CHAPTER 7
Strategy and Technology
Synopsis Of Chapter
The goal of this chapter is to describe the strategies and concepts that are unique to high-technology
industries. High-tech industries are growing in number and many formerly low-technology industries are
becoming more high-tech. In addition, high-technology industries face similar industry conditions, and thus
tend to employ a similar range of strategies.
One of the most important concepts in understanding high-technology industries is the idea of technical
standards. These standards emerge as a new technology evolves rapidly in its early days. Typically, many
alternate technologies are tried before a new standard is chosen. The existing technology is usually
completely replaced by the new technology in time. The contest is to decide which firm will own the
technical standard which is called a “format war.”
Standards may emerge as a result of government policy or through an agreement made by firms within an
industry, or gradually emerge based on consumer buying patterns. A critical part of a new technology’s
success is often the support of complementary products. A network of interrelated buyer and supplier firms
creates a support system for new technology.
Winning the format wars require a company to build the installed base for its standard as rapidly as possible,
thereby leveraging the positive feedback loop, inducing consumers to bear switching costs, and ultimately
locking the market into its technology. A number of strategies for winning a format war include ensuring a
supply of complements, leveraging killer applications, being aggressive in marketing and pricing, cooperating
with competitors, and licensing formats. Such activities contribute to the cost of being present in high-tech
industries. The cost structure is reflected in comparative cost economics and its strategic significance.
First movers typically have an economic benefit, due to the early monopoly and the opportunity to gain
technology-specific knowledge, driving down costs and increasing sales. Sometimes, however, firms that
follow first movers can benefit from the first mover’s experience without the steep up-front investment. There
are first mover disadvantages which include bearing significant pioneering costs, mistakes because of the
uncertainties in new markets, risk of building the wrong resources and capabilities, and investment in inferior
or obsolete technologies.
In addition, high-tech products are increasingly digitized, which makes it easier to steal the product through
piracy. Therefore, intellectual property rights are an important concern of high-tech firms. Also, hightechnology industries tend to have high fixed costs and low marginal costs.
Therefore, strategies for success in high-tech industries include being a first mover, owning the technical
standard, building demand early by dropping price, riding down the experience curve, and being open to
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Chapter 7: Strategy and Technology
strategic alliances with firms that possess complementary assets.
The last part of the chapter examines various strategies for use in high-technology industries and the nature of
the technological paradigm shifts. Strategies for exploiting first-mover advantages include having
complementary assets, higher barriers to imitation, being aware of capable competitors, and investing in
innovation. Technological paradigm shifts require companies to adopt new strategies in order to survive.
Paradigm shifts are more likely to occur in industries when there are limits to technology and when there is
disruptive technology. All the more reason that established companies have access to knowledge of disruptive
technology and invest in technologies that may produce disruptive technologies. New entrants, on the other
hand, can just focus on the opportunities available with disruptive technology.
Learning Objectives
1. Understand the tendency toward standardization in many high-technology markets.
2. Describe the strategies that firms can use to establish their technology as the standard in a market.
3. Explain the cost structure of many high-technology firms and articulate the strategic implications of this
structure.
4. Explain the nature of technological paradigm shifts and their implications for enterprise strategy.
Opening Case
A Battle Emerging in Mobile Payments
In 2012, more than 75% of the world population was using mobile phones, and 80% of those accessed the
mobile Web. 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.
The mobile web is similar to using the web on a laptop, but there was no dominant mobile payment system in
place then. Top firms began developing Near Field Communication (NFC) chips for smartphones that can
facilitate wireless transactions and enable purchase without contact. Other companies that did not require
NFC chips used a downloadable application and the web to transmit customer information. Companies like
PayPal had a clear advantage because customers could simply complete purchases by entering their phone
numbers and a pin number, or use their PayPal-issued card.
In other parts of the world where mobile phones are used more than banks, intriguing alternatives for mobile
banking were gaining traction even faster. The opportunity, then, of giving such people access to fast and
inexpensive funds transfer is enormous. The leading system in India is Inter-bank Mobile Payment Service
was developed by National Payments Corporation of India (NPCI). This system uses a unique identifier for
each individual that links directly to his or her bank account.
With such far reaching impact, by 2013, it was realized that mobile payments was an opportunity like no
other. It could accelerate e-commerce, smartphone adoption, and promote global financial services. However,
obstacles still exist due to the lack of compatibility between many mobile payment systems.
