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Standards and Competition

Standards and Competition. Prasada Reddy Lund University, Sweden. References. Hill, C.W.L. (1997) ‘Establishing a standard: Competitive strategy and technological standards in winner-take-all industries’, The Academy of Management Executive , 11 (2), 7-25.

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Standards and Competition

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  1. Standards and Competition Prasada Reddy Lund University, Sweden

  2. References • Hill, C.W.L. (1997) ‘Establishing a standard: Competitive strategy and technological standards in winner-take-all industries’, The Academy of Management Executive, 11 (2), 7-25. • Shapiro, C. And Varian, H.R. (1999) ‘The Art of Standards Wars’, California Management Review, 41 (2), 8-32.

  3. Competitive Strategy 1 • The ability of a firm to establish its technology as an industry standard has become a key determinant of its long term competitiveness. • Consumer electronics, computer hardware and software, and telecommunications are some of the industries in which standards are important. • Success of Microsoft (windows) and Intel - Wintel. • JVC-Matsushita Vs. Sony in VCR Standards.

  4. Competitive Strategy 2 • For a firm to design a competitive strategy, It must understand: • Why Standards are important? • What are the conditions that would lead to adoption of a particular technology as industry standard?

  5. Product Compatibility 1 • Why Standards are important? • Product compatibility, an aspect of product design, ensures that complementary products work together smoothly. • Compatibility is achieved by following a common technological standard or a set of design principles. • In industries where are compatibility is important, the value to the owner of a product is an increasing function of availability of compatible products (e.g. Software applications for windows vs. Apple OSS).

  6. Product Compatibility 2 • The availability of compatible products, in turn, is determined by the installed base of a given product. • Figure 1 Self-reinforcing character. • A larger installed base leads to greater availability of complementary products. This increases the value of the product to the customer, leading to increased demand for the product (greater installed based). • This self-reinforcing mechanism is also called ‘increasing returns. The more successful a firm becomes in getting its technology as standard, the more successful it will be in the future.

  7. Product Compatibility 3 • In markets where two or more technologies are competing to become the industry standards, small changes in initial conditions, either by chance or due to a strategy, may result in one technology gaining a sufficient lead (concept similar to dominant design) • This technology ‘lock’ in the market and become a de facto standard. • Other competing technologies get locked out. • Such a lock-in could occur even when the dominant technology is inferior to competing technologies/designs (e.g. QWERTY keyboard).

  8. Strategic Options 1 • For Installed Base: • Licensing and OEM Agreements - e.g. JVC-Matsushita in the VCRs. • Benefits: • - Enables a wide initial distribution of this technology to jump-start an increasing returns mechanism. • - Co-opts competitors who have the resources to develop their own superior (competing) technologies. • - A positive signal to suppliers of complementary products.

  9. Strategic Options 2 • For Installed Base: • Licensing and OEM Agreements - e.g. JVC-Matsushita in the VCRs. • Costs: • - Learning from this core technology, the licensees may alter this technology to supersede the original technology, which does not require payment of license fees. • - Increased number of suppliers based on licensed technology may keep the product prices lower, reducing the royalties.

  10. Strategic Options 3 • For Installed Base: • Entering into Strategic Alliances: • Alliances are more than arm’s length relations. • Commitment of partners to jointly develop and commercialize a technology (e.g. Philips-Sony CDs). • Same benefits/costs as licensing/OEM + • Partners can diversify into production of complementary products (e.g. Philips-Matushita DCC used their own in-house record labels) • A superior technology by combining partners’ complementary knowledge bases.

  11. Strategic Options 4 • For Installed Base: • Product Diversification: • Chicken-and-egg situation in availability of complementary products (e.g. Music for CDs). • A firm should be prepared to diversify (e.g. Apple laser jet for desktop publishing).

  12. Strategic Options 5 • For Installed Base: • Aggressive Positioning: • Positioning in relation to critical market dimensions - price, product features, distribution, and promotions. • In addition - Line up sufficient production capacity to serve potential demand, quality of the product, cost-efficient production and logistics to distribute product. • Philips DCC tape-decks: lower switching costs (play both analog and digital tapes). • Failure: No advertisement of digital benefits; High penetration price; Competing Sony’s minidisc system.

