CSE 410: Management of Information Technology

CSE 564: Advanced Topics on Management of

Technology
Lec 04: Developing and Managing a
Successful Technology
& Product Strategy

Faculty: Dr. M. Rokonuzzaman

Zaman.rokon@yahoo.com

1
What is a “strategy”
anyway?

2
Effective strategies answer three key
questions:

How will we
Create value?

How will we How will we

Deliver value? Capture value?

3
 How will we create value?
– How will the technology evolve?
– How will the market change?

 How will we capture value?

– How should we design the business model?
– Where should we compete in the value chain?
– How should we compete if standards are important?

 How will we deliver value?

– How do we manage the core business and growth
simultaneously?
– How do we use our strategy to drive real resource allocation?

4
Outline:

 Why do I need an technology strategy?

 How will we create value?
 How will we capture value?
 How will we deliver value?
 Doing strategy in practice

5
Why have a strategy?

6
Why have a strategy?

1. To make choices

7
Is This Your Project Pipeline?

8
Overload at PreQuip
Resources
Active Projects Implied Development Resource
Required for Months to Allocation (months)
(formal development Completion Completion
projects by number) (months) (desired) This year Next year Year after that

1 54 8 40 14 0
2 123 24 38 62 23
3 86 12 50 36 0
4 286 20 92 172 22
5 24 4 24 0 0
.
.
.
26 352 36 48 150 120
27 75 9 62 13 0
28 215 30 40 80 95
29 153 18 60 93 0
30 29 3 29 0 0

All Other Support Activity –– –– 430 430 430

(customer support, troubleshooting)

Total Development Requirements –– –– 2783 2956 2178

Available Resources (months) –– –– 960 960 960

Rate of Utilization (percent) –– –– 289.9 307.9 226.9

9
 Overcommitment destroys
productivity
Average
100%
Value-Added
Time on 80%

Engineering
Tasks 60%

40%

20%

0%
1 2 3 4 5 6
Number of Projects per
Engineer 10
 The Timing and Impact of Management
Attention
Phases
Knowledge Concept Basic Prototype Pilot Manufacturing
Acquisition Investigation Design Building Production Ramp-Up

High
ABILITY
TO INFLUENCE
OUTCOME

Index of
Attention and
Influence

ACTUAL
MANAGEMENT
ACTIVITY
PROFILE
Low

11
Why is it so hard to kill
project #26?
 It’s a “good” project!
 Good managers can meet stretch goals
(and I’m a good manager)
 Making difficult decisions takes time & energy

It’s very hard to kill projects without a strategy

12
Reasons to have a strategy:

2. To be able to change it

13
A Key Framework:
The industry life cycle

Era of Ferment/
Discontinuity

“Dominant design”
Maturity
emerges

Incremental
Innovation

14
 The Industry Life Cycle as an S curve

Performance
Maturity

Discontinuity
Takeoff

Ferment

Time
15
 The S-curve Maps Major Transitions

Maturity

Performance

Discontinuity
Takeoff

Ferment

Time
16
 Transitions often challenge existing
organizations severely
Cumulate share of sales of photolithographic alignment
equipment, 1962-1986, by generation

Contact Proximity Scanner S&R (1) S&R (2)

Cobilt 44 <1
Kasper 17 8 7
Canon 67 21 9
P-Elmer 78 10 <1
GCA 55 12
Nikon 70
Total 61 75 99+ 81 82+

17
But they also create major opportunity

 Corning glass
– Cookware to optical fiber
 HP
– Instrumentation to computers
 IBM
– Mainframes to PCs to Services
 Eli Lilly
– “Random” drug discovery to genetics and genomics

18
Discontinuities are hard!

 Answers to the key strategic questions:

– How do we create value?
– How do we capture value?
– How do we deliver value?

 CHANGE!

19
How shall we create value?

20
The first of 3 key questions

How will we
Create value?

How will we How will we

Deliver value? Capture value?