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Chapter 7: Strategy and Technology
Teaching Note:
This case illustrates that global developments take place rapidly, and competition in technology is especially
fast. Ask the students if similar technological developments can take place at the same time in all parts of the
world, or does technology have to mold itself to suit a particular place? Also, discuss with the students if
smartphones have facilitated communication among people, or have they led to a lack of personal contact.
Lecture Outline
I. Overview
Technology refers to “the body of scientific knowledge used in the production of goods or services.”
High-technology industries (also called high-tech industries) are ones in which the scientific knowledge
used by companies in the industry is advancing rapidly, and, by implication, so are the attributes of the
products and services that result from its application. Examples of high-tech industries include the
computer industry, telecommunications, consumer electronics, pharmaceuticals, power generation, and
aerospace, among others.
The circle of high-technology industries is both large and expanding, and technology is revolutionizing
aspects of the product or production system even in industries not typically considered high-tech. Although
high-tech industries may produce very different products, when developing a business model and strategies
that will lead to a competitive advantage and superior profitability and profit growth, they often face a similar
situation.
II. Technical Standards and Format Wars
Technical standards are a set of technical specifications that producers adhere to when making the
product or a component of it that can be an important source of competitive advantage. Battles to set and
control technical standards in a market are referred to as format wars—essentially, battles to control the
source of differentiation, and the value that such differentiation can create for the customer.
7.1 Strategy in Action
“Segment Zero”—A Serious Threat to Microsoft?
For over two decades Microsoft dominated the computer operating systems market. However, in 2013,
Microsoft faced a great threat as serious competitors had begun to emerge. The CEO of Intel said that
technologies improve faster than the customers’ demand of it. Although, customers expect better and
improved products over time, their ability to use these features is slowed by the need to learn how to use it,
and make it part of their lifestyle. This explains that the trajectory of technological development and customer
demands are upward sloping, but technology improvements are steeper. Most part of the market may feel that
they overpay for technology that they do not value. Whereas, another part of the market may feel that they
pay a lot more than they need or go without it. This is referred to as segment zero. Firms can make best use of
this “segment zero” by balancing their trajectory of technological development with the trajectory of
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Chapter 7: Strategy and Technology
customer demands.
The threat to Microsoft came when 90% of the worldwide market for smartphones was from Apple, Google,
and Blackberry in 2013. Soon these companies launched tablet operating systems, and fully functional
computers. Although, Microsoft still possessed an impressive set of resources, it still faced competition from
a disadvantaged position for the first time.
Teaching Note:
This case talks about “Segment Zero,” and how Microsoft, the leader in computer operating systems, is
fighting to save its market position. The instructor may use this case and ask the students to express their
opinions on what Microsoft can do to regain their market, and how they could use the segment zero to their
benefit.
Figure 7.1: Trajectories of Technology Improvement and Customer Requirements
Figure 7.2: Low-End Technology’s Trajectory Intersects Mass-Market Trajectory
A. Examples of Standards
A familiar example of a standard is the layout of a computer keyboard. The standard format
(QWERTY) makes it easy for people to move from computer to computer because the input medium,
the keyboard, is set in a standard way. Examples of products that rely on technical standards include the
dimensions of shipping containers such as trucks and railcars, and the components included in a
personal computer. When an industry relies upon a common set of features or design characteristics it
is called a dominant design. Embedded in this design are several technical standards.
Figure 7.3: Technical Standards for Personal Computers
B.
Benefits of Standards
Standards emerge because there are economic benefits associated with them. Following are the
benefits:
 A technical standard helps to guarantee compatibility between products and their complements.
 Standards help reduce consumer confusion.
 The emergence of a standard can help to reduce production costs. Once a standard emerges,
products that are based on the standard design can be mass produced, enabling the manufacturers
to realize substantial economies of scale while lowering their cost structures.
 The emergence of standards can help reduce risks associated with supplying complementary
products, and thus increase the supply for those complements.
A. Establishment of Standards
Standards emerge in an industry in three primary ways:
 When the benefits of establishing a standard are recognized, companies in an industry might
lobby the government to mandate an industry standard.
 Technical standards are often set by cooperation among businesses, without government help,
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Chapter 7: Strategy and Technology

and often through the medium of an industry association.
When the government or an industry association sets standards, these standards fall into the
public domain, meaning that any company can freely incorporate the knowledge and technology
upon which the standard is based into its products.
Often, however, the industry standard is selected competitively by the purchasing patterns of customers
in the marketplace—that is, by market demand. In this case, the strategy and business model a company
has developed for promoting its technological standard are of critical importance because ownership of
an industry standard that is protected from imitation by patents and copyrights is a valuable asset—a
source of sustained competitive advantage and superior profitability. Format wars are common in hightech industries where standards are important.
