Chapter

Seven
Strategy in
HighTechnology
Industries

High-Technology Industries
High-tech industries are those in which the

underlying scientific knowledge that companies in

the industry use is advancing rapidly.
By implication, the attributes of the products and services
that result from its application are also advancing rapidly.

Technology is:
The body of scientific knowledge used
in the production of goods or services
Accounting for an even larger share
of economic activity
Revolutionizing aspects of the
product or production system in
industries not thought of as high-tech

Technical Standards
and Format Wars
Technical standards are a set of technical

specifications that producers adhere to when

making the product or a component of it.

Format wars
Often, only one standard will
come to dominate a market.
Many battles in high-tech industries revolve
around companies competing to be the one
that sets the standard.

The source of product differentiation

and competitive advantage
is based on the technical
standard.

Technical Standards
for Personal Computers
Figure 7.1

Benefits of Standards
Standards emerge because there are
economic benefits associated with them.
Standards help:
Guarantee compatibility between products and
their compliments
Reduce confusion in the minds of consumers
Reduce production costs through massproduction
Reduce the risks associated with supplying
complementary products and help
Standards lead to both low-cost and differentiation
advantages for individual companies.

Establishments of Standards
Standards emerge in one of three ways:

1.

Companies may lobby the government to

mandate an industry standard.
Standards are often set by cooperation among
businesses or industry forums.

2.

May become part of the public domain

3.

Standards are often selected competitively by

market demand.

Network effects size of the network for complementary

products determines industry demand

Positive feedback loop increase in demand
further increases the value of owning a product
Lockout from the market occurs for companies promoting
alternate standards when consumers are unwilling to bear the
switching costs (unless benefits outweigh costs of switching)

Positive Feedback in
the Market for VCRs
Figure 7.2

Strategies for Winning

a Format War
Successful strategies revolve around finding
ways to make network effects work in their
favor and against their competitors:
Ensure a supply of complements.
In addition to the product itself

Leverage killer applications.

New products that are so compelling that customers adopt
them in droves, killing demand for competing formats

Aggressively price and market.

Pricing the product low to increase the installed base,
then pricing complements high to make profits

Cooperate with competitors.

To speed up adoption of the technology

License the format.

Reduce financial incentive for competitors to develop their own

Cost Structures in
High-Technology Industries
Figure 7.3

Managing
Intellectual Property Rights
Intellectual property rights apply to the

product of any intellectual and creative efforts.

Patents, copyrights, and trademarks give individuals

and companies incentives to engage in the expense
and risk of creating new intellectual property.

Digitalization and piracy rates

Large scale problem with high piracy rates

Legal and technological solutions are required

Strategies for managing digital rights

Low costs of copying and distributing digital media

Can be used to the companys advantage

Drive down costs of purchasing media

Encryption software
Vigorous defense of intellectual property rights

Capturing First-Mover Advantages

First-mover advantage: the first to develop and
pioneer revolutionary new products that can lead
to an enduring competitive advantage
If the new product satisfies unmet
consumer needs and demand is high:
First mover may be in a monopoly position
to
capture significant revenues and profits.
Strong revenues and profits signal an
opportunity to potential rivals.
Rival imitators may enter market in the absence of strong
barriers to imitation resulting in lower market returns.

Being a first-mover does not guarantee success.

Success depends on the first-mover strategy
that is pursued.

The Impact of Imitation on Profits

of a First Move
Figure 7.4

First-Mover Advantages
The five main sources of first-mover advantages:
1. Exploit network effects and positive feedback loops
Locking customers into its technology

2. Establish significant brand loyalty

Expensive for later entrants to break down

3. Enable economies of scale and learning effects

So first-mover has cost advantage and can respond to new
entrants by cutting price to maintain market share

4. Create switching costs for customers

Making it difficult for rivals to take customers away

5. Accumulate valuable knowledge

Regarding customers, distribution, and technology that late
entrants will find difficult or expensive to match

First-Mover Disadvantages
1. Pioneering costs
To develop technology and distribution channels
and to educate the customers
Later entrants free-ride on first-movers investments.

2. More prone to make mistakes

Because of the uncertainties in a new market
Later entrants learn from the mistakes of first-movers.

3. Risk of building the wrong resources and

capabilities

Mass-market may differ from the needs of early adopters

First-movers risk Plunging into the chasm.

4. May invest in inferior or obsolete technology

If the underlying technology is advancing rapidly

Late entrants may be able to leap frog the technology.

Strategies for Exploiting

First-Mover Advantages
1.

Going it alone

2.

Strategic alliance or joint venture

Develop and market the innovation itself.

Develop and market the innovation jointly

with other companies.

3.

License the innovation to others

Let them develop the market.

Key questions in choosing a strategy:

Does the company have the complementary assets

to exploit its innovation?
How difficult is it for imitators to copy the
companys innovation (height of barriers to
imitation)?
Are there capable competitors who could rapidly
imitate the innovation?

Strategies for Profiting

from Innovation
Table 7.1

Technological Paradigm Shifts

Occur when new technologies emerge that:
Revolutionize the structure of the industry
Dramatically alter the nature of the competition
Requires companies to adopt new strategies to
survive

Paradigm shifts are more likely to occur with:

Natural limits to technology
The established technology in the industry is mature
and approaching its natural limit.

New disruptive technology

Has entered the marketplace and is taking root in

niches that are poorly served by incumbent companies
using established technology.

The Technology S-Curve

Figure 7.5

Established and Successor

Technologies
Figure 7.6

Swarm of Successor
Technologies
Figure 7.7

Disruptive Technology
Disruptive technology is a new technology that

gets its start away from the mainstream of a market

and invades the main market as its functionality
improves over time.

Revolutionizes the industry

structure and competition
Causes a technological
paradigm shift

Disruptive technology often causes the

decline of established companies
because they listen to customers
who say they do not want it.

Strategic Implications of Paradigm

Shifts for Established Companies

Having access to knowledge about how

disruptive technologies can revolutionize
markets is in itself a valuable asset.
It is important for established enterprises to
invest in newly emerging technologies that may
become disruptive.
Commercialization of disruptive technology may
require a different value chain with a different
cost structure.

Internal forces suppress change.

Chances of success in developing and

commercializing disruptive technology will be
enhanced if it is placed in its own organization.

Strategic Implications of Paradigm

Shifts for New Entrants
New entrants, or attackers, have several
advantages over established enterprises:

Pressure to continue the out-of-date existing

business model does not hamper new entrants.
New entrants need not worry about established
customer base, distribution channels, or suppliers.

But new entrants face important new issues:

May be constrained by lack of capital

Need to manage the organizational problems
associated with rapid growth
Find a way to take the technology from a small niche
into the mass-market
Decide whether to go it alone or partner with an
established company