6. strategy of technology changes
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Overview
Technology The body of scientific knowledge used in the
production of goods or services
High-tech industries Those in which the underlying scientific
knowledge that companies in the industry use is
advancing rapidly, and by implication so are theattributes of the products and services that resultfrom its application
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The Importance of High-Tech
Technology is accounting for an ever largershare of economic activity
Many low-tech industries are becoming more
high tech High-tech products are making their way into a
wide range of businesses
Even in industries not thought of as high tech,technology is changing aspects of the productor production system
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Technical Standards and Format Wars
Technical standards A set of technical specifications that producers
adhere to when making the product or a
component of it Format wars
Battles to set and control technical standards
The source of product differentiation is basedon the technical standard
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Technical Standards for PersonalComputers
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Benefits of Standards
Helps to guarantee compatibility Can help to reduce confusion
Can help to reduce production costs Can help to reduce the risks associated withsupplying complementary products
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Establishments of Standards
Companies may lobby the government tomandate an industry standard
Technical standards are often set bycooperation among businesses Public domain
Standard is often selected competitively bymarket demand
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Network Effects and Positive Feedback
Network effects The size of the network of complementary
products is a primary determinant of demand for
an industrys products Positive feedback
Reinforcing network effects to encourage adoption
of a standard
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Lockout and Switching Costs
Lockout Occurs when the market settles on a standard and
companies promoting alternate standards are no
longer able to compete Switching costs The costs consumers must bear to switch from a
product based on one standard to a product based
on another If consumers are unwilling to bear switching
costs, a company will be locked out
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Strategies for Winning a Format War
Ensure a supply of complements Leverage killer applications
New technology or products that are so compelling thatcustomers adopt them in droves, killing demand forcompeting formats
Aggressively price and market Razor and blade strategy: pricing the product low to
increase the installed base, then pricing complementshigh to make profits
Cooperate with competitors License the format
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Managing Intellectual Property Rights
Intellectual property rights The product of any intellectual and creative effort Patents, copyrights, and trademarks give
individuals and companies incentives to engage inthe expense and risk of creating new intellectual
property
Digitalization and piracy rates Scale of the problem is very large Legal and technological solutions are required
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Managing Intellectual Property Rights(contd)
Strategies for managing digital rights Recognize that low costs of copying and
distributing digital media can be used to the
companys advantage Take advantage of low costs of copying and
distribution to drive down costs of purchasingmedia (coupled with encryption software)
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Technological Paradigm Shifts
When new technologies emerge that Revolutionize the structure of the industry Dramatically alter the nature of competition Require companies to adopt new strategies to
survive
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Paradigm Shifts and the Decline ofEstablished Companies
Paradigm shifts are more likely to occur when The established technology in the industry is
mature and approaching its natural limit
A new disruptive technology has entered themarketplace and is taking root in niches that are
poorly served by incumbent companies usingestablished technology
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The Technology S-Curve
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Established and Successor Technologies
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Disruptive Technology
A new technology that gets its start from themainstream of a market and then, as itsfunctionality improves over time, invades the
main market Revolutionizes the industry structure and
competition, often causing the decline ofestablished companies because they listen tocustomers who say they do not want it
Causes a technological paradigm shift
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Strategic Implications of ParadigmShifts for Established Companies
Having access to knowledge about howdisruptive technologies can revolutionizemarkets is valuable
It is important to invest in newly emergingtechnologies that may become disruptive
Commercialization of disruptive technologymay require a different value chain with adifferent cost structure
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Strategic Implications of ParadigmShifts for New Entrants
May be constrained by lack of capital May have to manage the organizational
problems associated with rapid growth May need to find a way to take the technology
from a small niche into the mass market May need to decide whether to go it alone or
partner with an established company