Chapter 4 is strategy
- 1. CHAPTER 4 IS STRATEGY AHMAD JAINI INFORMATION SYSTEM E-mail: ahmadjainisif@gmail.com
- 2. Standards Battles and Design Dominance
- 3. A Battle Emerging in Mobile Payments 12/26/2018 3 By 2014, there were 6.6 billion mobile phone subscriptions in the world, and of those, 2.3 billion had active mobile broadband subscriptions that would enable users to access the mobile web.a Mobile payment systems offered the potential of enabling all of these users to perform financial transactions on their phones, similar to how they would perform those transactions using personal computers. However, in 2015, there was no dominant mobile payment system, and a battle among competing mobile payment mechanisms and standards was unfolding. In the United States, several large players, including Apple, Samsung, and a joint venture called Softcard between Google, AT&T, T-Mobile, and Verizon Wireless, had developed systems based on Near Field Communication (NFC) chips in smartphones. NFC chips enable communication between a mobile device and a point-of-sale system just by having the devices in close proximity.b The systems being developed by Apple, Samsung, and Softcard transferred the customer’s information wirelessly and then used merchant banks and credit card systems such as Visa or MasterCard to complete the transaction. These systems were thus very much like existing ways of using credit cards but enabled completion of the purchase without contact.
- 4. OVERVIEW 12/26/2018 4 The previous chapter described recurrent patterns in technological innovation, and one of those patterns was the emergence of a dominant design. As Anderson and Tushman pointed out, the technology cycle almost invariably exhibits a stage in which the industry selects a dominant design. Once this design is selected, producers and customers focus their efforts on improving their efficiency in manufacturing, delivering, marketing, or deploying this dominant design, rather than continue to develop and consider alternative designs. In this chapter, we first will examine why industries experience strong pressure to select a single technology design as dominant. We then will consider the multiple dimensions of value that will shape which technology designs rise to dominance.
- 5. WHY DOMINANT DESIGNS ARE SELECTED 12/26/2018 5 Why do many markets coalesce around a single dominant design rather than support a variety of technological options? One primary reason is that many industries exhibit increasing returns to adoption, meaning that the more a technology is adopted, the more valuable it becomes.1 Complex technologies often exhibit increasing returns to adoption in that the more they are used, the more they are improved. A technology that is adopted usually generates revenue that can be used to further develop and refine the technology. Furthermore, as the technology is used, greater knowledge and understanding of the technology accrue, which may then enable improvements both in the technology itself and in its applications. Finally, as a technology becomes more widely adopted, complementary assets are often developed that are specialized to operate with the technology. These effects can result in a self- reinforcing mechanism that increases the dominance of a technology regardless of its superiority or inferiority to competing technologies. Two of the primary sources of increasing returns are (1) learning effects and (2) network externalities.
- 6. Learning Effects 12/26/2018 6 Ample empirical evidence shows that the more a technology is used, the more it is developed and the more effective and efficient it becomes.2 As a technology is adopted, it generates sales revenues that can be reinvested in further developing and refining the technology. Furthermore, as firms accumulate experience with the technology, they find ways to use the technology more productively, including developing an organizational context that improves the implementation of the technology. Thus, the more a technology is adopted, the better it should become. One example of learning effects is manifest in the impact of cumulative production on cost and productivity—otherwise known as the learning curve. As individuals and producers repeat a process, they learn to make it more efficient, often producing new technological solutions that may enable them to reduce input costs or waste rates. Organizational learning scholars typically model the learning curve as a function of cumulative output: Performance increases, or cost decreases, with the number of units of production, usually at a decreasing rate (see Figure 4.3). For example, in studies of industries as diverse as aircraft production and pizza franchises, researchers have consistently found that the cost of producing a unit (for example, a pizza or an airplane) falls as the number of units produced increases.
- 7. Absorptive capacity The ability of an organization to recognize, assimilate, and utilize new knowledge 12/26/2018 7 Prior Learning and Absorptive Capacity A firm’s investment in prior learning can accelerate its rate of future learning by building the firm’s absorptive capacity.7 Absorptive capacity refers to the phenomenon whereby as firms accumulate knowledge, they also increase their future ability to assimilate information. A firm’s prior related experience shapes its ability to recognize the value of new information, and to utilize that information effectively. For example, in developing a new technology, a firm will often try a number of unsuccessful configurations or techniques before finding a solution that works well. This experimentation builds a base of knowledge in the firm about how key components behave, what alternatives are more likely to be successful than others, what types of projects the firm is most successful at, and so on. This knowledge base enables the firm to more rapidly assess the value of related new materials, technologies, and methods. The effects of absorptive capacity suggest that firms that develop new technologies ahead of others may have an advantage in staying ahead. Firms that forgo investment in technology development may find it very difficult or expensive to develop technology in a subsequent period. This explains, in part, why firms that fall behind the technology frontier find it so difficult to catch up.