21
Creating Value:

 Understand how technologies will evolve

– (Both your own and those on which you rely)
 Understand how customer needs will evolve

 Develop world class products and services that meet

customer needs

22
Agenda

 Predicting Technological Change

– The Delphi Model
– Trend extrapolation

 Predicting the Evolution of Customer Needs

– Basic segmentation
– Crossing the chasm
– New technologies, new needs

23
Can one forecast the path of
technological change?
 No

But
 Delphi models
 Forecasting by analogy
 Trend extrapolation

24
Delphi Models
 Ask the experts!
– A committee?
– Structured questionnaires?

 Pros
– Field experts are often years ahead of day to day
practice: technologies do not “come from no where”

 Cons
– They sometimes have little knowledge of possible
applications
– They can be enthusiastic

25
Forecasting by Analogy

The Internet will be like:

Personalized medicine will be like:

The Xbox will be like:

26
Forecasting by Analogy

 Is nanotechnology like semiconductors?

 Or like biotechnology?

 Or like something else altogether?

27
 Dimensions in Silicon and redinbloodBiology
cell diatom
Simple DNA ~5 m (SEM) 30 m
molecules proteins
<1nm nm

bacteria
1 m
m

10-10 10-9 10-8 10-7 10-6 10-5 10-4 10-3 10-2

SOI transistor
width 0.12m

semiconductor Circuit design

nanocrystal (CdSe) Copper wiring
5nm Nanometer memory element width 0.2m IBM PowerPC 750TM
(Lieber) Microprocessor
1012 bits/cm2 (1Tbit/cm2) 7.56mm×8.799mm
6.35×106 transistors
28
control biological machines
Is nanotechnology like biotechnology?
Patents

10000

9000

8000

7000

6000
Semiconductors
5000 Biotechnology
4000
Nanotechnology

3000

2000

1000

0
0 2 4 6 8 10 12 14 16 18 20

Ye a rs

29
Is nanotechnology like biotechnology?
Venture Capital

$4,000,000,000

$3,500,000,000

$3,000,000,000

$2,500,000,000
Semiconductors
$2,000,000,000 Biotechnology

$1,500,000,000
Nanotechnology

$1,000,000,000

$500,000,000

$0
0 2 4 6 8 10 12 14 16 18 20

Ye a r s

30
Trend analysis

 The future is often much like the past, only more so

31
Trend extrapolation: Semiconductors
600 10
9
500
8
7
400

# Transistors (m)
Frequency (MHz)

6
Freq uency (MHz)
300 5 # transistors(m)

4
200
3
2
100
1
0 0
1984 1986 1988 1990 1992 1994 1996 1998 2000

Year

32
Issues in Trend Extrapolation

 Which parameter shall I predict?

 Do all good things come to an end?
 Exploring the difference between progress as a result
of the passage of time, and progress as the result of
returns to effort
 Predicting progress in complementary technologies

33
 Do all good things come to an end?
Technological exhaustion
Physical limit?

Performance

Performance is ultimately constrained

by physical limits

E.g.:
Sailing ships & the power of the wind
Copper wire & transmission capability
Semiconductors & the speed of the electron

Time

34
 Evolution of Measurement-While-Drilling tools
S-Curve

15 Co
n tin Physical limit: signal attenuation
Performance = Data Transmission Rate (bit per second)

u ou
14 sM
.P.
-F
13 SK
3G
12

11
Co
nti
nu
10 ou
sM
. P.
9 -B
PS
K
3G
8

7 Co
n tin
uo
us
6 M
.P .
-2
G
5P
os Co
itiv n
e tin
4 M
ud
uo
us Shallow wells only
Pu M
ls .P . All well conditions
e2 -1
Ne
ga
3 Po nd G
tiv s itiv Ge
eM e ne
M rat
ud2 ud i on
Pu Pu
lse lse Dominant Design = Continuous
1 Mud Pulse Telemetry
0
1 2 3 4 5 6 7 8 9
R&D Effort (measured in Generations = +/- 3 years )
35
 Improvements in Modem Speed

