Standards and Competition

1
Standards and Competition

• Prasada Reddy
• Lund University, Sweden

2
References

• Hill, C.W.L. (1997) Establishing a standard
  Competitive strategy and technological standards
  in winner-take-all industries, The Academy of
  Management Executive, 11 (2), 7-25.
• Shapiro, C. And Varian, H.R. (1999) The Art of
  Standards Wars, California Management Review, 41
  (2), 8-32.

3
Competitive Strategy 1

• The ability of a firm to establish its technology
  as an industry standard has become a key
  determinant of its long term competitiveness.
• Consumer electronics, computer hardware and
  software, and telecommunications are some of the
  industries in which standards are important.
• Success of Microsoft (windows) and Intel -
  Wintel.
• JVC-Matsushita Vs. Sony in VCR Standards.

4
Competitive Strategy 2

• For a firm to design a competitive strategy, It
  must understand
• Why Standards are important?
• What are the conditions that would lead to
  adoption of a particular technology as industry
  standard?

5
Product Compatibility 1

• Why Standards are important?
• Product compatibility, an aspect of product
  design, ensures that complementary products work
  together smoothly.
• Compatibility is achieved by following a common
  technological standard or a set of design
  principles.
• In industries where are compatibility is
  important, the value to the owner of a product is
  an increasing function of availability of
  compatible products (e.g. Software applications
  for windows vs. Apple OSS).

6
Product Compatibility 2

• The availability of compatible products, in turn,
  is determined by the installed base of a given
  product.
• Figure 1 Self-reinforcing character.
• A larger installed base leads to greater
  availability of complementary products. This
  increases the value of the product to the
  customer, leading to increased demand for the
  product (greater installed based).
• This self-reinforcing mechanism is also called
  increasing returns. The more successful a firm
  becomes in getting its technology as standard,
  the more successful it will be in the future.

7
Product Compatibility 3

• In markets where two or more technologies are
  competing to become the industry standards, small
  changes in initial conditions, either by chance
  or due to a strategy, may result in one
  technology gaining a sufficient lead (concept
  similar to dominant design)
• This technology lock in the market and become a
  de facto standard.
• Other competing technologies get locked out.
• Such a lock-in could occur even when the dominant
  technology is inferior to competing
  technologies/designs (e.g. QWERTY keyboard).

8
Strategic Options 1

• For Installed Base
• Licensing and OEM Agreements - e.g.
  JVC-Matsushita in the VCRs.
• Benefits
• - Enables a wide initial distribution of this
  technology to jump-start an increasing returns
  mechanism.
• - Co-opts competitors who have the resources to
  develop their own superior (competing)
  technologies.
• - A positive signal to suppliers of complementary
  products.

9
Strategic Options 2

• For Installed Base
• Licensing and OEM Agreements - e.g.
  JVC-Matsushita in the VCRs.
• Costs
• - Learning from this core technology, the
  licensees may alter this technology to supersede
  the original technology, which does not require
  payment of license fees.
• - Increased number of suppliers based on licensed
  technology may keep the product prices lower,
  reducing the royalties.

10
Strategic Options 3

• For Installed Base
• Entering into Strategic Alliances
• Alliances are more than arms length relations.
• Commitment of partners to jointly develop and
  commercialize a technology (e.g. Philips-Sony
  CDs).
• Same benefits/costs as licensing/OEM
• Partners can diversify into production of
  complementary products (e.g. Philips-Matushita
  DCC used their own in-house record labels)
• A superior technology by combining partners
  complementary knowledge bases.

11
Strategic Options 4

• For Installed Base
• Product Diversification
• Chicken-and-egg situation in availability of
  complementary products (e.g. Music for CDs).
• A firm should be prepared to diversify (e.g.
  Apple laser jet for desktop publishing).

12
Strategic Options 5

• For Installed Base
• Aggressive Positioning
• Positioning in relation to critical market
  dimensions - price, product features,
  distribution, and promotions.
• In addition - Line up sufficient production
  capacity to serve potential demand, quality of
  the product, cost-efficient production and
  logistics to distribute product.
• Philips DCC tape-decks lower switching costs
  (play both analog and digital tapes).
• Failure No advertisement of digital benefits
  High penetration price Competing Sonys minidisc
  system.