B. Network Effects, Positive Feedback, and Lockout
There has been a growing realization that when standards are set by competition between companies
promoting different formats, network effects are a primary determinant of how standards are
established. Network effects arise in industries where the size of the “network” of complementary
products is a primary determinant of demand for an industry’s product.
Network effects are important in the establishment of standards. The classic example of a format war
can be considered: the battle between Sony and Matsushita to establish their respective technologies for
videocassette recorders (VCRs) as the standard in the marketplace. Sony was first to market with its
Betamax technology, followed by JVC with its VHS technology. As more prerecorded VHS tapes were
made available for rental, the VHS player became more valuable to consumers, and therefore the
demand for VHS players increased. A large number of companies signed on to manufacture VHS
players, and soon far more VHS players were available for purchase in stores. Before long, it was clear
to anyone who entered a video rental store that there were more VHS tapes available for rent, and fewer
Betamax tapes available. This served to reinforce the positive feedback loop, and ultimately Sony’s
Betamax technology was shut out of the market. The pivotal difference between the two companies
was strategy: JVC and Matsushita chose a licensing strategy, and Sony did not. As a result, JVC’s VHS
technology became the de facto standard for VCRs, whereas Sony’s Betamax technology was locked
out.
Figure 7.4: Positive Feedback in the Market for VCRs
When two or more companies are competing with each other to get technology adopted as a standard in
an industry, and when network effects and positive feedback loops are important, the company that
wins the format war will be the one whose strategy best exploits positive feedback loops. As the market
settles on a standard, an important implication of the positive feedback process occurs: companies
promoting alternative standards can become locked out of the market when consumers are unwilling to
bear the switching costs required to abandon the established standard and adopt the new standard. In
this context, switching costs are the costs that consumers must bear to switch from a product based on
one technological standard to a product based on another technological standard. However, consumers
will bear switching costs if the benefits of adopting the new technology outweigh the costs of
switching.
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Chapter 7: Strategy and Technology
III. Strategies for Winning a Format War
Firms benefit when they exploit network effects and when positive feedback loops are in operation. The
various strategies that companies should adopt in order to win format wars are centered upon finding
ways to make network effects work in their favor and against their competitors. Winning a format war
requires a company to build the installed base for its standard as rapidly as possible, thereby leveraging
the positive feedback loop, inducing consumers to bear switching costs, and ultimately locking the
market into its technology.
A. Ensure a Supply of Complements
It is important for the company to make sure that there is an adequate supply of complements.
One way for companies to ensure a supply of complements is to diversify into the production of
complements and seed the market with sufficient supply to help jump-start demand for their format.
Also, companies may create incentives or make it easy for independent companies to produce
complements.
B.
Leverage Killer Applications
Killer applications are applications or uses of a new technology or product that are so compelling that
they persuade customers to adopt the new format or technology in droves, thereby “killing” demand for
competing formats. Killer applications often help to jumpstart demand for the new standard.
C. Aggressive Pricing and Marketing
One common tactic to jump-start demand is to adopt a razor and blade strategy: pricing the product
(razor) low in order to stimulate demand and increase the installed base, and then trying to make high
profits on the sale of complements (razor blades), which are priced relatively high. This strategy owes
its name to Gillette, the company that pioneered this strategy to sell its razors and razor blades.
Aggressive marketing is also a key factor in jump-starting demand to get an early lead in an installed
base. Substantial upfront marketing and point-of-sales promotion techniques are often used to try to
attract potential early adopters who will bear the switching costs associated with adopting the format. If
these efforts are successful, they can be the start of a positive feedback loop.
D. Cooperate with Competitors
Companies have been close to simultaneously introducing competing and incompatible technological
standards a number of times. Understanding that the nearly simultaneous introduction of such
incompatible technologies can create significant confusion among consumers, and often lead them to
delay their purchases.
E.
License the Format
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Chapter 7: Strategy and Technology
Licensing the format to other enterprises so that those others can produce products based on the format
is another strategy often adopted. The correct strategy to pursue in a particular scenario requires that the
company consider all of these different strategies and tactics and pursue those that seem most
appropriate given the competitive circumstances prevailing in the industry and the likely strategy of
rivals. Although there is no single best combination of strategies and tactics, the company must keep
the goal of rapidly increasing the installed base of products based on its standard at the front of its
mind. By helping to jump-start demand for its format, a company can induce consumers to bear the
switching costs associated with adopting its technology and leverage any positive feedback process that
might exist. It is also important not to pursue strategies that have the opposite effect.