60000

50000

40000
Modem Speed, Bps

30000

20000

10000

0
1960 1965 1970 1975 1980 1985 1990 1995 2000
Time
36
 The Evolution of Palomar’s Products:
Laser Based Skin Treatment

E2000
Ruby Laser
Material
Product Price Cost Year
LightSheer EpiLaser™ $150K $80K 1996
E2000™ $130K $60K 1997
LightSheer™ $100K $40K 1998
SLP1000™ $65K $25K 2000
EsteLux™ $40K $ 4K 2001
400 pounds MediLux™ $50K $ 4K 2003
NeoLux™ $30K $ 4K 2003
StarLux™ $80K $ 5K 2004
Lux Handpieces $10K $ 1K 2002-4
MediLux 120 Pounds Home Devices ? ? ?

48 pounds

37
 Year
1994 1996 1998 2000 2002 2004 2006
0

20

40
Price, Cost $000

60

Price
80
Cost

100

120

140

160

38
Moore’s Law at Work

$1,000,000,000.00
10x reduction
$100,000,000.00 every 7.5 years
$10,000,000.00

$1,000,000.00
Dollars per MIP

$100,000.00
10x reduction every
$10,000.00 4.25 years
$1,000.00

$100.00

$10.00

$1.00

$0.10

$0.01
1959 1969 1979 1989 1999 2009
[Source: Hans P. Moravec 1998-2003]

39
 Semiconductor Performance: Minimum Line Width over Time

Year
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
0

4
Minimum Feature Size

10

12

14

16
40
 Semiconductor Performance: Minimum Line Width over Time

Year
0.1

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
M inim um Feature Siz e

10

100
41
 Modeling the returns to effort vs. time

Performance

Performance may be a non linear

function of effort expended: in
mature industries more and more
effort may lead to less and less
progress, while progress in emerging
industries may be “surprisingly” fast

Effort
42
 Semiconductors: Minimum feature size vs "effort"
Cumulative commerical patents
0.1
Minimum feature size

0 10000 20000 30000 40000 50000 60000

1

10

43
Reflections on the S Curve

 Which unit of analysis?

– Industry? Firm? Technology? Product?
 Which dimension of performance?
 Effort vs. time?
 Can performance limits be predicted?

The S curve is best viewed as a tool for triggering

discussion, not as a “scientific reality”

44
The Evolution of Markets

or

Predicting the pattern of

customer needs

45
Market Evolution over the Life Cycle

 Market segmentation
 Crossing the chasm
 New markets, new needs:
– The Innovator’s Dilemma

46
 The Key Question:
Who buys a technology as it evolves?

Performance

Time

47
 Understanding market dynamics:
Basic segmentation (Rogers)

Units
Bought

Early Late
Majority Majority
Early
Adopters

Innovators Laggards

Time

Adopters differ by, for example, social, economic status --

particularly resources, affinity for risk,
knowledge, complementary assets, interest in the product
48
Understanding market dynamics:
Crossing the chasm: (Moore)

Units
Bought

Crossing the chasm?

Early Late
Majority Majority
Early
Adopters

Innovators Laggards

Time

Making the transition from “early adopters” to “early majority” users often
requires the development of quite different competencies: e.g. service,
support capabilities, much more extensive training.
49
 Managing customers at moments
of discontinuity

Who buys a technology

when it is first
introduced?
Performance

New technologies sell to:

- New customers
- With new needs
- Often at lower margins

Time
50
 The Innovator’s Dilemma: “Disruptive”
technologies may threaten established firms

Established technology

Performance
Mainstream customer needs

Invasive Technology

Niche customer needs

Time
Clay Christensen: The Innovator’s Dilemma
51
Unpacking the Innovator’s Dilemma:
The case of the power bar

52
 Changing Tradeoffs in Photolithography

140

S&R 2
120

Scanning
Sp eed (wa fers/m in g)

100
Projection
Aligners
80

60

40

S&R 1
20

0
0 1 2 3 4 5 6
Yield
53
Initially, PDAs did not seem to be a
threat to PCs:
Speed,
Power,
Memory
PCs

?
PDAs

Time

54
PDAs sold to customers with different
needs:
Speed,
Power,
Memory
PCs

PDAs

Weight/cost

55
But as PDAs improve they may come to
challenge PCs
Speed, ?
Power,
Memory
PCs

PDAs

Weight/cost

56
Or consumer preferences may change

Speed,
Power,
Memory
PCs
?