13
(No Transcript)
14
Strategic Contingencies

• Barriers to Imitation
• - High barriers permit a gradual build up of
  installed base.
• Complementary Resources of the Firm
• - Firms without manufacturing or marketing adopt
  licensing/OEM or SA.
• Capability of Potential Competitors
• - Firms facing capable rivals should try to
  co-opt them.
• Supply of Complementary Products
• - If no suppliers, diversify.

15
Strategies

• Aggressive Sole Provider
• - e.g. Xerox in Japan should have adopted more
  aggressive stance to pre-empt rivals.
• Passive Multiple Licensing
• - e.g. Dolby in the audio player market - low
  fees forestall rivalry scale of adoption
  generates profits.
• Aggressive Multiple Licensing
• - e.g. JVC-Matsushita in VCR
• Selective Partnering
• - e.g. Philips and Sony in CDs, IBM with Intel
  MS.

16
(No Transcript)
17
Standard Wars

• Classification of standard wars
• Identification of seven critical assets
• Main lessons on standard wars.

18
Standard Wars - Classification

• Evolution Strategy - new technology compatible
  with the old superior performance with little
  switching costs.
• Revolution Strategy - incompatibility with the
  old technology compelling performance so
  customers do not mind incurring switching costs.

19
Standard Wars - Classification

• Rival Evolutions - competitors technologies are
  compatible with their own old technologies, but
  incompatible with each other, e.g. DVD vs. Divx
  (both play CDs).
• Evolution vs. Revolution - your technology offers
  backward compatibility and the rivals does not.
  Compatibility vs. Superior performance.
• Rival Revolutions - competitors technologies are
  not compatible with the old technologies, e.g.
  Nintendo 64 Sony Playstation.

20
(No Transcript)
21
Seven Key Assets in Network Markets 1

• Control over an installed base of users
• Intellectual property rights
• Ability to innovate
• First-mover advantages
• Manufacturing capabilities
• Strength in complements
• Brand name and reputation

22
Seven Key Assets in Network Markets 2

• Control over an installed base of users (e.g.
  Microsoft) - Large locked-in customers favor an
  evolution strategy as well as blocking rivals
  and forcing them into risky revolution
  strategies.
• Intellectual property rights - Legal protection
  against imitation by competitors, e.g. Respective
  patents of Philips Sony in DVDs and CDs.
• Ability to innovate - Resources capabilities
  that enable the firm to out-engineer the
  competition.
• First-mover advantages - Technological and market
  leadership based on previous product development
  work, e.g. Netscape in bowsers.

23
Seven Key Assets in Network Markets 3

• Manufacturing capabilities (e.g. Compaq and Dell
  in computers) - Efficient production can yield
  cost advantages.
• Strengths in complements - Acceptance of
  complementary products stimulates sales in the
  market.
• Reputation and brand name - instant credibility
  in the market place.

24
Market Tactics

• Two crucial marketplace tactics
• 1) Pre-emption is based on early lead and
  positive feedback.
• - Techniques - early product launches, marketing
  aimed at pioneers, penetration pricing (below
  cost), etc.
• 2) Expectations management is about establishing
  credibility with customers.
• - Techniques - announcing upcoming products to
  freeze rivals sales, assembling allies and
  making grand claims about your product.

25
Defending a Dominant Standards 1

• Stay on your guard (avoid rigidities like
  Frances Minitel)
• Offer customers a migration path (Microsofts
  improvements)
• Commoditize complementary products (have a
  vibrant and competitive market for complements to
  your product)
• Compete against your own installed base (Intel
  pushes for hardware performance of complementary
  products such as graphics chips,and thus helping
  develop applications that require higher
  processing power and in turn driving hardware
  upgrade cycle).

26
Defending a Dominant Standards 2

• Protect your position (One tactic is to offer
  ongoing attractive terms to important
  complementors, e.g. Nintendo to developers of hit
  games.
• Leveraging installed base (control over an
  interface to extend leadership from one side to
  the other)
• Stay a leader (Ciscos use of profits from
  established products to buy up firms developing
  next generation)

27
Those Who Fell Behind

• Rear-Guard Actions
• Defend the remaining niche markets
• Leapfrogging
• Adapters and Interconnections (negotiate access
  to the larger network)
• Survival pricing
• Legal actions.