IV. Costs in High-Technology Industries
In most high-tech industries, the fixed costs of product development are very high, but the costs of
producing one extra unit of the product are very low. Many other high-technology products have similar
cost economics: very high fixed costs and very low marginal costs. Most software products share these
features, although if the software is sold through stores, the costs of packaging and distribution will raise
the marginal costs, and if it is sold by a sales force direct to end-users, this too will raise the marginal
costs. Many consumer electronics products have the same basic economics.
A. Comparative Cost Economics
To grasp why this cost structure is strategically important, company must understand that, in many
industries, marginal costs rise as a company tries to expand output (economists call this the law of
diminishing returns). To produce more of a good, a company must hire more labor and invest in more
plant and machinery. At the margin, the additional resources used are not as productive, so this leads to
increasing marginal costs.
Figure 7.5: Cost Structures in High-Technology Industries
B.
Strategic Significance
If a company can shift from a cost structure where it encounters increasing marginal costs to one where
fixed costs may be high but marginal costs are lower, its profitability may increase. When a high-tech
company faces high fixed costs and low marginal costs, its strategy should emphasize the low-cost
structure option: companies should deliberately drive prices down in order to increase volume.
7.2 Strategy in Action
Lowering the Cost of Ultrasound Equipment Through Digitalization
The ultrasound unit is an important diagnostic tool, producing images of organs. The technology is very
valuable, but the equipment is bulky, heavy, and expensive, so it is used primarily in dedicated hospital
facilities. ATL, a leading ultrasound company, decided to reduce the size of an ultrasound set-up to about the
size and weight of a laptop computer. This would be accomplished by replacing many of the machine’s solid
circuits with software (in a process called “digitalizing”), reducing size and costs. The researchers reasoned
that a portable and inexpensive ultrasound unit would find market opportunities in totally new niches. Smaller
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Chapter 7: Strategy and Technology
size and lower cost would allow the units to be placed on ambulances or into physician’s offices—market
niches that were impossible to reach with the technology of the day. The researchers later became part of a
project team within ATL, and thereafter became an entirely new company, SonoSite. Late in 1999, SonoSite
introduced its first unit, which weighed just 6 pounds and cost about $25,000. SonoSite targeted niches that
full-sized ultrasound products could not reach: ambulatory care and foreign markets that could not afford the
more expensive equipment. In 2010, the company sold over $275 million of product.
Teaching Note:
This case shows how a company reached a previously untapped market niche by digitalizing a product, which
also allows the firm to reduce expenses. Thus, digitalizing can support a firm that is pursuing a simultaneous
advantage in differentiation and cost leadership. Ask students to discuss in detail how companies are coming
up with strategies to exploit and benefit from this new era of digitalization.
V. Capturing First-Mover Advantages
In high-technology industries, companies often compete by striving to be the first to develop
revolutionary new products, that is, to be a first mover. First movers initially have a monopoly position.
If the new product satisfies unmet consumer needs and demand is high, the first mover can capture
significant revenues and profits. Such revenues and profits signal to potential rivals that imitating the
first mover makes money.
Figure 7.6: The Impact of Imitation on Profits of a First Mover
Despite imitation, some first movers have the ability to capitalize on and reap substantial first-mover
advantages—the advantages of pioneering new technologies and products that lead to an enduring
advantage. Some first movers can reap substantial advantages from their pioneering activities that lead to
an enduring competitive advantage. They can, in other words, limit or slow the rate of imitation. But
there are plenty of counterexamples suggesting that first-mover advantages might not be easy to capture
and, in fact, that there might be first-mover disadvantages—the competitive disadvantages associated
with being first.
A. First-Mover Advantages
There are five primary sources of first-mover advantages:
 The first mover has an opportunity to exploit network effects and positive feedback loops,
locking consumers into its technology.
 The first mover may be able to establish significant brand loyalty, which is expensive for later
entrants to break down.
 The first mover may be able to increase sales volumes ahead of rivals, and thus reap cost
advantages associated with the realization of scale economies and learning effects.
 The first mover may be able to create customer switching costs for its customers that
subsequently make it difficult for rivals to enter the market and take customers away from the
first mover.
 The first mover may be able to accumulate valuable knowledge related to customer needs,
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Chapter 7: Strategy and Technology
distribution channels, product technology, process technology, and so on.
B.