PDAs

Weight/cost

57
Exercise: Industry Evolution
 Consider the two industries:
– Publishing (Books or music)
– Cellular telephony
 For each industry:
– Sketch the relevant S curves.
• What are the appropriate (technical) measures of
performance? Are there more than one?
• Where is this industry now? Are there major growth areas
or discontinuities on the horizon?
– Sketch the likely trajectory of customer needs
 Choose one industry and be prepared to present your
results to the group

58
 Managing the change in customer
groups may be the hardest task!

Performance

Leading edge customer

focused research may be
a critical capability

Effort
59
The marketing strategy issue at a major
materials supplier:

CR&D
CR&D SBU 1

$100m
? SBU 2

SBU 3 The
Biomaterials Market
work

60
What can be done?

 “Ready, aim, fire”

 Small scale experiments
 Market research of all kinds:
– Conjoint analysis
– Direct customer contact
– Virtual products
– Lead user research

 Significant resources required?

61
Creating Value:

 Understand how customer needs will evolve

 Understand how technologies will evolve
– (Both your own and those on which you rely)

 Develop world class products and services that meet

customer needs

62
 How shall we capture
value?

Uniqueness, Complementary Assets &

the Structure of the Value Chain

63
The second of two key questions:

How will we
Create value?

How will we How will we

Deliver value? Capture value?

64
How shall we capture value?

 How should we design the business model?

 Where should we compete in the value chain?

 How should we compete if standards are

important?

65
Or:
What determines the Inventor’s Share?

Suppliers Customers

Imitators, Inventor
followers

66
Is it the case that
great ideas = pots of money?

Coca
Coca Cola
Cola Xerox
Xerox (early)
(early)
Wal
Wal Mart
Mart
Value Nylon
Nylon
Dell
Dell
captured

Apple
Apple
Xerox
Xerox (late)
RC
RC Cola
(late)
Cola

Value created
(through “raw” invention)

67
Three key ideas:

 Uniqueness
– Controlling the knowledge generated by an innovation

 Complementary assets
– Controlling the assets that maximize the profits from
innovating

 Understanding the dynamics of the value chain

– Should we buy our suppliers? Distributors?
– Should we outsource our manufacturing…
distribution… sales… capability?

68
Uniqueness is very important:

 If a particular innovation, or the knowledge on which it

rests, can be completely “appropriated” (i.e.,
completely controlled or protected) then the innovating
firm may be able to maintain a unique position. This is
a tremendous source of bargaining power.

69
Sources of Uniqueness

 Intellectual property protection

– Patents
• Finite length
• The right to prohibit “producing”
– Copyrights
• The right to prohibit “copying”
 Secrecy
– Trade secrets & non compete clauses
– “Tacit” knowledge
 Speed

70
 IP in historical perspective
US Patents granted per 1000 population

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0
1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
71
 The 2003
Intellectual Property Owners Association
Survey on the Strategic Management of
Intellectual Property in America’s Corporations

Iain Cockburn
Boston University and NBER

Rebecca Henderson
MIT and NBER

72
Survey methodology

 Targeted at senior IP managers, typically Chief Patent

Counsel
 Depth at the expense of breadth: 18 page
questionnaire, more than 120 questions!
 Core sample frame: IPO membership, supplemented
with additional mailing to Delphion list
 Response rate: 1/3 of IPO membership, 5% of others.
N=66.

