1.

3 Standards
Source a/o: MIT technology strategy course 2005 & 2007

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Standards covers a very wide range of concepts

Official, public standards (GSM) de-factor standards (Microsoft Windows) dominant designs (the combustion engine) # parrallel standards: game consoles

What counts is fact that there is a (limited set of) common standard ways to approach/solve a topic

And not that everybody does it his own way Officially and/or de facto Unanimously or not

A standard is what we standardize on

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Why standards?

Standards facilitate

Manufacturers know what is expected from them

To build a GSM-compatible telephone To use the electricity grid To write software for the internet

Ease of communication between actors

5 liters of paint, RAL 1003 PDF

Compatibility between users

The society and economy need standards because they:

allow products (and people) to work together and be interchangeable provide assurance that a product can deliver a certain level of performance provide the tools (symbols, terminology) that make it easier for designers, manufacturers and users to communicate.
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Standards: at what cost? What products are least standardized?

Standards: at the expense of Performance optimisation Uniqueness, personality

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About standards

Many are part of society, very formal and entrenched

Standards are a key dynamic in business ecosystems: The advent of a standard is part of the maturation process of an industry (see industry life cycles) Standards often generate their own ecosystems and vice-versa Two or more competing standards... Standards can create opportunities for niche players

Driving on right hand side Electricity, GSM, internet... Form factors for screws

Can be purely technical

Can be very long lasting or very transient

QWERTY/AZERTY Second life Europe= GSM standard US: no GSM standard, competing technologies

Governments play a major role

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Modularity and standards

Between modules in the value chain there always are interfaces

Harddisk and processor Between trainwagons, between rain and rails Ipod and iTunes

Almost always these interfaces are standardized

Mais il y a la manire How widely applicable?

inhouse-only, subset of industry, industry-wide In consensus, by a leader, after a war

How are these defined?

An example: GSM

GSM (Global System for Mobile Communications: originally from Groupe Spcial Mobile) is the world's most popular standard for mobile telephony systems.

The GSM Association estimates that 80% of the global mobile market uses the standard. GSM is used by over 1.5 billion people across more than 212 countries and territories. that subscribers can use their phones throughout the world, enabled by international roaming arrangements between mobile network operators. Ability to roam and switch carriers without replacing phones network operators can choose equipment from many GSM equipment vendors.

This ubiquity means

GSM also pioneered low-cost implementation of the short message service (SMS). The standard includes a worldwide emergency telephone number feature.
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How the GSM standard was created

In 1982, the European Conference of Postal and Telecommunications Administrations (CEPT) created the Groupe Spcial Mobile (GSM) to develop a standard for a mobile telephone system that could be used across Europe. In 1987, a memorandum of understanding was signed by 13 countries to develop a common cellular telephone system across Europe. In 1989, GSM responsibility was transferred to the European Telecommunications Standards Institute (ETSI) 1990 phase I of the GSM specifications were published. The first GSM network was launched in 1991 by Radiolinja in Finland with joint technical infrastructure maintenance from Ericsson.

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A remarkable inside story

http://69.89.31.95/%7Estephfh0/wp-content/uploads/2010/08/ Inside-a-Mobile-Revolution-Temple-20101.pdf
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Who sets standards?

The official term Industry Standard applies to standards set by official bodies

National (DIN, ASA), regional, international International Organization for Standardization (ISO) European Telecommunications Standards Institute International Telecommunication Union World Wide Web Consortium Universal Postal Union American Petroleum Institute USB: Compaq, DEC, IBM, Intel, Microsoft, NEC and Nortel. Audio CD: Philips + Sony

Sometimes standards emanate from groups of companies

Setting de facto standard can be the subject of vast battles of influence and market share especially in emerging industries

Microsoft Windows vs. Apple Macintosh

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standards forums

Important process in ecosystem Sometimes it is an option to participate even for smaller companies Some elements to consider before participating
what are the costs involved in participation? who are the participants?

what is the intellectual property regime?

incumbents or insurgents customers or producers

disclosure and licensing -what is reasonable What with rights held by non-participants consensus voting

what is the process by which decisions are made?

how is compliance enforced? Whats in it for you? Resource needs

Who sets the standard, is the standard public?

Adobe

Adobe twice decided to make architectural information openly available

Postscript and PDF

in both cases they became dominant designs it is quite the inverse of protection of intellectual property! they succeeded because no major competitor arose to grab market share +Adobe is generally respected as serious business partner

PDF is now a formal open standard known as ISO 32000, maintained by the international organization for standardization

Some standards battles...

