Chapter 7—Strategy and Technology

TRUE/FALSE 1. Interestingly, technical standards create benefits primarily for those firms that do not
adhere to them.
ANS: F

2. It can be argued that Microsoft's near monopoly of PC operating systems helped raise the level of
industry profitability.
ANS: T

3. Battles to set and control technical standards in a market are referred to as product positioning.
ANS: F

4. The layout of the keys on a computer keyboard is an example of a technical standard.

ANS: T

5. A set of related technical standards that specify the common set of features or design characteristics
of a product is called a dominant design.
ANS: T

6. Fortunately, technical standards always exist in the public domain so that any company can use them.
ANS: F

7. Ownership of an industry standard that is protected from imitation by patents and copyrights is a
weak organizational resource.
ANS: F

8. By exploiting a positive feedback loop, Dolby Laboratories, became the standard for sound quality.
ANS: T

9. Digital music downloads have high marginal costs.

ANS: F

10. When two or more companies are competing with each other to get their technology adopted as a
standard in an industry, and when network effects and positive feedback loops are important, the
company that wins the format war will be the one whose strategy best exploits positive feedback loops.

Interestingly, technical standards create benefits primarily for those firms that do not adhere to them.
f

It can be argued that Microsoft's near monopoly of PC operating systems helped raise the level of

industry profitability.
t

Battles to set and control technical standards in a market are referred to as product positioning.
f

The layout of the keys on a computer keyboard is an example of a technical standard.

t

A set of related technical standards that specify the common set of features or design characteristics of

a product is called a dominant design.

t

Fortunately, technical standards always exist in the public domain so that any company can use them.
f

Ownership of an industry standard that is protected from imitation by patents and copyrights is a weak

organizational resource.
f

By exploiting a positive feedback loop, Dolby Laboratories, became the standard for sound quality.
t

Digital music downloads have high marginal costs.

f

When two or more companies are competing with each other to get their technology adopted as a

standard in an industry, and when network effects and positive feedback loops are important, the

company that wins the format war will be the one whose strategy best exploits positive feedback loops.
t

Companies that are locked out of a market are those in which consumers are unwilling to bear the

switching costs required for them to abandon the established standard and adopt the new one.
t

Switching costs are the costs that consumers must bear to switch from a product based on one

technological standard to a product based on another.

t

A possible strategy for winning a format war is for a company to make sure that, in addition to the

product itself, there is an adequate supply of complements.

t

Microsoft Word, the word-processing software, is so easy to use and has so many useful features that

no other software can compete with it. Therefore, Microsoft Word can be described as a killer

application.
t

15. A razor-and-blade strategy refers to lowering a company's cost structure.

f

Aggressive marketing is a key factor in jump-starting demand to get potential early adopters to bear

the switching costs associated with adopting a new innovation.

t

Digitalization has made it more difficult to protect some intellectual property rights.
t

One important advantage of being a first mover is that it guarantees success.

f

When a company is trying to win a format war it should license its format for a low fee rather than a

high fee.
t

Marginal costs in high-technology industries tend to stay very low as production rises.
t

21. An example of an important complementary asset is a state-of-the-art manufacturing facility.

t

Technological paradigm shifts occur when new technologies come along that revolutionize the

structure of the industry, dramatically alter the nature of competition, and require companies to adopt

new strategies to survive.

t

The law of diminishing returns states that marginal costs fall as a company tries to expand output.
f

One strategy for success in high-tech industries is to keep prices low and thus increase sales volume.
t

Even if they are constrained by a lack of capital, research shows that new entrants should avoid

partnering with a larger company and go it alone.

f

Antibody Solutions is an American company that specializes in cell bank storage and finding and

producing antibodies for bacterial and viral infections. Antibody Solutions would not be considered a
high-tech company since it is not in the computer industry which is considered high-tech.
f

The works of Shakespeare and Beethoven and the English language are all examples of standards

within the public domain.

t

In high-technology industries, the underlying scientific knowledge companies use is

advancing rapidly.