First-Mover Disadvantages
Balanced against the first-mover advantages are a number of disadvantages:
 They have to bear significant pioneering costs that later entrants do not.
 They are more prone to make mistakes because there are so many uncertainties in a new market.
 They run the risk of building the wrong resources and capabilities because they are focusing on a
customer set that is not going to be characteristic of the mass market.
 They may invest in inferior or obsolete technology.
C. Strategies for Exploiting First-Mover Advantages
First movers must strategize and determine how to exploit their lead and capitalize on first mover
advantages to build a sustainable long-term competitive advantage while simultaneously reducing the
risks associated with first-mover disadvantages. There are three basic strategies available:
 Develop and market the innovation.
 Develop and market the innovation jointly with other companies through a strategic alliance or
joint venture.
 License the innovation to others and allow them to develop the market.
The optimal choice of strategy depends on the answers to three questions:
 Does the innovating company have the complementary assets to exploit its innovation and
capture first-mover advantages?
 How difficult is it for imitators to copy the company’s innovation? In other words, what is the
height of barriers to imitation?
 Are there capable competitors that could rapidly imitate the innovation?
1.
Complementary Assets
Complementary assets are the assets required to exploit a new innovation and gain a competitive
advantage. Among the most important complementary assets are competitive manufacturing
facilities capable of handling rapid growth in customer demand while maintaining high product
quality. Complementary assets also include marketing knowhow, an adequate sales force, access
to distribution systems, and an after-sales service and support network. All of these assets can
help an innovator build brand loyalty and more rapidly achieve market penetration.
2.
Height of Barriers to Imitation
Barriers to imitation are factors that prevent rivals from imitating a company’s distinctive
competencies and innovations. Barriers to imitation give an innovator time to establish a
competitive advantage and build more enduring barriers to entry in the newly created market.
3.
Capable Competitors
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Chapter 7: Strategy and Technology
Capable competitors are companies that can move quickly to imitate the pioneering company.
Competitors’ capability to imitate a pioneer’s innovation depends primarily on two factors:
 Research and development (R&D) skills
 Access to complementary assets
In general, the greater the number of capable competitors with access to the R&D skills and
complementary assets needed to imitate an innovation, the more rapid imitation is likely to be.
4.
Three Innovation Strategies
The competitive strategy of developing and marketing the innovation alone makes most sense
when:
 The innovator has the complementary assets necessary to develop the innovation.
 The barriers to imitating a new innovation are high.
 The number of capable competitors is limited.
Table 7.1 Strategies for Profiting from Innovation
Complementary assets allow rapid development and promotion of the innovation. High barriers
to imitation give the innovator time to establish a competitive advantage and build enduring
barriers to entry through brand loyalty or experience-based cost advantages. The fewer capable
competitors there are, the less likely it is that any one of them will succeed in circumventing
barriers to imitation and quickly imitating the innovation.
The competitive strategy of developing and marketing the innovation jointly with other
companies through a strategic alliance or joint venture makes most sense when:
 The innovator lacks complementary assets.
 Barriers to imitation are high.
 There are several capable competitors.
Licensing makes most sense when:
 The innovating company lacks the complementary assets.
 Barriers to imitation are low.
 There are many capable competitors.
VI. Technological Paradigm Shifts
Technological paradigm shifts occur when new technology revolutionizes the structure of an industry,
dramatically alter the nature of competition and require companies to adopt new strategies in order to
survive. An example is the current trend toward digital photography in replacing chemical photography.
For over half a century, the large incumbent enterprises in the photographic industry such as Kodak and
Fujifilm have generated most of their revenues from selling and processing film using traditional silver
halide technology. The rise of digital photography has been a huge disruptive threat to their business
models.
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Chapter 7: Strategy and Technology
A. Paradigm Shifts and the Decline of Established Companies
Paradigm shifts appear to be more likely to occur in an industry when one, or both, of the following
conditions are in place:
 The established technology in the industry is mature and approaching or at its “natural limit”
 A new “disruptive technology” has entered the marketplace and is taking root in niches that are
poorly served by incumbent companies using the established technology.
1.
The Natural Limits to Technology
The relationship between the performance of a technology and time is called the technology Scurve. This curve shows the relationship over time of cumulative investments in R&D and the
performance (or functionality) of a given technology.
Figure 7.7: The Technology S-Curve
Figure 7.8: Established and Successor Technologies
2.
Disruptive Technology
The term disruptive technology refers to a new technology that gets its start away from the
mainstream of a market, and then as its functionality improves over time, invades the main
market. Such technologies are disruptive because they revolutionize industry structure and
competition, often causing the decline of established companies. They cause a technological
paradigm shift.
