Technology Strategy

1
Technology Strategy

• Competition for sustainability in the era of
  information economy

2
Vision of corporation

• 3M
• Microsoft
• GE
• FedEx
• Oracle
• Sheseto
• Xerox

3
Align technology with business

• The price-quality tradeoff
• The profit-share tradeoff
• The growth-position tradeoff
• The pioneer-harvest tradeoff
• The consistency-diversity tradeoff
• The enactment-response tradeoff

4
Clarify the core competence

• Distinguished, non-imitable, substantial,
  marketable
• Complementary technology
• Critical technology
• Externally acquired technology
• Fundamental needed technology
• Mature technology

5
Integration considerations

• Integration for technology exploitation
• Integration for order fulfillment
• Integration
• relevance vs. difficulty
• Investment vs. controllability
• Generic vs. specific
• Modular design vs. integral design

6
Competitive advantage

• Absolute advantage
• Relative advantage
• Critical to technology exploitation integration
  arrangement
• Clustering the position
• Relative market power vs. absolute advantage vs.
  technology maturity

7
The strategic guide to information economy

• System products
• Standard competition
• Rights management
• Policy

8
System products

• Complementary products
• Different manufacturers
• Strategy for complementors as well as competitors
• Compatibility as strategic choice
• Standards and interconnection
• Hardware/software
• Client/server
• Viewer/content
• Product lines
• High fixed cost, low incremental cost
• Leaders to value based pricing
• Lower quality may be more expensive
• Proliferation strategy

9
How Standards Change the Game

• Expanded network externalities
• Make network larger, increase value
• Share info with larger network
• Attracts more users
• Reduced uncertainty
• No need to wait
• In war, neither side may win
• Reduced consumer lock-in
• Netscapes Open Standards Guarantee

10
Change Game

• Competition for the market v. competition in the
  market
• Buy into an open standard, that becomes closed?
• Competition on price v features
• Commoditized products?
• Competition to offer proprietary extensions
• Extending a standard
• Component v systems competition
• With interconnection, can compete on components

11
Who wins? Who loses?

• Consumers
• Generally better off
• But variety may decrease
• Complementors
• Generally better off
• May serve the brokering role (DVD)
• Incumbents
• May be a threat
• Strategies
• Deny backward compatibility
• Introduce its own standard
• Ally itself with new technology
• Innovators
• Technology innovators collectively welcome
  standards
• If the group benefits, there should be some way
  to make members benefit
• Negotiation costs, opportunistic behavior

12
Formal Standard Setting

• Essential patents must be licensed on fair,
  reasonable and non-discriminatory terms
• ITU, ANSI and ISO
• What is your goal?
• National or international?
• Protecting your interests?
• What are others goals?
• Do they really want a standard?

13
Tactics in Formal Standard Setting

• Dont automatically participate
• If you do, you have to license
• Keep up momentum
• Continue RD while negotiating
• Look for logrolling
• Trading technologies and votes
• Be creative about deals
• Second sourcing, licensing, hybrids, etc.
• Beware of vague promises
• Definition of reasonable
• Search carefully for blocking patents
• Patents held by non-participants
• Preemptively build installed base

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Building Alliances

• Assembling allies
• Pivotal customers should get special deals
• But dont give your first customers too big an
  advantage
• Offer temporary price break
• Who bears risk of failure?
• Usually ends up with large firms
• But bankruptcy favors small firms
• Government is even better!
• Smart cards in Europe

15
Managing Open Standards

• Standard is in danger if it lacks a sponsor
• Lessons of Unix
• Interconnectionsearching a migration route
• Extension of TLC
• Negotiating a truce
• Do the benefit cost calculation
• How to divide a larger pie?

16
The standards game
Player B
openness
Player A
openness
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Lessons from standards competition

• Commoditize technology and complements
• Competition requires allies
• How does your standard affect competition?
• Standards benefit consumers and suppliers, at
  expense of incumbents and sellers
• Formal standard setting adds credibility
• Find natural allies
• Before a battle, try to negotiate a truce
• Try to retain control over technology, even when
  establishing an open standard

18
Rights Management

• The characteristics of information
• The structure of cost
• Low reproduction cost is two-edged sword
• Cheap for owners (high profit margin)
• But also cheap for copiers
• Maximize value of IP, not protection
• Examples
• Library industry
• Video industry

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Information cost

• Anything that can be digitized
• Text, images, videos, music, etc.
• Unique demand characteristics
• Expensive to produce, cheap to reproduce
• High fixed cost, low marginal cost
• Not only fixed, but sunk
• No significant capacity constraints
• Particular market structures
• Monopoly
• Cost leadership
• Product differentiation (versioning)

20
Policy

• Understand environment
• IP regime
• Price discrimination
• Illegal if it effectively lessens competition
• Legal arguments that work
• Can set lower prices resulting from lower costs
• Set differential prices to meet competition
• Pricing only questionable if it lessens
  competition
• Competition policy
• Regulation
• Antitrust

21
Tactics for Lock-In and Switching Costs

• Systems lock-in durable complements
• Hardware, software, and wetware
• Individual, organizational, and societal
• Example Stereos and LPs, Costly switch to CDs
• Deeply digging the Network Effects
• Value depends on number of users
• Positive feedback
• Indirect network effects
• Expectations management, preemption
• Compatibility
• Backwards forwards

22
Classification of Lock-In

• Durable purchases and replacement declines with
  time
• Brand-specific training rises with time
• Information and data rises with time
• Specialized suppliers may rise
• Search costs learn about alternatives
• Loyalty programs rebuild cumulative usage
• Contractual commitments damages

23
Follow the Lock-in cycle
Brand Selection
Sampling
Lock-In
Entrenchment
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Implications for strategy

• Protects competition as a process
• Monopoly isnt illegal, but attempt to monopolize
  is
• Monopoly may be inhibited from using strategies
  that are legal for other firms
• But even small firms may be accused of antitrust
  violations
• Role of treble damages

25
Information economy is different, but not so
different!

• Key concepts
• Versioning
• Lock-in
• Systems competition
• Network effects

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Beyond technology competitionexperience
Absorption
Entertainment
Education
Passive participation
Active participation
Aesthetics
Escapism
Immersion
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Upgrading the technology value
high
high
Demonstration of experience
Customization
Relevance of demand
Differentiation
Add-on service
Fabrication
Commoditization
Raw materials
low
low
low
high
Pricing
28
Extended readings

• Porter, Michael (1996), What is Strategy?
  Harvard Business Review, Nov.-Dec.
• Iansiti, Marco and Jonathan West (1997),
  Technology Integration Turning Great Research
  into Great Products, Harvard Business Review,
  May-June.
• Shapiro, Carl and Hal R. Varian (1998),
  Information Rule, Harvard Business School Press,
  Boston.
• Pine II, B. Joseph, James h. Gilmore (1999), The
  Experience Economy, Harvard Business School
  Press, Boston.