All of the followingconsidered high-technology industries except:

Retail clothing

Technical standards in high-technology industries are

specifications that all producers adhere to when making a product or product component.

Which of the following is an example of a technical standard?

All of these

When standards are part of the public domain, they can be used
freely by any company.

An industry is considered to be high technology, or high tech, when

the underlying scientific knowledge that companies in the industry use is advancing

rapidly.

When an industry's products rely on a common set of features, these features are called a
dominant design.

In the 1870s, Christopher Sholes invented the layout of keys on a typewriter keyboard, sometimes

called the QWERTY layout. This invention is a(n)

technical standard.

Which of the following economic benefits result from the use of standards?
All of these

Recently, the U.S. Food and Drug Administration began to require more descriptive labeling of food

products. This is an example of standards developed

by government mandate.

Microsoft released its latest operating system, Windows Vista, and intended it to replace earlier

versions of Windows. Buyers of Vista had to learn how to use the features of the new software; thus,
buyers were facing
switching costs.

When automobiles first became available to the public, it was difficult for buyers to find products such

as tires, gasoline, and light bulbs for their cars. Early automobile owners
lacked complementary products.

Matsushita licensed its VHS technology to rivals, while Sony kept its Beta technology proprietary.

This action allowed Matsushita to

win the format war.

What advice would you give to a firm that wants to exploit network effects?
Create incentives for other firms to develop complementary products.

42. Which of the following strategies should a company not adopt if it wants to win a format war?
Price the product high to recover steep upfront costs.

What percentage of the world's PCs adhere to the Wintel standard?

95%

Often, the industry standard is selected competitively by

market demand.

An adequate supply of complements to a product helps ensure that consumers

will buy the company's product.

Killer applications are applications or uses of a new technology or product that

are so compelling they persuade customers to adopt or use the new technology in droves.

The razor-and-blade strategy was pioneered by

Gillette.

Cellular phone service providers often sell the phone itself at very low prices and then charge a

relatively high fee for usage. This illustrates

The razor-and-blade strategy.

Marginal cost refers to the cost of

producing one extra unit of product.

Aggressive marketing to jump-start demand for a product often involves all of these except:
high introductory prices.

Consider a cost curve, with production volume on the horizontal axis and marginal costs on the
vertical axis. What shape would the marginal cost curve most resemble in a high-tech industry?
Straight and flat

First movers are the first to recover the costs of a new technology.
f

Which of the following is not one of the benefits that first movers enjoy?
Lower pioneering costs

Which of the following is not a disadvantage to being a first mover?

Accumulation of market knowledge

The various strategies that companies should adopt to win format wars revolve around
making network effects work in their favor and against their competitors.

Which of the following is not a basic strategy for a first mover?

Discourage development of complementary assets

If a first mover does not have complementary assets, barriers to imitation are high, and there are

several capable competitors, the first mover should

enter into a joint venture to protect the product.

If a first mover does not have complementary assets, barriers to imitation are low, and there are many

capable competitors, the first mover should

license the innovation to others.

A technological paradigm shift is most likely to occur in which stage of the industry life cycle?
Maturity

Consumers will bear the costs of switching technologies when

the benefits of adopting the new technology outweigh the costs of switching.

Cell phone technology is replacing traditional wired phone technology. This is an example of a(n)
technological paradigm shift.

Which of the following will not help an established company in addressing the potential challenge of a

disruptive technology?
Distinctive competencies in the current business model

Technological disruption
causes firms to adopt a new business model.

There are guidelines for turbine blades for jet engines. These guidelines define the exact

material and performance requirements of these engines and can be referred to as

technical standards.

Mathematica 1.0 was one of the most distinctive applications for the short-lived NeXT Computer. It

still sets the standard for symbolic math and visualization on Windows, Mac, Linux, and Unix.

Mathematica 1.0 can be described as a(n) _____ application.

killer