Established companies are often aware of the new alternatives, but do not invest in it because
they listen to their customers, and their customers do not want it. Established companies decline
to invest in new disruptive technologies because initially they serve such small market niches
that it seems unlikely there would be an impact on the company’s revenues and profits
Figure 7.9: Swarm of Successor Technologies
.
7.3 Strategy in Action
Disruptive Technology in Mechanical Excavators
Excavators are used to dig foundations and trenches, and for years the dominant technology was a system of
cables and pulleys that lifted a large bucket of earth. In the 1940s, however, hydraulic technology presented a
more efficient and convenient design, but it could not lift as large a load. Excavator manufacturers surveyed
customers and found that most did not want to use the new technology because of the limits on load size. This
created an opportunity for new entrants into the industry. Manufacturers such as Case, Deere, and Caterpillar
initially focused on small hydraulic excavators, but as their expertise grew, they solved the engineering
limitations of the hydraulic design. They were able to make hydraulic excavators with larger buckets, and
ultimately they rose to dominate the industry.
Teaching Note:
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Chapter 7: Strategy and Technology
This case describes an example of a disruptive technology revolutionizing an industry. A class discussion can
be initiated in which students are asked to describe other examples of paradigm shifts to reinforce this
concept. Examples might include PCs and word processing software replacing typewriters (along with
correction fluid and ink erasers), calculators replacing slide rules, automobiles replacing horse-drawn buggies
(and horseshoes and harnesses), and many more. A book that discusses one case in extended detail is The
Victorian Internet: The Remarkable Story of the Telegraph and the Nineteenth Century’s On-Line Pioneers
(by Tom Standage, published by Berkley Publishing Group, October 1999). This book tells a wonderfully
modern story of industrial espionage, wildly ambitious entrepreneurs, and the development of complementary
products—such as the development and placement of a 1,600-mile-long cable at the bottom of the Atlantic.
B.
Strategic Implications for Established Companies
Established companies must meet the challenges created by the emergence of disruptive technologies:
 Companies should have access to knowledge about how disruptive technologies can
revolutionize markets because it is a valuable strategic asset.
 Established companies should invest in newly emerging technologies that may ultimately
become disruptive technologies.
 When established companies undertake R&D investments in potentially disruptive technologies,
they often fail to commercialize those technologies because of internal forces that suppress
change
C. Strategic Implications for New Entrants
The new entrants or attackers have several advantages over established enterprises. New entrants must
manage the organizational problems associated with rapid growth; most important, they may need to
find a way to take their technology from a small out-of-the-way niche into the mass market. One of the
most important issues facing new entrants is the choice of whether to partner with an established
company or go it alone in an attempt to develop and profit from a new disruptive technology. Although
a new entrant may enjoy all of the advantages of the attacker, it may lack the resources required to fully
exploit them. In such a case, the company might want to consider forming a strategic alliance with a
larger, established company to gain access to those resources.
Teaching Note: Ethical Dilemma
This question should solicit an interesting discussion of various opinions. However, the instructor should reemphasize the advantages of being a first-mover. From this, the instructor can solicit opinions on the ways the
company could be more accepted in the marketplace by its competitors. This can be used as a homework
assignment in which the students would be asked to investigate real-world situations similar to this and
identify the company first-mover advantages and strategies it could have used to be more accepting in the
market.
Answers to Discussion Questions
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Chapter 7: Strategy and Technology
1.
What is different about high-tech industries? Were all industries once high tech?
High-technology industries rely heavily on rapidly advancing scientific knowledge, whereas other
industries’ technologies are more stable and evolve slowly and predictably. Thus, high -tech
industries are unstable, chaotic, and prone to sudden disruption. The implications for managers are
that high-tech firms must be extremely innovative, flexible, and forgiving of mistakes.
Every technology was new at some point in human history; thus every industry was rapidly
evolving and chaotic at some time. Even the wheel was a new technology—about 5,500 years ago
in ancient Mesopotamia. The astonishing new invention underwent several further refinements as it
swept the known world, revolutionizing transportation.
2.
Why are standards so important in high-tech industries? What are the competitive implications of this?
Standards are important in every industry, but in high-tech industries they are still evolving and
thus require a great deal of managerial attention. The development of standards marks an important
transition point in an industry because after standards are developed, industry evolution will slow.