Electric power

several co-existing standards Microsoft Windows vs Mac OS k56flex (Rockwell/Lucent) vs x2 (US Robotics/3com) vs v.90 TDMA (Ericsson/AT&T) vs CDMA (Qualcomm) vs GSM (EU) vs PHS iPhone, Windows, Google

DC (Edison) vs AC (Westinghouse) width, side of the road, signage mechanical (CBS) vs electronic (RCA) door on front left, jetways/ airbridges, taxi ways Betamax (Sony) vs VHS (Matsushita+)

Personal Computers

Roads

56k modems

Color television

Cellphones (2)

air travel

Smartphones

video cassettes

Cellphones(1)
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AC/DC

DC

During the initial years of electricity distribution, Edison's direct current was the standard for the United States Edison did not want to lose all his patent royalties. Direct current worked well with incandescent lamps that were the principal load of the day, and with motors. Direct-current systems could be directly used with storage batteries, providing valuable load-leveling and backup power during interruptions of generator operation. Edison had invented a meter to allow customers to be billed for energy proportional to consumption, but this meter only worked with direct current. From his work with rotary magnetic fields, Tesla devised a system for generation, transmission, and use of AC power. He partnered with George Westinghouse to commercialize this system. Westinghouse had previously bought the rights to Tesla's patents EC is technically superior in many aspects:

Rivalry between Edison and Tesla

AC

Edison was a brute-force experimenter, but was no mathematician.

AC cannot be properly understood or exploited without a substantial understanding of mathematics and mathematical physics (see AC power), which Tesla possessed.

Easier to transport

Tesla had worked for Edison but was undervalued Bad feelings were exacerbated because Tesla had been cheated by Edison of promised compensation for his work.
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AC/DC

Edison carried out a campaign to discourage the use of alternating current

spreading disinformation on fatal AC accidents publicly killing animals lobbying against the use of AC in state legislatures Edison directed his technicians to preside over several AC-driven killings of animals, stray cats and dogs, cattle and horses, Topsy, a Coney Island circus elephant which had recently killed three men He also tried to popularize the term for being electrocuted as being "Westinghoused".

Harold P. Brown, who was being secretly paid by Edison, built the first electric chair for the state of New York to promote the idea that alternating current was deadlier than DC.

When the chair was first used, on August 6, 1890, the technicians on hand misjudged the voltage needed to kill the condemned prisoner, William Kemmler. The first jolt of electricity was not enough to kill Kemmler, and only left him badly injured. The procedure had to be repeated and a reporter on hand described it as "an awful spectacle, far worse than hanging." George Westinghouse commented: "They would have done better using an axe."
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Tipping point...

In 1890, the Niagara Falls Power Company formed a Commission to analyze proposals to harness Niagara Falls to generate electricity. It was backed by entrepreneurs such as J. P. Morgan, Lord Rothschild, and John Jacob Astor IV. Among 19 proposals, they even briefly considered compressed air as a power transmission medium, but preferred electricity. But they could not decide which method would be best overall. In 1893, NFPC was finally convinced by George Forbes to award the contract to Westinghouse. Power was to be generated and transmitted as alternating current. The generators were built by Westinghouse Electric Corporation. To appease the interests of General Electric, they were awarded the contract to construct the transmission lines to Buffalo using the Tesla patents. The successful Niagara Falls system was a turning point in the acceptance of alternating current. AC replaced DC for central station power generation and power distribution, enormously extending the range and improving the safety and efficiency of power distribution. Eventually, the General Electric company (formed by a merger between Edison's companies and the rival Thomson-Houston) began manufacture of AC machines.
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My experience with battling Standards...

Quadtree compression vs. CCITT Group IV

Mobitex vs GSM

Better technology

Invented @ VUB for SoftCore Format to compress scanned pages Arguably better technology

Packed switched Much more reliable

Faster compression, better visualisation The way fax machines compress images Software libraries available at low cost

In theory: depends very much on coverage!

Standard: GSM

versus the absolute standard

At that time coming up at full speed Massive investments

Main partners of RAM redirect funds to GSM

Volume volume volume!

And that for a key element in the perception of customers: long term accessibility of documents...

What if SoftCore goes bankrupt? Will I be able to view my documents?

Try and order 10.000 modems with a mamunfacturer if GSM orders 10 million... Impossible to match coverage Mobitex networks close... Customer loose confidence Best employees leave (for GSM operators...