  13. Strategic Contingencies • Barriers to Imitation • - High barriers permit a gradual build up of installed base. • Complementary Resources of the Firm • - Firms without manufacturing or marketing adopt licensing/OEM or SA. • Capability of Potential Competitors • - Firms facing capable rivals should try to co-opt them. • Supply of Complementary Products • - If no suppliers, diversify.

  14. Strategies • Aggressive Sole Provider • - e.g. Xerox in Japan should have adopted more aggressive stance to pre-empt rivals. • Passive Multiple Licensing • - e.g. Dolby in the audio player market - low fees forestall rivalry; scale of adoption generates profits. • Aggressive Multiple Licensing • - e.g. JVC-Matsushita in VCR • Selective Partnering • - e.g. Philips and Sony in CDs, IBM with Intel & MS.

  15. Standard Wars • Classification of standard wars • Identification of ‘seven critical assets’ • ‘Main lessons’ on standard wars.

  16. Standard Wars - Classification • Evolution Strategy - new technology compatible with the old; superior performance with little switching costs. • Revolution Strategy - incompatibility with the old technology; compelling performance so customers do not mind incurring switching costs.

  17. Standard Wars - Classification • Rival Evolutions - competitors technologies are compatible with their own old technologies, but incompatible with each other, e.g. DVD vs. Divx (both play CDs). • Evolution vs. Revolution - your technology offers backward compatibility and the rival’s does not. Compatibility vs. Superior performance. • Rival Revolutions - competitors technologies are not compatible with the old technologies, e.g. Nintendo 64 & Sony Playstation.

  18. Seven Key Assets in Network Markets 1 • Control over an installed base of users • Intellectual property rights • Ability to innovate • First-mover advantages • Manufacturing capabilities • Strength in complements • Brand name and reputation

  19. Seven Key Assets in Network Markets 2 • Control over an installed base of users (e.g. Microsoft) - Large locked-in customers favor an ‘evolution’ strategy as well as blocking rivals and forcing them into risky ‘revolution’ strategies. • Intellectual property rights - Legal protection against imitation by competitors, e.g. Respective patents of Philips & Sony in DVDs and CDs. • Ability to innovate - Resources & capabilities that enable the firm to out-engineer the competition. • First-mover advantages - Technological and market leadership based on previous product development work, e.g. Netscape in bowsers.

  20. Seven Key Assets in Network Markets 3 • Manufacturing capabilities (e.g. Compaq and Dell in computers) - Efficient production can yield cost advantages. • Strengths in complements - Acceptance of complementary products stimulates sales in the market. • Reputation and brand name - instant credibility in the market place.

  21. Market Tactics • Two crucial marketplace tactics: • 1) Pre-emption is based on early lead and positive feedback. • - Techniques - early product launches, marketing aimed at ‘pioneers’, penetration pricing (below cost), etc. • 2) Expectations management is about establishing credibility with customers. • - Techniques - announcing upcoming products to freeze rivals’ sales, assembling allies and making ‘grand claims about your product.

  22. Defending a Dominant Standards 1 • Stay on your guard (avoid rigidities like France’s Minitel) • Offer customers a migration path (Microsoft’s improvements) • Commoditize complementary products (have a vibrant and competitive market for complements to your product) • Compete against your own installed base (Intel pushes for hardware performance of complementary products such as graphics chips,and thus helping develop applications that require higher processing power and in turn driving hardware upgrade cycle).

  23. Defending a Dominant Standards 2 • Protect your position (One tactic is to offer ongoing attractive terms to important complementors, e.g. Nintendo to developers of hit games. • Leveraging installed base (control over an interface to extend leadership from one side to the other) • Stay a leader (Cisco’s use of profits from established products to buy up firms developing next generation)

  24. Those Who Fell Behind • Rear-Guard Actions: • Defend the remaining niche markets • Leapfrogging • Adapters and Interconnections (negotiate access to the larger network) • Survival pricing • Legal actions.

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