Chapter 7

STRATEGY AND
TECHNOLOGY
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 Learning Objectives
• Understand the tendency toward
standardization in hi-tech markets
• Describe strategies used to establish a
technology as the standard
• Explain the cost structure of hi-tech
firms and articulate strategic
implications
• Explain nature of technological
paradigm shifts and their implications
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 “Whoever is first in the field
and awaits the coming of
the enemy, will be fresh for
the fight; whoever is second
in the field and has to
hasten to battle will arrive
exhausted. - Sun-Tzi

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 High-Technology Industries
“…those in which the underlying scientific
knowledge that companies in the industry use is
advancing rapidly… (as) are the attributes of the
products/services that result from its application
are also advancing rapidly.”

Technology is:
• Scientific knowledge used in production of goods
or services
• Accounting for a larger share of economic activity
• Revolutionizing the product or production system
in industries not thought of as high-tech

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 Technical Standards
and Format Wars
“…standards are a set of technical specifications
that producers adhere to when making the
product or a component of it.
Format wars
• One standard will come to dominate a market.
• Many battles in high-tech industries are
companies competing to set standard.

Product differentiation and competitive

advantage are based on a technical standard.

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 Technical Standards
for Personal Computers
Figure 7.1

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 Benefits of Standards
o Guarantee compatibility between
products & compliments
o Reduce consumer confusion
o Reduce production costs
o Reduce risks associated with
supplying complementary products

Standards lead to low-cost and

differentiation advantages for companies.
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 3 Ways Standards Emerge:
1. Firms lobby government to mandate
industry standard- public domain.
2. Standards often set by cooperation
among firms/forums.
3. Standards often selected by
market demand.
• Network effects
• Positive feedback loop
• Lockout
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 Positive Feedback
in VCR Market
Figure 7.2

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 Winning a Format War
Successful strategies revolve around finding
ways to make network effects work in their favor
and against their competitors:
o Ensure supply of complement- Plus product itself
o Killer applications- New products so compelling
customers adopt rapidly killing demand for
competition
o Aggressively price/market- Price product low to
increase installed base, price complements high for
profits
o Cooperate with competitors-Speed up adoption
o License format- Reduce incentive for competitors
to develop own
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 Cost Structures in
High-Tech Industries

Figure 7.3

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 Law of
Diminishing Returns
“To produce more of a good, a
company… hires more labor…
invests in more plant/machinery…
additional resources… are not as
productive… increasing marginal
costs.”

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 Strategic Significance of
High-Tech Cost Structure
Fixed costs of developing product very high,
but costs of producing additional units are low:

o If can shift from cost structure with increasing

marginal costs to high fixed costs but low marginal
costs- profitability may increase.
o When company faces high fixed costs/low marginal
costs, it should drive prices down to drive up
volume.

Strategy of pricing low to drive volume to reap

wider profit margins is central to business model
of some successful high-tech companies.
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 Impact of Imitation
on First Mover Profits
Figure 7.4

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 First-Mover Advantages
First to develop/pioneer revolutionary products
can lead to enduring competitive advantage
5 key Advantages:
• Opportunity to exploit network effects and positive feedback
loops
• Ability to establish significant brand loyalty
• Ability to ramp up sales volume early
• Ability to create switching costs for customers
• Ability to accumulate valuable knowledge

Being first-mover does not guarantee success.

Success depends on first-mover strategy pursued.
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 First-Mover Disadvantages
1. Pioneering cost- develop technology &
distribution channels & educate customer
2. Prone to mistakes- uncertainties in new
market
3. Risk building wrong resources &
capabilities- mass-market may differ from
the needs of early adopters
4. May invest in inferior/obsolete technology-
if underlying technology advancing rapidly
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 Exploiting First-Mover Advantages
Strategies
1. Going it alone- develop/market innovation
2. Strategic alliance/joint venture- develop/market
innovation with other companies
3. License innovation- let them develop the market
Choosing strategy:
? Does company have complementary assets to
exploit innovation?
? How difficult for imitators to copy innovation?
? Are there capable competitors who could
rapidly imitate innovation?
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 Strategies for
Profiting from Innovation

Table 7.1

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 Technological Paradigm Shifts
New technologies emerge that:
• Revolutionize structure of industry
• Dramatically alter nature of competition
• Requires firms adopt new strategies

More likely to occur with:

• Natural limits to technology- established
technology is mature & approaching natural
limit
• New disruptive technology- entered
marketplace and taking root in niches poorly
served by firms using established technology
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 Technology S-Curve
Figure 7.5

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 Established and
Successor Technologies

Figure 7.6

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 Swarm of
Successor Technologies

Figure 7.7

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 Disruptive Technology
“…new technology that gets its start away from
mainstream of market and invades
main market as functionality improves...”

o Revolutionizes industry structure &

competition
o Causes technological paradigm shift

Often causes decline of established companies

–because they listen to customers who say
they do not want it.
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Implications of Paradigm Shifts-
Established Companies
o Knowledge about how disruptive technologies
can revolutionize markets is valuable asset.
o Important for established firms to invest in
newly emerging technologies that may
become disruptive.
o Commercialization may require different value
chain & cost structure.
Chances of success in developing &
commercializing disruptive technology will be
enhanced if it is placed in its own organization.
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 Implications of Paradigm
Shifts- New Entrants
Advantages:
o No pressure to continue out-of-date business .
o No worry about established customer base,
distribution channels, or suppliers.
Challenges:
o Constrained by lack of capital
o Need to manage organizational problems from rapid
growth
o Find way to take technology from small niche to the
mass-market
o Go it alone or partner with established company
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 “The guy with the competitive
advantage is the one with the
best technology.” - Walter Wriston

“A business’s flexibility in
adapting to change and market
dynamics will mark the winners
and losers in this fast-changing
Internet Age.”
- Michael Dell

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