73
Sample characteristics

 Sample of responding companies dominated by large

manufacturing companies
– Chemicals 22%
– IT and communications 44%
– Life sciences 15%
– Mechanical 16%
 Average sales $20bn, 2001 market cap $44bn
 Average of 14 full time IP attorneys, 264 patent
applications, $91MM licensing revenue

74
 We found:

 Many companies report limits to the effectiveness of

patents: 43% (!) agree that “many of our most important
ideas cannot be effectively protected with patents”
 Yet most rate formal IP rights the most important means
of controlling the use of technology
 Contract law (NDAs, NCAs etc.) also highly rated

75
 Strategic use of IP?

 Our overall impression is that the IP strategy of the

majority of companies is defensive
– Non-confrontational responses to competitors
– Relatively conservative and cautious policies
 Companies are ambivalent about the role of IP in
business strategy
– Many report that profitability and returns to R&D are linked
to strong IP positions and aggressive strategic posture, but
few report activity by their company consistent with this…

76
 Competitive interaction in IP
 65% of surveyed companies report that the most profitable
companies in their industry “react aggressively to IP activity
by competitors”

 But
– Less than 20% would attempt to “fence in” an aggressive
competitor by building IP assets
– More than 90% do not “always evaluate competitor reactions”
when filing patents
– Only 1/3 anticipate triggering an “arms race” if many new
patents are filed

77
So

 It is critically important to proactively develop an IP

strategy that is tightly integrated to the strategic goals
of the business

 But…

78
Uniqueness is powerful but often
difficult to maintain

 Legal mechanisms can be costly to create, and then

even more costly to enforce: and sometimes they
require public disclosure
 Secrecy may be difficult to maintain
 Speed is hard work, and sometimes imitable

79
What are Complementary Assets?

 Those assets that allow a firm to make money, even if

the innovation is not unique:
 The answer to the question:
– If our innovations were instantly available to our
competitors, would we still make money? Why?

80
In the best case, complementary assets
should be tightly held

 Complementary assets that are tightly held are not

easily available to entrants or to most competitors

81
Types of Complementary Assets

 Things you can do

– Manufacturing capabilities
COMPETENCIES
– Sales and service expertise

 Things you own

– Brand name
– Distribution channels RESOURCES
– Customer relationships

82
In successful firms, competencies
create resources, and vice versa:

Competencies Resources

83
 Exercise:
Position:
Frozen foods Complementary assets are:
Publishing Available Tightly
Cell phones held
Your industry/firm

Easy to
maintain

Uniqueness is:

Hard to
maintain

84
Uniqueness & Complementary Assets
over the Life Cycle:

Complementary
Uniqueness Assets

Maturity

Takeoff

Ferment

85
 Indian IP driven
(e.g., patents) growth
path of IT industry is
poised to take off

Maturity

Performance

Discontinuity
Takeoff

Ferment

Time
86
Uniqueness & Complementary Assets:
Strategic Imperatives

 Defend uniqueness if possible and appropriate

 Build complementary assets in advance of competition
 At moments of discontinuity ask:
– Are my complementary assets useful?
– If so, which ones?

87
How shall we capture value?

 How should we design the business model?

 Where should we compete in the value chain?

 How should we compete if standards are important?

88
Power in the Value Chain

89
Porter’s “5 (actually at least 7) Forces”:
Thinking about the balance of power

Political,
“Complementors” regulatory and
Entrants
Entrants institutional
context

Suppliers
Suppliers Rivals
Rivals Buyers
Buyers

Substitutes
Substitutes

90
C.Assets/Uniqueness speak to Rivalry
and the Threat of Entry.

Entrants
Entrants

Suppliers
Suppliers Rivals
Rivals Buyers
Buyers

Substitutes
Substitutes

91
Porter reminds us to think about the
structure of the value chain:

Entrants
Entrants

Suppliers
Suppliers Rivals
Rivals Buyers
Buyers

Substitutes
Substitutes

92
Powerful suppliers and buyers may
constrain profitability

Suppliers
Suppliers Buyers
Buyers

93
Does this mean that if the
money is down (up) stream
we should forwards
(backwards) integrate?

94
 If the money is in lobster
restaurants,
should the lobster fisherman go
into the restaurant business?

95
Key Questions:

 When should an entrepreneurial firm develop it’s own:

– Manufacturing
– Distribution
– Sales
– ….. capabilities?
 When should a mature firm outsource it’s:
– Manufacturing
– Distribution
– Sales
– ….. capabilities?