- 8. Network Externalities 12/26/2018 8 Many markets are characterized by network externalities, or positive consumption externalities.8 In a market characterized by network externalities, the benefit from using a good increases with the number of other users of the same good. The classic examples of markets demonstrating network externality effects are those involving physical networks, such as railroads or telecommunications. Railroads are more valuable as the size of the railroad network (and therefore the number of available destinations) increases. Similarly, a telephone is not much use if only a few people can be called with it—the amount of utility the phone provides is directly related to the size of the network. Network externalities can also arise in markets that do not have physical networks. For example, a user’s benefit from using a good may increase with the number of users of the same good when compatibility is important. The number of users of a particular technology is often referred to as its installed base. A user may choose a computer platform based on the number of other users of that platform, rather than on the technological benefits of a particular platform, because it increases the ease of exchanging files. For example, many people choose a computer that uses the Windows operating system and an Intel microprocessor because the “Wintel” (Windows and Intel) platform has the largest installed base, thus maximizing the numberof people with which the user’s files will be compatible. Furthermore, the user’s training in a particular platform becomes more valuable as the size of the installed base of the platform increases. If the user must invest considerable effort in learning to use a computer platform, the user will probably choose to invest this effort in learning the format he or she believes will be most widely used.
- 9. Government Regulation 12/26/2018 9 In some industries, the consumer welfare benefits of having compatibility among technologies have prompted government regulation, and thus a legally induced adherence to a dominant design. This has often been the case for the utilities, telecommunications, and television industries, to name a few.10 For example, in 1953 the U.S. Federal Communications Commission (FCC) approved the National Television Systems Committee (NTSC) color standard in television broadcasting to ensure that individuals with monochrome television sets would be able to receive the color television programs broadcast by networks (though they would see them in black and white). That standard was still in place in 2003. Similarly, in 1998, while a battle was being fought in the United States over wireless technology formats, the European Union (EU) adopted a single wireless telephone standard (the general standard for mobile communications, or GSM). By choosing a uniform standard, the EU could avoid the proliferation of incompatible
- 10. The Result: Winner-Take-All Markets 12/26/2018 10 All these forces can encourage the market toward natural monopolies. While some alternative platforms may survive by focusing on niche markets, the majority of the market may be dominated by a single (or few) design(s). A firm that is able to lock in its technology as the dominant design of a market usually earns huge rewards and may dominate the product category through several product generations.
- 11. MULTIPLE DIMENSIONS OF VALUE 12/26/2018 11 1. A Technology’s Stand-Alone Value The value a new technology offers to customers can be driven by many different things, such as the functions it enables the customer to perform, its aesthetic qualities, and its ease of use. To help managers identify the different aspects of utility a new technology offers customers, W. Chan Kim and Renee Mauborgne developed a “Buyer Utility Map.”15 They argue that it is important to consider six different utility levers, as well as six stages of the buyer experience cycle, to understand a new technology’s utility to a buyer. 2. Network Externality Value In industries characterized by network externalities, the value of a technological innovation to users will be a function not only of its stand-alone benefits and cost, but also of the value created by the size of its installed base and the availability of complementary goods (see Figure 4.6(a)).
- 12. Summary of chapter 12/26/2018 12 1. Many technologies demonstrate increasing returns to adoption, meaning that the more they are adopted, the more valuable they become. 2. One primary source of increasing returns is learning-curve effects. The more a technology is produced and used, the better understood and developed it becomes, leading to improved performance and reduced costs. 3. Another key factor creating increasing returns is network externality effects. Network externality effects arise when the value of a good to a user increases with the size of the installed base. This can be due to a number of reasons, such as need for compatibility or the availability of complementary goods. 4. In some industries, the consumer welfare benefits of having a single standard have prompted government regulation, such as the European Union’s mandate to use the GSM cellular phone standard. 5. Increasing returns can lead to winner-take-all markets where one or a few companies capture nearly all the market share.
- 13. 12/26/2018 13 6. The value of a technology to buyers is multidimensional. The stand- alone value of a technology can include many factors (productivity, simplicity, etc.) and themtechnology’s cost. In increasing returns industries, the value will also be significantly affected by the technology’s installed base and availability of complementary goods. 7. Customers weigh a combination of objective and subjective information. Thus, a customer’s perceptions and expectations of a technology can be as important as (or more important than) the actual value offered by the technology. 8. Firms can try to manage customers’ perceptions and expectations through advertising and public announcements of preorders, distribution agreements, and so on. 9. The combination of network externality returns to market share and technological utility will influence at what level of market share one technology will dominate another. For some industries, the full network externality benefits are attained at a minority market share level; in these industries, multiple designs are likely to coexist.