Downward spiral

Lots of efforts to convince users, implicit negative point Finally we dropped the technology

Only alternative: survive in niche market

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what triggers standards battles, and what are the outcomes?

How important are network effects?

Tipping
fight to the death

Truce
convergence comprise

Two (or more)

no tipping duopoly or oligopoly

Are two (or more) businesses or business ecosystems vying for dominance?

1.4 Network effects and lock-in

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network effects
value to user Products with network effects

conventional products

Actual (or anticipated) number of users

Some examples of products with network effects that come to your mind?

Network effects

Direct network effects

Value of product increases with (anticipated) number of users I derive value from others using the product Generally (always?) related to co communication

phones, fax machines, e-mail, internet, PDF/MS Office, Facebook

Network effects arise in the adoption of technologies for which interaction or compatibility with others is important Network effects and monopolies and standards

Strong network effects lead to monopolies (Facebook, MS Office) or standards (phones, fax, email, www...) Network effects were a central theme in the arguments of Bell Telephone in gaining a monopoly on US telephone services. In 1908 there were over 4000 local and regional telephone exchanges, most of which were eventually merged into the Bell System. Network effects were popularized by Robert Metcalfe. He was one of the co-inventors of Ethernet and a co-founder of the company 3Com. the value of a network goes up as the square of the number of users

Metcalfe's law

10 users => $100; 100 users => $10.000

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Are there products with negative (direct) network effects?

Status goods Limits to capacity

Negative network effects

Resource limits, capacity

The connection that overloads the freeway, competition for bandwidth Threshold limits: the n+1 person begins to decrease the value of a network if additional resources are not provided. Restrict resources, consider fee increases, dont improve products, lousy services...

Provider complacency

RTT United States Postal Service Telephone companies during the 1960s and 1970s Microsoft's operating system eBay's auction site.

Examples cited on Wikipedia

See also Microsoft Word

(Loss of exculsivity)

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Indirect network effects

Indirect, lagged effects Supply of complementary goods and services (by third parties and by company) develops only if there is sufficient installed base Complementary products

Software for OS Games for console VHS movies Local service offering, 24h support, language support...

Critical mass, economies of scale

Apply more often than direct effects

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Two-sided network effects

Two-sided markets, also called two-sided networks, are economic platforms having two distinct user groups that provide each other with network benefits.

Credit cards (cardholders and merchants) Operating systems (end-users and developers) Travel reservation services (travelers and airlines) Yellow pages (advertisers and consumers) Video game consoles (gamers and game developers) eBay

Particularly useful for analyzing the chicken-and-egg problem of standards battles, such as the competition between VHS and Beta. Useful in explaining many free pricing or "freemium" strategies where one user group gets free use of the platform in order to attract the other user group. (wikipedia 25/2/2011)

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Economies of scale

Economies of scale, in microeconomics, refers to the cost advantages that a business obtains due to expansion. There are factors that cause a producers average cost per unit to fall as the scale of output is increased.

reductions in unit cost as the size of a facility and the usage levels of other inputs increase. The common sources of economies of scale are

purchasing (bulk buying of materials through long-term contracts) managerial (increasing the specialization of managers) financial (obtaining lower-interest charges when borrowing from banks and having access to a greater range of financial instruments) marketing (spreading the cost of advertising over a greater range of output in media markets) technological (taking advantage of returns to scale in the production function). learning by doing + Service offering

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Diseconomies of scale

Cost increase / efficieny decrease due to size Sources of diseconomie of scale (wikipedia)

Cost of communication Duplication of effort Office politics Isolation of decision makers from results of their decisions Slow response time Inertia (unwillingness to change) Cannibalization Large market portfolio Inelasticity of Supply Public and government opposition

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network effects
value to user Products with threshold network effects Products with extensive network effects

conventional product

Actual (or anticipated) number of users

lock-in, switching costs

The resilience of a standard depends a/o on how easy it is to part from it, and to switch

Google search to Bing; Ford to Volkswagen Windows to Linux: very costly: change software, learning Change side of the road on which youre driving the total cost of installing an Enterprise Resource Planning (ERP) system such as SAP was eleven times greater than the purchase price of the software due to the cost of infrastructure upgrades, consultants, retraining programs, and the like These switching costs are endemic in high technology industries and can be so large that switching suppliers is virtually unthinkable, a situation known as lock-in Contractual commitment Durable equipment and aftermarkets Brand-specific training Information and databases Specialized suppliers Search costs Loyalty programs
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Switching costs can be order of magnitude larger than costs of new product

types of lock-in

1.5 Actors in the ecosystem

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Actors in the ecosystems

Infinite variety, large number of classifications We cover main types of operational actors in part on strategy

