MKT 450 Strategic Management
Mishari Alnahedh
LECTURE 7: Technology-based Industries
The Role of Technology in Creating Competitive
Advantage
Mishari Alnahedh
 Technological change is not simply a story of agile startups beating the
stuffing out of established giants analysis
o Pirelli, from tire to telecommunications
o Nokia, from pulp and paper to telecommunications
 Competitive advantage in technology-intensive industries
o Appropriating the returns to innovation
 Strategies to exploit innovation
o Alternative approaches
o Timing: to lead or to follow?
o Managing risk
 Competing for standards
 Implementing technology strategy
o The conditions for creativity
o From invention to innovation
The Development of Technology
Mishari Alnahedh
From Knowledge Generation to Diffusion
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
The Development of Technology
Mishari Alnahedh
Lags Between Knowledge Generation and Commercialization
Basic Knowledge
First
Patents
Product
Launch
Imitation
Jet Engines
17th century Newtonian
physics
1930
1957
1959
Xerography
Late 19th, early 20th
centuries
1940
1958
1974
Fuzzy Logic
Controllers
1960s
1981
1987
1988
Automobile
Satellite
Navigation
Late 1950s
Early 1960s
1998
2002
MP3 Players
Early 1990s
1994
1997
1999
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
Appropriation of Value
Mishari Alnahedh
How are the Benefits from Innovation Distributed?
Customers
Suppliers
Innovator
Imitators and
other
“followers”
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
The Development of Technology
Mishari Alnahedh
The Profitability of Innovation:
Value of the
Innovation
• Legal protection
• Complementary
Resources
Innovator’s ability
to appropriate the
value of the
innovation
• Imitability of
the technology
• Lead time
Profits
from
Innovation
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
Legal Protection of Intellectual Properties
Mishari Alnahedh
 Patents – Exclusive rights to a new product process, substance
or design
 Copyrights – Exclusive rights to artistic, dramatic and musical
works
 Trademarks – Exclusive rights to words, symbols or other
marks to distinguish goods and services; trademarks are
registered with the Patent Office
 Trade Secrets – Protection of chemical formulae, recipes and
industrial processes
Also, private contracts between firms and between a firm and its
employees can restrict the transfer of technology and know how
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
Legal Protection of Intellectual Properties
Mishari Alnahedh
Manufacturing Distribution
Finance
Core
technological
know-how
Marketing
Other
Service
Complementary
technologies
Other
Bargaining power of owners of complementary resources depends
upon whether complementary resources are generic or specialized.
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
Lead Time
Mishari Alnahedh
 If rivals can imitate – Time lag is the major advantage of
the innovator
 But maintaining lead-time advantage requires
continuous innovation
 Lead time is reinforced by learning effects
US Manager’s Perception of the Effectiveness of
Different Mechanisms for Protecting Innovation
Mishari Alnahedh
Secrecy
(%)
Patents
(%)
Leadtime (%)
Sales/
Service (%)
Manufacturing
(%)
Food
59
18
53
40
51
Drugs
54
50
50
33
49
Electronic
communications
34
21
46
50
51
Telecom equipment
47
26
66
42
41
Medical equipment
51
55
58
52
49
All industries
51
35
53
43
46
Food
56
16
42
30
47
Drugs
68
36
36
25
44
Electronic equipment
47
15
43
34
41
Medical equipment
49
34
45
32
50
All industries
51
23
38
31
43
Product Innovations
Process Innovations
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
The Comparative Success of Leaders and Followers
Mishari Alnahedh
Who Do You Think are More Successful:
Leaders or Followers ?
The Strategic Management of Technology
Mishari Alnahedh
To Lead or to Follow ?
Can the innovation be protected
by intellectual property rights or
lead-times advantages
How important are
complementary resources
Is owning/controlling industry
standard critical to competitive
advantage
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
If so, advantages in leadership
• Followers can avoid investing
in complementary resources
by using better-established
industry infrastructure
• Firms possessing
complementary resources
have the luxury of waiting
If so, advantages in leadership
Uncertainty and Risk Management in Tech-Based
Industries
Mishari Alnahedh
Sources of
uncertainty
Technological
uncertainty
Selection process for standards and
dominant designs emerge is complex
and difficult to predict, e.g. future of 3G
Market
uncertainty
Customer acceptance and adoption rates
of innovations notoriously difficult to
predict, e.g. PC, Xerox copier, Walkman
Cooperating with lead users
early identification of customer requirements
–assistance in new product development
Strategies for
managing risk
Flexibility
• Keep options open
• Use speed of response to
adapt quickly to new
information
• Learn from mistakes
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
Limiting risk exposure
• Avoid major capital commitments
(e.g. lease don’t buy)
• Outsource
• Alliances to access other firms’
resources & capabilities
• Keep debt low
The Emergence of Standards
Mishari Alnahedh
 Emergence of a dominant design paradigm



Model T in autos
IBM 360 in mainframes
Douglas DC3 in passenger aircraft
 Emergence of technical standards

Emerge in industries where they are network externalities
 Entrenchment of the dominant designs and technical
standards



Learning effects: Incremental improvement of the dominant design
Switching costs
Need for coordinated action by multiple players
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
Sources of Network Externalities
Mishari Alnahedh
 User linkages, e. g.
Telephone systems – Only value of telephone is connection to other users
 Online auction – Value of auction depends on number of buyers and sellers
participating
 Smartphones – Same platform with the biggest user base (currently Android)
attracts the most applications
Also social identification – The desire to conform encourages us to listen to the same
music, watch the same TV shows and wear the same clothes as those with whom we
identify

 Availability of complementary products, e.g.


Most PC applications software Written for Windows, not Mac
In economy autos, easier to get parts and repair for a Ford Focus or Honda Accord
than a Kia, Proton or Lamborghini
 Economizing on switching costs, e.g.

In suites of office software, users of Microsoft Office more likely to avoid switching
costs than users of Lotus SmartSuite when they move jobs
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
Network Externalities
Mishari Alnahedh
 An industry has network externalities if the demand is
dependent on the perception of number of product sold.



Three critical masses (Q=0, Q=Q1, Q=Q2)
Q1 is unstable  Knife‘s Edge
If you have a low market share, what strategies are available ?
P
P*
0
Q1
Q2
Q
Sources of Network Externalities
Mishari Alnahedh
Competing for Standards:
Value Appropriation vs. Market Acceptance
Video Cassette Recorders
Maximize
market
acceptance
VHS
Betamax
LOOSE
TIGHT
IBM-PC
Apple
Mac
Personal Computers
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
Maximize
value
appropriation
Fighting Standards War
Mishari Alnahedh
1. Determine the potential for standards emergence – Analyze
network extremities
2. Assemble allies – Enlist partners (customers, complementors,
competitors) to build a bandwagon
3. Pre-empt the market – Build user base quickly: enter early,
attract key customers, adopt penetration marketing
4. Manage expectations – Use launch and pre-launch publicity
and promotion to convince the market that you will be the
winner
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
Today’s Main Takeaway
Mishari Alnahedh
In emerging industries and other industries where technology is
the primary medium of competition, the nurturing and
developing of innovation is the fundamental source of
competitive advantage, and the focus of strategy formulation
NEXT CLASS !
Mishari Alnahedh
Case: Video Games Console Industry in 2012:
The Next Round