STRATEGY& TECHNOLOGY

DR. MARK FRUIN

BUS 189, CHPT 7

FALL 2009

TEAM ORGANIZATION• IT’S BETTER TO HAVE 1 TEAM MEMBER ANALYZE

BOTH FIRMS IN THE SAME TOPIC AREA– KEY AREAS

• GROWTH IN INDUSTRY & PRODUCT/MARKET SEGMENTS; FUNCTIONAL AND B-L STRATEGIES

• FINANCIAL PERFORMANCE; EARNINGS, ROI, ETC.• R&D, DESIGN, PRODUCTION, MARKETING, DISTRIBUTION &

MANAGEMENT (VALUE CHAIN ANALYSIS)

• IT’S BETTER FOR 1 MEMBER TO INTEGRATE, WRITE & INTEGRATE THE PROJECT– FOLLOW GOOD ESSAY GUIDELINES

• SET UP ARGUMENT AS HYPOTHESES TESTING• 3-4 REASONS WHY “THIS COMPANY IS A BETTER INVESTMENT

CHOICE FOR NEXT 3 YEARS” WITH SUPPORTING EVIDENCE• RECAP AND REITERATE

IMPORTANT DATES: REVISED SCHEDULE

• OCT 27, SLIDES AVAILABLE ON-LINE; NO CLASSROOM MEETING

• NOV 3: DRAFTS OF GROUP PROJECTS• NOV 3: SECOND IN-CLASS MID-TERM USING

CASE 12, INFOSYS CONSULTING• NOV 24: THIRD IN-CLASS MID-TERM, USING

CASE 31, EASTMAN KODAK• DEC 1: GROUP A PRESENTATIONS• DEC 8: GROUP B PRESENTATIONS• DEC 11: FINAL PROJECT DUE IN MY OFFICE

Q: WHAT ARE HIGH-TECH IND?• A: INDUSTRIES IN WHICH UNDERLYING

TECHNOLOGIES (SCIENTIFIC KNOWLEDGE) & COMPLEMENTARY PRODUCTS/SERVICES ADVANCE RAPIDLY (SAYS HILL & JONES, p. 229)

• HIGH GROWTH = HIGH TECH? • OR, A MORE COMPLETE DEFINITION OF HIGH

TECH– HIGH GROWTH

– HIGH COST

– HIGH RISK

– HIGH COMPLEXITY

WHAT MAKES AN INDUSTRY HIGH-TECH

• BESIDES FACTORS JUST LISTED, WHICH ARE INTERNAL TO THE INDUSTRY, THERE IS THE EXTERNAL ENVIRONMENT– NORMALLY, FIRMS ADAPT TO ENVIRON OR FAIL, BUT IS

ADAPTING TO H-T ENV ENOUGH?

– RICHARD D’AVANI & HYPERCOMPETITION, A STATE OF PERMANENT INNOVATION (NO EQUILIBRIUM, NO REST)

– GARY HAMEL & STRATEGY AS REVOLUTION

– ANNALEE SAXENIAN - SILICON VALLEY AS A REGIONAL RELATIONAL NETWORK OF CAPABILITIES

IMPORTANCE OF STANDARDS & DOMINANT DESIGN

• TECH STANDARDS, WIDELY ADOPTED FORMATS, & DOMINANT DESIGNS– GENERALLY COME AFTER SHAKEOUT IN GROWTH

PHASE– REDUCE CONFUSION– REDUCE COSTS– REDUCE RISK– ENHANCE COMPATIBILITY AND ADVENT OF

COMPLEMENTARY ASSETS/RESOURCES/PRODUCTS– INCREASE OPPORTUNITIES TO MAKE MONEY

• AGAIN, POST-SHAKEOUT; BEFORE SHAKE, EVERYONE THINKS THEIR TECH IMPLEMENTATION IS BEST; NO AGREEMENT

TECH STANDARDS FOR PCsEXAMPLES OF DOMINANT DESIGN (FIG

7.1) & THEIR INTERCONNECTEDNESS TO OTHER PRINCIPAL PIECES OF PUZZLE– OS (WINTEL STANDARD)– MICROPROCESSOR– INTERNAL HARD DRIVE– MONITOR– KEYBOARD– MODEM (TCP/IP)– CD (FLOPPY DISK)– PERIPHERAL SLOTS (USB)