Investment goods manufacturer Components/materials supplier Service supplier Network/service operator ODM/OEM/Brand owner... ... +

Later in the course we will cover some special roles in the ecosystem

Government -> separate session Channels -> marketing Staff functions in the ecosystem -> marketing

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1.6 Regional clusters

some examples

Mythical

Silicon Valley Hollywood

Unnoticed

Massive

a narrow belt in the US. northeast and the eastern part of the midwest dominated US manufacturing up until the mid fifties

Sialkot's stainless steel cluster in Pakistan, together with Tuttlingen in Germany dominate the world surgical instrument market 30 export oriented clusters in Portugal

ranging from ornamental stones in Evora to horticulture in Faro

64 percent share of manufacturing employment

Close to home

Petrochemical Diamond trade Car manufacturing Biotech and pharma

Clusters

Factors that trigger the emergence of clusters

local demand prior existence of supplier industries natural resources innovative firms chance events.

Once a cluster is formed a self-reinforcing cycle promotes its growth

support of local public and private institutions initial transitory advantages get "locked in" within the cluster Tipping point agglomeration economies attracting new specialized firms to locate within the cluster and gain from increasing returns to scale

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Characteristics of clusters

Critical mass

The existence of a large pool of individuals with specialized skills

Trust and the related concept of social capital

reduced search and hiring costs requisite quality skill set is easily available individuals with skills are attracted to the cluster

The existence of firms providing specialized inputs High levels of technological spillovers and innovation due to proximity

deals in valuable diamonds are sealed by a handshake on the diamond exchange when trust breaks down, unwritten rules must be codified and third parties brought in to resolve differences.

Dynamics

Under certain conditions clusters slow technological innovation

since information flows are easier locally than over distances.

resource diseconomies insular competitive practices lock-in in ageing technology

existence of sophisticated buyers access to specialized suppliers gives high levels of flexibility and are able to implement innovations more rapidly high levels of competition and peer pressure within the cluster act as an important stimulus for innovation.

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1.6.1 Silicon Valley

The mother of all clusters...

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San Francisco Bay Area

San Francisco Bay Area Silicon Valley stretches over about 100 kilometer between San Jos and San Francisco

Inhabitants:

core Silicon Valley does not include San Francisco culturally and economically both are closely linked

Silicon Valley 2.44 million San Francisco 750.000 Bay Area around 4 million.

Mediterranean climate

In size and population the greater Bay Area is in the same order of magnitude as Flanders.

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Silicon Valley companies

1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s

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Silicon Valley employment

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Silicon Valley Industry Concentration

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Per capita income

According to the United States Census Bureau, of the 280 defined metropolitan areas, the San Francisco Bay Area has the highest median household income in the nation with $62,024 (40% above national average).
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Added value per employee

Value added per employee in Silicon Valleys industry clusters is $326,100. In 2004, the regions value added is $224,200 per employee This is more than two-and-half times US value added per employee

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Magnet for talent...

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Biotech clusters

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Scientific excellence

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Flanders biotech clusters

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Roundup ecosystems

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Business ecosystems

1. Industries, markets, segments and niches

subsets of the economic world Business-to-business industries How value is built in a succession of steps The interfaces between the different actors and components Adoption matters Proximity matters

2. Value chains

3. Standards

4. Network effects and lock-in

5. Regional ecosystems: clusters

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what have we learned?

The economy consists of a wide range of smaller and larger subsets: industries, (vertical) markets, segments, niches

Markets can differ enourmously in size, (in)stability, growth...

Market have their value chain/workflow: the way in which value is built up step by step, (often) by a large number of actors each specialising is a particular step

Value chains vary from the straightforward to the inifinitely complex, from relatively stable to extremely volatile... Value chains interact, overlap, compete, change...

Companies often have different options as how to fit into the value chain

Finding your place in the value chain is an essential element of strategy

Standards and network effects can play a major role in the ecosystem Ecosystems can be regional: clusters
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Why should we learn this?

Because this is what the economic world is made of Because it is the world in which every entrepreneur and enterprise functions in Because entrepreneurs needs this knowledge -applied to their market- to start, survive, thrive

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