Some early industry competitors may fail to adopt the new standard in time, and may exit the
industry. Establishment of standards will draw new entrants, and for the first time price
competition will become important. Managers also care about standards because the company that
establishes the standard may be able to use that standard as a significant source of revenue. Thus,
the establishment of standards will affect industry participants, the intensity of r ivalry, the basis of
rivalry, the strategies used by participants, and the industry’s profit potential.
3.
You work for a small company that has the leading position in an embryonic market. Your boss
believes that the company’s future is ensured because it has a 60% share of the market, the lowest cost
structure in the industry, and the most reliable and highest-valued product. Write a memo to your boss
outlining why the assumptions posed might be incorrect.
In answering this question, students should focus on the following points:
 The embryonic nature of the industry means that the technology is still undergoing major
changes, and therefore the company cannot afford to be complacent, but must continue to
innovate.
 A high market share, low cost, and a high-quality product are no guarantee of future success
when the industry may experience rapid and drastic changes. In fact, the company’s early
success may make it more difficult for it to adapt when the large changes come. The manager
should be encouraged to continue to look for improvements and to monitor the actions of
competitors closely.
4.
You are working for a small company that has developed an operating system for PCs that is faster and
more stable than Microsoft’s Windows operating system. What strategies might the company pursue to
unseat Windows and establish its own operating system as the dominant technical standard in the
industry?
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Chapter 7: Strategy and Technology
There are several large hurdles that must be overcome if the company is to succeed with this highrisk strategy; however, if the product is truly superior to Windows, there are opportunities to
compete against a powerful “standard”. The company could employ an aggressive pricing strategy
(offer it for free, perhaps) with financial incentives to early-adopters, and/or seek partnerships to
develop industry complementers. Business level strategies such as an innovative marketing
campaign could stimulate demand. The company could license its technology to Microsoft to
exploit Microsoft’s size and market position and avoid the enormous costs of a format battle.
5.
You are a manager for a major music record label. Last year, music sales declined by 10%, primarily
because of very high piracy rates for CDs. Your boss has asked you to develop a strategy for reducing
piracy rates. What would you suggest that the company do?
One strategy is to work to develop an encryption scheme that will reduce piracy. However, these
are typically not very effective. In one recent case, Sony spent months developing a new CD
encryption scheme, which consumers were able to defeat less than 24 hours with an ordinary
marking pen. Another strategy would be to give something away with each purchase, such as a
poster or collectible, that isn’t easily duplicated. However, this strategy adds to product and
distribution costs. A third possibility is to reduce the price so low that consumers are willing to pay
for convenience. Continue to lobby congress for stronger copyright infringement laws and
penalties, and prosecute offenders. At the same time, promote positive music -buying experiences
and innovate delivery channels and pricing.
6.
Reread the Opening Case on the emerging standards battles in mobile payments. Which mobile
payment system do you think will become dominant?
Students’ answers may vary. Mobile payment systems offer the potential of enabling all users to
perform financial transactions on their phones, similar to how they would perform those transactions
using personal computers. However, in 2012, there was no dominant mobile payment system, and a
battle among competing mobile payment mechanisms and standards was unfolding. In other parts of
the world, intriguing alternatives for mobile banking were gaining traction even faster. In India and
Africa, for example, there are enormous populations of “unbanked” or “underbanked” people
(individuals who do not have bank accounts or make limited use of banking services). Therefore,
although by early 2013, it was clear that mobile payments represented a game-changing opportunity
that could accelerate e-commerce, smartphone adoption, and the global reach of financial services, lack
of compatibility between many of the mobile payment systems and uncertainty over what type of
mobile payment system would become dominant still posed significant obstacles to consumer and
merchant adoption.
Practicing Strategic Management
Small-Group Exercise: Digital Books
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Chapter 7: Strategy and Technology
The students are asked to break up into groups of three to five and discuss the following scenario. Ask them
to appoint one group member as a spokesperson who will communicate their findings to the class. The
students must enact a group of managers and software engineers at a small start-up that has developed
software that enables customers to easily download and view digital books on a variety of digital devices,
including PCs, iPods, and e-book readers. The same software also allows customers to share digital books
using peer-to-peer technology (the same technology that allows people to share music files on the Web), and
to “burn” digital books onto DVDs.
1. How do you think the market for this software is likely to develop? What factors might inhibit adoption
of this software?
2. Can you think of a strategy that your company might pursue in combination with book publishers that
will enable your company to increase revenues and the film companies to reduce piracy rates?