COMMUNITIES OF PRACTICE• CREATE THEIR OWN ACTIVITIES/ECONOMIES

THAT ARE NOT WIDELY AVAILABLE OTHERWISE– BY WORKING TOGETHER INTENSELY, CREATE HIGH

PERFORMANCE WORK GROUPS– CAN OCCUR WITHIN AND BETWEEN FIRMS

• BOUNDARY SPANNING (BETWEEN SECTIONS, DEPARTMENTS, DIVISIONS & FIRMS) IN THIS SENSE IS OPPORTUNITY ENHANCING

• RELATIONAL PATTERNS BETWEEN WORKERS DEFINED BY SETS OF ACTORS/INTERACTIONS

MUCH OF THE WORKING OUT OF DOMINANT DESIGN/STANDARDS

• IS DONE COOPERATIVELY

• SMALL NUMBERS COOPERATION– STRATEGIC ALLIANCES– JOINT VENTURES– COALITIONS & SUPPLY CHAINS

• LARGE NUMBERS COOPERATION– SPECIAL ECONOMIC ZONES/INDUST. DISTRICTS– GLOBAL FIRMS & NETWORKS OF SUBSIDIARIES– INTERFIRM NETWORKS

ESTABLISHING STANDARDS• RECOGNIZING BENEFITS OF STANDARDS:

FIRMS IN INDUSTRY LOBBY GOVERNMENTS• RECOGNIZING BENEFITS, FIRMS COOPERATE

WITHOUT GOV HELP, OFTEN THROUGH MECHANISMS OF INDUSTRY ASSOCIATIONS

• COMBINATION OF PUBLIC/PRIVATE EFFORTS• INDUSTRY STANDARDS EMERGE SELECTIVELY

& PRIVATELY– PREEMPT COMPETITION

– FIRST MOVER ADVANTAGES

– COALITIONS OF RIVAL FIRMS/STNDRDS• BETAMAX (SONY) V. VHS (MATSUSHITA)/INTEL V. AMD

NETWORK EFFECTS

• INCREASING AND DECREASING BENEFITS ARE POSSIBLE BASED ON NETWORK EFFECTS– SIZE IS IMPORTANT– COMPLEMENTARY PRODUCTS ARE IMPORTANT– HOW MANY DIFFERENT WAYS CAN NETWORK

BE ACCESSED & USED?– FREE RIDING (FIRMS RIDE ON EMERGING

CONSENSUS BUT DON’T CONTRIBUTE)

NETWORK EFFECTS

• WHAT ARE THEY?

• 2ND LAW OF SILICON VALLEY– BOB METCALFE, 3COM– AND 1ST LAW IS? MOORE’S LAW

• EXTERNALITIES AND NETWORK EFFECTS - WHAT ARE THEY?– DEFINE EXTERNALITIES– SOME EXAMPLES

METCALFE’S LAW• COSTS OF NETWORK EXPAND LINEARLY WITH

INCREASE IN SIZE, WHILE VALUE OF NETWORK INCREASES EXPONENTIALLY

• HOW IS THIS POSSIBLE

• DIFFERENT SORTS OF NETWORKS– STAR NETWORKS, THE SIMPLEST

– SCALE FREE OR HUB BASED

– HIERARCHICAL

– RANDOM (NOT REALLY RANDOM BUT MULTIPLE CONFIGURATIONS POSSIBLE)

STRATEGIES FOR WINNING FORMAT WARS

• ENSURE READY SUPPLY OF COMPONENTS• LEVERAGE KILLER APPS (APPLICATIONS)• AGGRESSIVELY PRICE AND CAPTURE MARKET

SHARE– RAZOR & BLADE STRATEGY

• COOPERATE WITH COMPETITORS (IMMEDIATELY PRIOR TO MATURE PHASE, BUT NOT AFTER)

• LICENSE FORMAT– GET MORE USERS; BUILD CRITICAL MASS OF USERS

LAW OF DIMINISHING RETURNS• IN MANY INDUSTRIES, OTHER THAN

HIGH-TECH, LAW OF DIMINISHING RETURNS HOLDS:– MARGINAL COSTS RISE AS OUPUT EXPANDS

• INVEST MORE, SUCH AS IN LABOR, TO PRODUCE MORE

• TRADITIONAL ECONOMIES OF SCALE & SCOPE

– BUT IN H-T INDUSTRIES, SUCH AS SOFTWARE AND MULTIMEDIA, MARGINAL COSTS ARE ALMOST ZERO

INTELLECTUAL PROPERTY RIGHTS AND HIGH-TECH

• RECOGNIZE DIFFERENCE BETWEEN BIO-TECH AND SOFTWARE, FOR EXAMPLE– R & D INVESTMENT/HUMAN RISK– APPROPRIABILITY OF VALUE– MARKET CONTESTABILITY

