Chapter Seven

Strategy in High-Technology 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

VII

Strategy in High Technology Industries The smart phone format war

At the present time, the cell phone business is witnessing a format war. Symbian, a consortium led by Finnish cell phone maker Nokia, is engaged in a winner takes all struggle with Microsoft and PalmSource to establish its software as the operating system that will run applications on smart phones. Smart phones are hand held devices that combine traditional cell phone functions with functions once found only on hand held computers or PCs. Leading edge smart phones are in effect powerful hand held computers and communicators that come with a full range of personal information and management applications such as addresses and date books; the ability to browse the internet; the ability to send and receive email and digital photos; and the ability to run a growing number of other software programs ranging from pocket sized versions of Microsoft Office and videogames. Although the global market for such software is still relatively small valued at $250 million a year in 2004 sales of smart phones are growing rapidly and may exceed 30 million units worldwide in 2005, up from a mere 5 million in 2003. Ultimately, many analysts believe that the development of market for smart phone operating systems will mirror the market for personal computers, where MS dominates with a share of over 90%. They argue that independent software developers will write programs for whichever operating system is found on the largest number of smart phones. Thus if Symbian is outselling its rivals 2 to 1, developers will write applications for Symbian first. This will make Symbian phones more attractive for customers and thus demand for smart phones with Symbian operating system will increase. As demand grows, even more apps will become available for smart phones with Symbian OS and its lead will increase will its rivals are marginalized in the industry. Symbian could become the MS of smart phone business. Symbian has some big advantages on its side. In addition to Nokia, with about 48% of Symbians equity, members of the consortium include some of the worlds largest cell phone manufacturers, most notably Ericsson, Sony, Matsushita and Siemens. These manufacturers have an incentive to push the Symbian OS. Perhaps for this reason, as of mid 2004 Symbian held a 41% of the market up from 37% a year earlier, followed by PalmSource and MS, each with a 23% market share. However Symbians influence is constrained by the fact that ultimately it is smart phone service providers such as Verizon that place orders for smart phones on behalf of their customers, and the service providers may request a MS or Palm OS. Both of the latter have an advantage in that there are already a wide range of apps written for their OSs. Moreover people are already familiar with their user interfaces. Still these have not proved sufficient to halt the rise of Symbian. While MS market share held steady between 2003 and 2004, PalmSource saw its share fall to 23% from 31 % a year earlier. Neither company is ready to concede defeat just yet.

Net Worth: $3.5 Billion The World's Billionaires #307 Ray Dolby 03.05.08

VII

Strategy in High Technology Industries How Dolby became the standard in Sound Technology ?

Inventor Ray Dolbys name has become synonymous with superior sound in homes, movie theaters and recording studios. The technology produced by Dolby is part of nearly every music cassette and cassette recorder, prerecorded videotape and more recently DVD movie Disc and player. Since 1976, close to 1.5 billion audio products that use Dolbys technology have been sold worldwide. More than 44,000 movie theaters now show films in Dolby Digital Surround sound, and some 40 million Dolby Digital home theater receivers have been sold since 1999. It has become the industry standard for high quality sound. Any company that wants to promote its products as having superior technology licenses sound technology from Dolby. How did Dolby build this technology franchise ? The story goes back to 1965 when Dolby was founded in London by Ray Dolby (later moved to San Francisco). Ray had invented a technology for reducing the background hiss in professional tape recording without compromising the quality of material being recorded. He manufactured the systems incorporating this, but sales to professional recording studios were slow initially. Then in 1968 he had a big break. He met Henry Kloss of KLH, a highly regarded producer of audio equipment (record players & tape decks) for consumer markets. He reached an agreement to license his noise reduction technology, and soon all other manufacturers started approaching him for licensing. He briefly considered manufacturing these items himself but then he realized that he would then be in competition with all his licensees, forcing them to develop their own technologies or maybe change the standard itself. He adopted the Licensing model but knew if he charged too much, he would be encouraging others to develop it on their own, so a modest fee would lower the incentive for anyone to attempt that. The next question was whom to license? Dolby wanted the Dolby brand to be associated with superior sound, so he needed to make sure that the licensee adhered to quality standards, hence set up a formal quality control program for licensees and the agreement required that all agree to have their products tested at Dolby and they cannot sell products that do not pass Dolby quality tests. Hence he maintained the quality image of products featuring Dolby technology and Trademarks.

Another key aspect of his strategy was born when he began to promote the idea of releasing pre-recorded cassettes encoded with Dolby Noise Reduction Technology. He decided to license the technology for free, instead collecting licensing fee from sales of tape players that used Dolby. This strategy was hugely successful and set up a positive feedback loop. Growing sales of tapes created a demand for players and as the players installed base increased, there was a surge for tapes and further boosting demand for players with Dolby. The came videocassettes, videogames and DVD releases.
Dolby has become the standard for sound in music and film and video industries and finally onto the web where it has also licensed its digital technology to compaies in music delivery on internet, those making PCs and hand held devices etc.

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.

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 mass-production Reduce the risks associated with supplying complementary products and help

The source of product differentiation and competitive advantage is based on the technical standard.

Establishments of Standards
Standards emerge in one of three ways:
1. 2. Companies may lobby the government to mandate an industry standard. Standards are often set by cooperation among businesses or industry forums. May become part of the public domain 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)

3.

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

In many high-tech industries, the fixed costs of developing the product are very high, but the costs of producing additional units are low:

Strategic Significance of High-Tech Cost Structure

If a company can shift from a cost structure with increasing marginal costs to one with high fixed costs but low marginal costs, its profitability may increase. When a high-tech company faces high fixed costs and low marginal costs, it should deliberately drive prices down to drive up volume.

The strategy of pricing low to drive volume to reap wider profit margins is central to the business model of some successful high-tech companies.

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.

The Impact of Imitation on Profits of a First Move

Being a first-mover does not guarantee success. Success depends on the first-mover strategy that is pursued.

First-Mover Advantages
The five main sources of first-mover advantages: 1. Exploit network effects and positive feedback loops Locking customers into its technology Establish significant brand loyalty Expensive for later entrants to break down 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 Create switching costs for customers Making it difficult for rivals to take customers away Accumulate valuable knowledge Regarding customers, distribution, and technology that late entrants will find difficult or expensive to match

2.

3.

4.

5.

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 Develop and market the innovation itself. 2. Strategic alliance or joint venture

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 innovation (height of barriers to imitation) ? Are there capable competitors who could rapidly imitate the innovation ?

Strategies for Profiting from Innovation

Technological Paradigm Shifts

Occur when new technologies emerge which: 1. 2. 3. 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

Established and Successor Technologies

Swarm of Successor Technologies

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

Strategic Implications of Paradigm Shifts for Established Companies

1. 2. 3. 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.

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 New Entrants

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

1. 2.

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:

1. 2. 3. 4.

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