96
Exercise:

 Under what conditions should an entrepreneurial firm

develop it’s own:
– Manufacturing
– Distribution
– Sales
– ….. capabilities?

 And when should it subcontract/partner for them?

97
Comparing “make” vs. “buy”

Startup Startup

Asset Asset

Supplier Supplier

98
Key Considerations:

 How easy is it to write contracts?

– How tight is the IP regime?
– How much uncertainty is there?
– “Specificity” of the asset – how “thick” is the market?

 What will happen to “entrepreneurial energy”?

 What will be the key complementary assets going

forward?

99
 Make vs. Buy over the life cycle

Performance
Mostly Buy?

Mostly Make? ????

????

Time
100
So “make” (i.e. do it in-house) if:

 There are significant IP worries

 There are likely to be contractual problems
– We can’t be sure of getting the “fair” price
– We can’t be sure they’ll do the work “right”
– I.e., when market are “thin” or there is limited
information
 We have unique competencies that are relevant
 And if buying won’t destroy everyone’s incentives to
be creative and energetic

101
But remember…

 One cannot “buy” profit – if everyone knows it is there

– it will be in the price
 Besides, shouldn’t we “stick to our knitting”?
 Wouldn’t you rather deal with an independent firm,
whom you could fire, than an internal subsidiary?

102
 Make vs. Buy

Entrepreneurial
Drive,
Freedom from
the “old ways” Make

Buy

Control & Coordination

103
 Standards and Strategy:
Competing in Increasingly
Open Worlds

104
What is a standard?

 A standard is a specification that allows for

interoperability

 Eg:
– Cups and lids
– Pistons and engines
– Telephones and sockets
– Speakers and amplifiers
– Hardware and software

105
Questions:
 What is a standard?
 What are switching costs?
 What are network effects?
 What is positive feedback?
 What does increasing returns mean?
What does it means when a market “tips”?
 What is lock-in?
 What is the significance of “winner-takes-all”?

106
 Answers:
 A standard is a particular interface, format or system that allows for
interoperability
 Switching costs are incurred when a customer changes from one supplier or
marketplace to another. The greater the costs, the more difficult it is to switch
 A product or technology benefits from network effects or network externalities
if a significant part of its value to a consumer lies in the size of its (actual or
anticipated) installed base, or market share
 Positive feedback involves a chain of consequences that produces a dynamic
outcome by feeding off itself – an amplification effect
 Success becomes self-reinforcing with increasing returns to scale. Demand
creates further demand
 If consumers believe that one standard is going to capture a very large share of
the market, and that a competing standard is not viable, then the market will “tip
” towards the more successful standard
 Lock-in occurs once a market has tipped. Switching costs may be high, and it
is therefore difficult to get a market to tip to an alternative standard
 The Microsoft operating system monopoly exemplifies “winner-takes-all”

107
Outline

 Moving from “product” to “systems” competition

 Coming soon to an industry near you: the push for
public open standards
 Will all markets “tip”? – managing the complexity of
standards evolution
 Making money in an open world

108
It’s not just about high technology

 Bicycles
 Financial services
 Health care
 Automobiles

109
 The challenge

Selling
Performance products

Selling (parts of)

interconnected
systems

Time
110
Selling Products Selling Interconnected
Systems

 Customers who care about  Customers who care about the

products “on their own total system experience: will
terms”: is this the right this connect with the rest of my
product for me? world?

 Build the “best” product  Control the architecture

– Best designed Or
– Lowest cost  Influence the architecture and
– Most reliable build the best products within it

111
These transitions raise both strategic
and organizational questions

What strategy
Performance should
we pursue?

How do we execute it?

