advantage • Absolute advantage • Relative advantage • Critical to technology exploitation & integration arrangement • Clustering the position • Relative market power vs. absolute advantage vs. technology maturity

7. The strategic guide to information economy • System products • Standard competition • Rights management • Policy

8. System products • Complementary products • Different manufacturers • Strategy for complementors as well as competitors • Compatibility as strategic choice • Standards and interconnection • Hardware/software • Client/server • Viewer/content • Product lines • High fixed cost, low incremental cost • Leaders to value based pricing • Lower quality may be more expensive • Proliferation strategy

9. How Standards Change the Game • Expanded network externalities • Make network larger, increase value • Share info with larger network • Attracts more users • Reduced uncertainty • No need to wait • In war, neither side may win • Reduced consumer lock-in • Netscape’s “Open Standards Guarantee”

10. Change Game • Competition for the market v. competition in the market • Buy into an open standard, that becomes closed? • Competition on price v features • Commoditized products? • Competition to offer proprietary extensions • Extending a standard • Component v systems competition • With interconnection, can compete on components

11. Who wins? Who loses? • Consumers • Generally better off • But variety may decrease • Complementors • Generally better off • May serve the brokering role (DVD) • Incumbents • May be a threat • Strategies • Deny backward compatibility • Introduce its own standard • Ally itself with new technology • Innovators • Technology innovators collectively welcome standards • If the group benefits, there should be some way to make members benefit • Negotiation costs, opportunistic behavior

12. Formal Standard Setting • Essential patents must be licensed on “fair, reasonable and non-discriminatory” terms • ITU, ANSI and ISO • What is your goal? • National or international? • Protecting your interests? • What are others goals? • Do they really want a standard?

13. Tactics in Formal Standard Setting • Don’t automatically participate • If you do, you have to license • Keep up momentum • Continue R&D while negotiating • Look for logrolling • Trading technologies and votes • Be creative about deals • Second sourcing, licensing, hybrids, etc. • Beware of vague promises • Definition of reasonable • Search carefully for blocking patents • Patents held by non-participants • Preemptively build installed base

14. Building Alliances • Assembling allies • Pivotal customers should get special deals • But don’t give your first customers too big an advantage • Offer temporary price break • Who bears risk of failure? • Usually ends up with large firms • But bankruptcy favors small firms • Government is even better! • Smart cards in Europe

15. Standard is in danger if it lacks a sponsor Lessons of Unix Interconnection—searching a migration route Extension of TLC Negotiating a truce Do the benefit cost calculation How to divide a larger pie? Managing Open Standards

16. The standards game Player B openness Player A openness

17. Lessons from standards competition • Commoditize technology and complements • Competition requires allies • How does your standard affect competition? • Standards benefit consumers and suppliers, at expense of incumbents and sellers • Formal standard setting adds credibility • Find natural allies • Before a battle, try to negotiate a truce • Try to retain control over technology, even when establishing an open standard

18. Rights Management • The characteristics of information • The structure of cost • Low reproduction cost is two-edged sword • Cheap for owners (high profit margin) • But also cheap for copiers • Maximize value of IP, not protection • Examples • Library industry • Video industry

19. Information & cost • Anything that can be digitized • Text, images, videos, music, etc. • Unique demand characteristics • Expensive to produce, cheap to reproduce • High fixed cost, low marginal cost • Not only fixed, but sunk • No significant capacity constraints • Particular market structures • Monopoly • Cost leadership • Product differentiation (versioning)

20. Policy • Understand environment • IP regime • Price discrimination • Illegal if it “effectively lessens competition” • Legal arguments that work • Can set lower prices resulting from lower costs • Set differential prices to meet competition • Pricing only questionable if it “lessens competition” • Competition policy • Regulation • Antitrust

21. Tactics for Lock-In and Switching Costs • Systems lock-in: durable complements • Hardware, software, and wetware • Individual, organizational, and societal • Example: Stereos and LPs, Costly switch to CDs • Deeply digging the Network Effects • Value depends on number of users • Positive feedback • Indirect network effects • Expectations management, preemption • Compatibility • Backwards & forwards

22. Classification of Lock-In • Durable purchases and replacement: declines with time • Brand-specific training: rises with time • Information and data: rises with time • Specialized suppliers: may rise • Search costs: learn about alternatives • Loyalty programs: rebuild cumulative usage • Contractual commitments: damages

23. Follow the Lock-in cycle Brand Selection Sampling Lock-In Entrenchment

24. Implications for strategy • Protects competition as a process • Monopoly isn’t illegal, but attempt to monopolize is • Monopoly may be inhibited from using strategies that are legal for other firms • But even small firms may be accused of antitrust violations • Role of treble damages

25. Information economy is different, but not so different! • Key concepts • Versioning • Lock-in • Systems competition • Network effects

26. Beyond technology competition—experience Absorption Entertainment Education Passive participation Active participation Aesthetics Escapism Immersion

27. Upgrading the technology value high high Demonstration of experience Customization Relevance of demand Differentiation Add-on service Fabrication Commoditization Raw materials low low low high Pricing

28. Extended readings • Porter, Michael (1996), “What is Strategy?”Harvard Business Review, Nov.-Dec. • Iansiti, Marco and Jonathan West (1997), Technology Integration: Turning Great Research into Great Products,”Harvard Business Review, May-June. • Shapiro, Carl and Hal R. Varian (1998), Information Rule, Harvard Business School Press, Boston. • Pine II, B. Joseph, James h. Gilmore (1999), The Experience Economy, Harvard Business School Press, Boston.