• THE VALUE OF SOFTWARE, FOR EXAMPLE, IS NOT DIMINISHED BY USE, QUITE THE CONTRARY– OLD NOTION OF COMMONS, NEW NOTION OF

COMMONS– COMPLEXITY & COMPLEMENTARITY OF KNOWLEDGE

FIRST-MOVER ADVANTAGES• FIRST MOVER MORE EASILY EXPLOIT NETWORK

EFFECTS (SPEED OF FADS DIFFUSING/SPREADING)• MAY BE ABLE TO ESTABLISH BRAND LOYALITY

BEFORE RIVALS APPEAR• MAY BE ABLE TO HARNESS 4Ss BEFORE RIVALS;

WHEN RIVALS APPEAR, CUT PRICES TO REFLECT 4S ADVANTAGES ALREADY HELD

• CREATE SWITCHING COSTS• ACCUMULATE VALUABLE MARKET, CUSTOMER,

PROD & PROCESS KNOWLEDGE VIA FEEDBACK

FIRST MOVER DISADVANTAGES• FAST FOLLOWER STRATEGIES MAY BE SUPERIOR

TO FIRST MOVER STRATEGIES– LEARN FROM MISTAKES OF OTHERS– INVEST LESS & DO MORE– CROSS CHASM ON BACKS OF OTHERS– CHEAPER, BETTER, FASTER ALTERNATIVES EXIT– PRODUCT VERSUS PROCESS INNOVATIONS

• ECONOMIC BACKWARDNESS IN HISTORICAL PERSPECTIVE– ALEXANDER GERSCHENKRON, HARVARD & NOBEL

PRIZE WINNER– BUT CATCH-UP REQUIRES MORE & BETTER PLANNING– FALLS TO STATE TO COORDINATE & PLAN IN

CENTRALIZED WAY

CAPTURING FIRST MOVER ADVANTAGES

• BUILD HIGH BARRIERS TO IMITATION– KNOWLEDGE ABOUT MINOR/MAJOR INNOVATIONS – NEW INNOVATION HARD TO KEEP SECRET,

HOWEVER– KNOWLEDGE ABOUT (HOW) & KNOWLEDGE OF, NOT

THE SAME THING• KNOW-HOW, KNOW-WHEN, KNOW-WHO, KNOW-WHAT

• DEVELOP COMPLEMENTARY ASSETS– MANUFACTURING CAPABILITY, MKTNG

KNOWLEDGE, ADEQUATE SALES FORCE, SUPPORT

• HARNESS CAPABLE COMPETITORS– A SMALL PIECE OF A BIG PIE IS BETTER THAN…

INNOVATION STRATEGIES• GOING IT ALONE• ENTERING INTO AN ALLIANCE• LICENSING INNOVATION

• ALL 3 DEPEND ON:– INNOVATOR HAVING REQUIRED

COMPLEMENTARY ASSETS OR NOT?– HEIGHT OF BARRIERS TO IMITATION – # OF CAPABLE COMPETITORS

INNOVATION TYPES• INCREMENTAL - MOST OF IT; MOSTLY MATURE

STAGE OF ILC• RADICAL - ONCE IN A BLUE MOON

– SOMETIMES CALLED “BREAKTHROUGH” INNOVATION– BY DEFINITION, REQUIRES LOTS OF RESOURCES– LIKELY TO OCCUR AT ONLY ONE OR TWO POINTS IN

INDUSTRY LIFE CYCLE

• DISRUPTIVE/DISCONTINUOUS – ONLY OCCASIONALLY IN ‘HIGH-TECH’ INDUSTRIES

WHERE COMPETING TECHNOLOGY PARADIGMS & DOMINANT DESIGNS ARE OVERTAKEN

– A NEW MARKET SPACE IS CREATED W/I INDUSTRY LIFE CYCLE

CHRISTENSEN & DISRUPTIVE TECHNOLOGY

• CLAY CHRISTENSEN, HBS, ARGUES THAT ESTABLISHED FIRMS ARE OFTEN AWARE OF NEW TECH BUT TOO INVESTED IN OLD TECH TO PAY HEED TO IT– PARTLY NIH SYNDROME– PARTLY LACK OF CUSTOMER INTEREST IN NEW,