Time
112
The push for public open
standards

113
The pros and cons of open standards

 Pros  Pros

 Cons  Cons

114
Thinking about the dynamics of the
strategic space
Access is:
Open Closed
Details of standards are
Standards are owned
available to all: no
and controlled by the
single firm has control
public sector but are not
over how they evolve:
freely available
no charge for their use
Public
E.g. TCP/IP, HTML
E.g. Cryptography

Control is:
Details of standard are Technology may be
made available to all: standard, but details
but owner has control are not made available
Private over how the standard beyond the firm
evolves and may
charge for use
E.g. Landmark Graphics,
E.g. Nintendo, Palm OS IBM 360

115
In practice these boundaries are fuzzy:
Access is:
More More
Open Closed
More
Public Linux

Control is: Symbian

IBM
360
Mercury/
CDMA
Windows Corba
More
Private

116
Conventional logic (1):
What do customers prefer?
Access is:
More More
Open Closed

More
Public

Control is:
More
Private

117
Conventional logic (2):
What do producers prefer?
Access is:
More More
Open Closed

More
Public

Control is:
More
Private

118
Wireless communications in transition

Market Share

Service Provision
T-Mobile Orange NTT DoCoMo Vodafone
Network Operation

Applications Vodafone
Series Series Live!Live!
Windows
UI 60-90 60-90 UIQ
Microsoft Microsoft SavaJe Microsoft
Linux
Value Share

Operating Systems Symbian Symbian Symbian Symbian Windows

Device Design Nokia Motorola Siemens Samsung Clones and Asians

Sony
Ericsson
Device Manufacture EMS Players
BREW

Chipset Design W-CDMA Qualcomm

Motorola
Infineon
I-250 and beyond
Chipset Manufacture TI

119
Will all markets tip?

Or:
Getting a standard established

120
Tipping

 Markets “tip” when one standard becomes the

preferred choice of nearly every consumer
– VHS
– Windows on the PC
 Not all markets tip: in some markets multiple
standards co-exist
– UNIX vs. Windows on servers
– Sony vs. Microsoft in video games
– Palm vs. Windows CE in PDAs
– Multiple standards in cellular phones

121
“Great products” vs. “Architectures”
Great Products
 Consumers base their
purchase decision on the
intrinsic value of the product
to them
 What would this be worth to
me if I were the only buyer in
the world?
 Competition on the basis of
features, price etc
Architectures
 Consumers base purchase
decisions on the size of the
(actual or projected) installed
base and/or the (actual or
projected) availability of
network externalities
 How many other people are
likely to buy this product?
 Competition on the basis of
the size of network effects:
installed base, availability of
complementary products etc
122
With Strong Network Effects Market
Share Itself Creates Value

Value of standards
Driven product
Value to
consumer

Conventional product

Actual (or anticipated) size of the installed base

123 31
If network effects are important,
markets may “tip”
1

Probability
the next
consumer
chooses to
buy A

0
0 A’s share of installed base 1 28

124
 Probability of Purchase vs Share of sales: Betamax

120

100

80
Share of sales

60

40

20

0
0 20 40 60 80 100 120
Share of installed base
125
 Share of installed base vs purchase probability: VHS

100

90

80

70
Share of sales

60

50

40
30

20
10

0
0 20 40 60 80 100
Share of installed base

126
 Annual Production: VHS vs Beta

50000

45000

40000
A n n u a l P ro d u ctio n , Th o u sa n d s o f u n its

35000

30000

25000
VHS
20000

15000

10000

5000 Betamax

0
1974 1976 1978 1980 1982 1984 1986 1988 1990
Year

127
Tipping dynamics differ with the
strength of network effects

Products with
extensive N.effects
Value to
consumer
Products with
“threshold”
network effects

Conventional product

Actual (or anticipated) size of the installed base

128
Markets with moderate network effects only
tip once critical thresholds are reached
1

Probability
the next
consumer
chooses to
buy from
Firm A

0 1
Firm A’s actual or anticipated share of installed base
129
 Will this market tip?
Market Share

Service Provision
T-Mobile Orange NTT DoCoMo Vodafone
Network Operation

Applications Vodafone
Series Series Live!Live!
Windows
UI 60-90 60-90 UIQ
Microsoft Microsoft SavaJe Microsoft
Linux
Value Share

Operating Systems Symbian Symbian Symbian Symbian Windows

Device Design Nokia Motorola Siemens Samsung Clones and Asians

Sony
Ericsson
Device Manufacture EMS Players
BREW

Chipset Design W-CDMA Qualcomm

Motorola
Infineon
I-250 and beyond
Chipset Manufacture TI

130
How are standards established?

 Standards “win” when a critical mass of consumers

have adopted them

 OR:

 When a critical mass of key players believe that the

standard will be adopted.

