1 / 22

Recognizing Lock-In

Recognizing Lock-In. Jan Damsgaard Dept. of Informatics Copenhagen Business School http://www.cbs.dk/staff/damsgaard/. This presentation is based on chapter five, pp. 103 - 134 in Shapiro and Varian (1998): Information Rules: A Strategic Guide to the

hagen
Download Presentation

Recognizing Lock-In

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Recognizing Lock-In Jan Damsgaard Dept. of Informatics Copenhagen Business School http://www.cbs.dk/staff/damsgaard/ This presentation is based on chapter five, pp. 103 - 134 in Shapiro and Varian (1998): Information Rules: A Strategic Guide to the Network Economy Boston, MA: Harvard Business School Press

  2. Recognizing Lock-In • Costs of switching • LP to CD to DVD • 36 millimeter film to APS(Advanced Photo System) • VHS to DVD • Compare • Switching from Ford to VW • Switching from Mac to PC • Switching from CD to DVD Jan Damsgaard, 2004

  3. Outline This presentation is based on chapter five, pp. 103 - 134 in Shapiro and Varian (1999): Information Rules: A Strategic Guide to the Network Economy Boston, MA: Harvard Business School Press • What are switching costs • Examples of switching costs • Valuing the installed base • Classification of lock-in • The lock-in cycle • Lessons Jan Damsgaard, 2004

  4. What are Switching Costs? • Costs of switching from one system to another • Due to durable investments in complementary assets • Hardware • Software • In general • Suppliers want to lock-in customer • Customers want to avoid lock-in • Basic principle: Look ahead and reason back Jan Damsgaard, 2004

  5. Examples • IBM’s OS/2 operating systems for students • Penetration pricing • Mobile phones only USD 1 + a one year subscription to certain infrastructure • Cable TV (low cost to join, high running costs) • Provision of complementary products/services • Cheap modems to increase fixed net traffic Jan Damsgaard, 2004

  6. Your examples • How did you switch from LP to CD? or haven’t you? What was your strategy? • Provide some examples where you feel/felt locked-in to some brand or system or infrastructure • Have you changed ISP or Telephone operator? On what ground did you base your decision? • What Internet services do you feel locked into? • Identify lock-ins’ of society Jan Damsgaard, 2004

  7. Switching Costs Matter • Accumulated switching costs • Phone number portability • Email addresses • Hotmail (advertising) • ACM (professional associations) • and many e-commerce sites • Look at lock-in costs on a per customer basis Jan Damsgaard, 2004

  8. Valuing an Installed Base • Customer C switches from A to "same position" w/ B • Total switching costs = customer costs + B's costs • Example • Provide sweetener • free minutes (higher market value than actual costs) • Hand in competitor’s product to get a discount • Any razor to get Phillips razor at favorable price • Give up the use of competitors’ products to get a discount • The Finnish beer industry (contract) • Coca Cola at Aalborg University (conditions) • Disruption costs Jan Damsgaard, 2004

  9. Profits & Switching Costs • In General use of this rule of thumb • How much to invest to get a locked-in base • Harvest of switching costs • Evaluate a target acquisition • Buy or steal • Product and design decisions that affect switching costs • Compatibility and migration paths Jan Damsgaard, 2004

  10. Classification of Lock-In • Contractual commitments • Durable purchases and replacement • Brand-specific training • Information and data • Specialized suppliers • Search costs • Loyalty programs Jan Damsgaard, 2004

  11. Contractual Commitments • Commitment to source from one supplier • Types of contracts • Evergreen contracts that automatic renews • Book clubs • Requirement contract • Minimum order-size commitment • Switching costs after the contract terminates Jan Damsgaard, 2004

  12. Durable Purchases • Buying hardware implies the need for software • Aftermarket sales (supplies, maintenance) • ZIP drives and ZIP disks, car market • Usually falls with time • Upgrades as aftermarket service • The difference between technology lock-in versus vendor lock-in Jan Damsgaard, 2004

  13. Brand-specific Training • Purchase of brand products often requires specific training to use them • SAP systems, FrontPage, WordPerfect, and standard PCs • Competitors want to lower switching costs • Word and WordPerfect help Jan Damsgaard, 2004

  14. Information & Databases • Examples • CD players and CD disks • Address book software • Usage of home-made macros • Customization • As the library grows so does the lock-in • Minimizing the lock-in • Insist on standard and/or open source formats Jan Damsgaard, 2004

  15. Specialized Suppliers • Companies that typically offer specialized services • Advertising, legal, accounting firms • R & D increases dependency • Pentagon • Banks selling of key IT system to competitor • Strategy of dual sourcing • IBM, Intel and AMD Jan Damsgaard, 2004

  16. Search Costs • Transactions cost in finding new supplier • lock-in by habit • Also costs borne by new supplier • Promotion, closing deal, setting up account, credit risks • Example • Looking for satisficing and not optimal solutions • Market valuation of “loyalty” or “laziness” Jan Damsgaard, 2004

  17. Loyalty Programs • Constructed by sellers • Frequent flyer programs • Frequent user programs • Coordinated programs • Air mileage for car renting • Personalized pricing • Gold, Silver, and Blue Status • Cumulative pay-offs, pyramid-programs Jan Damsgaard, 2004

  18. Your examples • Provide at least one example of each of the seven types of lock-in • How was it established? • Could it have been avoided? • Can it be sustained? • Can competitors break the lock-in? Jan Damsgaard, 2004

  19. Suppliers and partners • Anyone that makes investments that are specific to a particular supplier, customer or partner is subject to lock-in for the economic lifetime of the investment • Railroad lines to service a specific customer • Customized software Jan Damsgaard, 2004

  20. Follow the Lock-in cycle Brand Selection Sampling Lock-In Entrenchment Jan Damsgaard, 2004

  21. Lessons • Switching costs and lock-in are ubiquitous in the information economy • The installed base is extremely valuable in the information economy • Your choices are limited by the decisions of the past. Path dependency • Be able to identify the 7-types of lock-in Jan Damsgaard, 2004

  22. MICROSOFT PUTS HAILSTORM ASIDE • Microsoft's My Services, formerly called Hailstorm, has been put on hold due to lack of support from potential partners. The service, part of Microsoft's .Net initiative, was designed to act as a central repository for consumers' personal data. Partner corporations would have access to that data, eliminating the need for users to establish separate profiles for each company. According to reports, despite initial interest in the program from firms including American Express and Expedia, no major partners agreed to implement the service. Experts said that decisions not to use the My Services application are generally based on a distaste for sharing consumer information rather than on lack of trust in the technology. NewsFactor Network, 11 April 2002 Jan Damsgaard, 2004

More Related