UNPROVEN, EMERGING TECH

AS A RESULT, ESTAB FIRMS CONT TO IMPROVE & INVEST IN OLD TECH UNTIL ONE DAY…

DISRUPTIVE TECHNOLOGY• OFTEN TAKES A RADICALLY DIFFERENT VALUE

CHAIN TO COMMERCIALIZE A DISRUPTIVE TECHNOLOGY– WHEN MAINSTREAM PRODUCTS ARE EXPENSIVE AND

INCONVENIENT; LOOK OUT– NANO CAR FROM TATA; REDUCE PRICE TO $2500

WHEN CHEAPEST ALTERNATIVE IS $7500• LOW COST INNOVATION MAY BE THE FUTURE

• SMALL FIRMS WITH ENTREPRENEURIAL MANAGERS ARE MORE RISK TAKING– IN GENERAL, IN H-T INDUSTRIES SMALL FIRMS ARE

ESTABL TO TAKE RISKS

BIG FIRMS BUY SMALL FIRMS BECAUSE THEY ARE INNOVATIVE & TO REDUCE COMPETITION

DIGITAL EQUIPMENT CORP• DEC ENGINEERS COULD DESIGN A PC WITH

EYES CLOSED– PLANS FOR PCs at FOUR DIFFERENT TIMES

• CURRENT BUSINESS MODEL WAS FOR MINICOMPUTERS WITH LARGE SCALE COMPUTING POWER, LARGE SALES FORCE, AND IN-FIELD SUPPORT FOR CUSTOMERS

• WHY ABANDON SALES OF HIGH MARGIN, HIGH PRICED COMPUTERS IN FAVOR OF PCs?

DEC & DISRUPTIVE TECHNOLOGY• DEC WAS VULNERABLE TO DISRUPTIVE

TECHNOLOGY• RIVALS SEE DIFFERENT SEGMENTS THAT ARE

UNDERSERVED IN THE SAME INDUSTRY– NON-MAINSTREAM BECOMES MAINSTREAM

• DISRUPTIVE DOES NOT ALWAYS/USUALLY MEAN RADICAL

• DISRUPTIVE MEANS PICKING OFF THE LESS ATTRACTIVE SEGMENTS OF A BUSINESS AND RUNNING WITH THEM– IF ENOUGH CUSTOMERS FOLLOW, NEW MARKET

SEGMENTS ARE BORN

OTHER EXAMPLES

• TOYOTA AND CREW MAX– TOO LATE TO THE PARTY?– MAHINDRA & MAHINDRA PICKUPS

• HIGH TOWING/HAULING, ECONOMICAL (DIESEL), UTILITARIAN & AFFORDABLE

• APPLE AND iPHONE• HONDAJET

– ONE OF THE FEW COMPANIES MAKING BOTH AIRFRAMES AND JET ENGINES

– ORIGINALLY, NEEDED AN AIRFRAME TO TEST THEIR ENGINE, SO THEY DESIGNED ONE

SOURCES OF INNOVATION• INNOVATION ARISES THROUGH INTERACTIONS• INNOVATIONS ARE OFTEN STIMULATED WHEN

INTERACTIONS OCCUR BETWEEN HETEROGENEOUS ACTORS– HOMOGENEOUS ACTORS ARE NOT AS LIKELY TO ROCK

THE BOAT

• EFFORTS TO CLARIFY, ALIGN, RE-ALIGN, INTEGRATE, & CALIBRATE RESULT IN INNOVATIONS– ON THE OTHER HAND, IT’S A LONG WAY FROM A

BETTER IDEA TO A BETTER PRODUCT

CAUSES & CONSEQUENCES OF INNOVATION

• IN WHAT SORT OF ORGANIZATIONAL, INDUSTRY AND INSTITUTIONAL CONDITIONS ARE INNOVATIONS LIKELY TO OCCUR– ORGANIZATIONAL?– INDUSTRY?– INSTITUTIONAL?

• ATTITUDES OF MANAGERS TOWARDS DIFFERENT SORTS OF INNOVATION

• WHAT SORT OF FIRMS, IF ANY, SHOULD PURSUE INNOVATION-BASED STRATEGIES AS B-L STRATEGIES? – SUCH AND SUCH FIRMS AT SUCH AND SUCH

MOMENTS IN THE INDUSTRY LIFE CYCLE???– ARE THERE FIRMS THAT FIT THE PART?