131
Establishing a standard: Sun

 Sun founded in 1982 to focus on the workstation

market
 “Open” standard:
– Standard components,
– UNIX operating system

132
Sun (2)
 1980: Apollo founded
 1983: Apollo has $18m in sales, dominates the
workstation market -- uses a proprietary operating
system
 1983: Sun has $1m in sales, mostly to universities
 Lead customer, Computervision “likes the technology
but doesn’t find the company credible” -- “we love your
technology but there is no way you can supply it.
Apollo is the standard in the industry, well financed
and well managed.”
 What should Sun do?

133
Establishing a standard

 Introduce a great “product”

 Come to market ahead of competition
 Build expectations
 Develop, or encourage the development of,
complementary products and services
 Give it away: put the standard in the public sector

134
Making money in
an open world

135
Where’s the money?
Competition in a closed, private world

136
Where’s the money?
Competition in an open private world

137
Where’s the money?
The challenge of an open public world

138
Making money in an open public world

 Competing on a level playing field:

– Do it better, faster, cheaper, in a more integrated way…
– Leverage “complementary assets”

 Be part of the evolution of the playing field:

– Exploring “soft” standards

139
Business models in the different
quadrants
The technology is:
Open Closed

Compete on a
level field
Public
Move to “soft”
standards?
Run hard
Control is:
Encourage the
Deliver a best in
“ecosystem”
Private class system
Embrace/extend
Run hard
Run hard

140
Exploring soft standards

 A “soft” standard is a specification that is completely

compatible with current public standards but offers
enhanced functionality and performance
 It offers customers the security of knowing that they
have avoided being “locked in” and an upgrade path
to the public standard
 Plus the functionality and performance of a more finely
“tuned” technology
 May permit significant premium pricing and the
generation of customer loyalty

141
Soft standards in action:

“Soft” standard
Perf.

Public
standard

Time
142
Managing soft standards

 Maintaining customer trust is critical:

– The instant they come to believe you’re trying to lock
them in, there will be trouble
 The technology task is complex. The “soft” standard
must be:
– Better than the public standard
– Compatible with the current version
– Compatible with future versions
 Ensuring that the “soft” technology is embodied in
future generations of the technology may be a central
strategic goal
143
Summary

 The move from “product” to “system” competitions raises

both strategic and organizational issues
 And increases the force behind the push for open
standards
 Not all markets tip: but as network effects (connectivity,
complementary services, tools, products) become more
important, more and more will.
 Getting a private standard established in these kinds of
worlds is likely to be very hard
 Fortunately, there are ways to make money in an open
world - but managing a “soft” standard requires sustained
attention

144
Summary

145
Two day outline:
 How will we create value?
– How will the technology evolve?
– How will the market change?

 How will we capture value?

– How should we design the business model?
– Where should we compete in the value chain?
– How should we compete if standards are important?

 How will we deliver value?

– How do we manage the core business and real growth
simultaneously?
– How do we use our strategy to drive real resource allocation?

146
Putting the pieces together….

Technology Competition
Markets Organization

Maturity

Takeoff

Ferment

147
 Tomorrow:
Organizational Competence & Change

Performance
?

Time
148
For tomorrow: KODAK

 Evaluate Kodak’s digital imaging strategy to date

– “B+” or “F”?
 How would you evaluate the decision to invest in
digital imaging:
– In the 80s? In the 90s? Now?
 Given that they made the decision to invest, how
would you evaluate their execution?
 What should Kodak do next?
– Where should they try to play in the digital value chain?
– How should they organize their digital efforts?

149