Teaching Note:
Through work on these tasks, students will come to understand that, although the specific technology
changes, the process by which new technologies are adopted follow a strikingly similar path. This exercise
also highlights the desirability of win-win strategies, such as the type of actions that would increase sales and
reduce piracy, benefiting both firms. You can initiate discussion by asking students to consider what would be
the likely consequences if their firm decided not to cooperate with the book publishers.
Strategy Sign-On
Article File 7
Find an example of an industry that has undergone a technological paradigm shift in recent years. What
happened to the established companies as that paradigm shift unfolded?
Teaching Note:
You may have to point students to industries that have experienced recent paradigm shifts. One possibility is
the telecommunications industries in developing countries, where consumers are choosing to adopt wireless
technology before wired technology, reversing the process in developed nations. Another good example
would be the handheld communications industry, where cell phones can now act like computers or Internet
browsers, in addition to their other functions. Conversely, you can ask students to describe industries that
have not undergone a recent paradigm shift. Do the students see any potential for such industries to change,
and will the change be a radical or an incremental one? Or will they simply continue as is indefinitely?
Strategic Management Project: Developing Your Portfolio 7
This module requires students to analyze the industry environment in which their choice of company is based
and determine if it is vulnerable to a technological paradigm shift. With the information at their disposal,
students must answer the following questions:
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Chapter 7: Strategy and Technology
1.
2.
3.
4.
5.
6.
What is the dominant product technology used in the industry in which your company is based?
Are technical standards important in your industry? If so, what are they?
What are the attributes of the majority of customers purchasing the product of your company (e.g.,
early adopters, early majority, late majority)? What does this tell you about the strategic issues that the
company is likely to face in the future?
Did the dominant technology in your industry diffuse rapidly or slowly? What drove the speed of
diffusion?
Where is the dominant technology in your industry on its S-curve? Are alternative competing
technologies being developed that might give rise to a paradigm shift in your industry?
Are intellectual property rights important to your company? If so, what strategies is it adopting to
protect those rights? Is it doing enough?
Teaching Note:
You can point out to students that every industry is vulnerable to paradigm shifts, whether the potential for
those shifts is apparent or not. Paradigm shifts are typically radical, unexpected changes. When students
speculate about possible paradigm shifts, they may be concerned that their ideas sound too extreme, but they
may in fact not be extreme enough. For example, who could have predicted in 1910, as automobiles were just
coming into use for long-distance transportation, that 30 years later flight would replace driving as the
dominant method of travel? Therefore, they may have trouble identifying new technologies, just as managers
do.
Closing Case
The Rise of Cloud Computing
Cloud computing is creating a paradigm shift beginning in the world of computing. Co-located and
interlinked computer servers will contribute to individual business cost advantages. Early adopters of cloud
computing services include InterContinental Hotel Group, Netflix, and Starbucks. Early leaders and providers
of cloud services include Amazon, Microsoft, and Google. They realized they could rent out capacity on their
server farms or clouds to other businesses and essentially created cloud computing. As the competition
becomes fierce, a format ware in cloud computing is developing. Estimations are that only 2-3 formats will
survive.
Teaching Note:
This case illustrates the importance of standards in determining the winners in the technology marketplace.
There are clear battles in format wars and the stakes are high due to enormous R&D and infrastructure costs.
To draw parallels, students should have examples of format wars they have witnessed in other tech markets
(e.g., in the gaming systems market, Sony PlayStation won dominance for a time and/or the eBook market—
Sony vs. Kindle). Also the importance of product innovation (iPhone) can be seen in the environment and
shifts in market demand (from primarily business users to everyone). In addition to describing benefits of
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Chapter 7: Strategy and Technology
standards to companies, students should be asked about the benefits of standards to end-users. If a company
loses the format war in its market, what alternative strategies are available to companies to remain profitable?
Answers to Case Discussion Questions
1. What are the advantages and disadvantages of using cloud services for individuals and businesses?
Students’ answers may vary. There are significant cost advantages associated with shifting data and
applications to the cloud. Business will no longer need to invest in information technology
hardware that rapidly becomes obsolete. Cloud providers will instead be responsible for
maintenance costs of servers and hardware. Moreover, businesses will no longer need to purchase
many software applications.
However, cloud services also threatened to redistribute who earned those revenues in information
technology, attracting the attention of companies such as Microsoft and Google. Software
applications that are written for one cloud-based operating system will not run on another cloud
operating system without a complete rewrite—meaning that there will be significant switching
costs involved in moving an application from one cloud provider to another.
2. How does the adoption of cloud services affect the revenues for computer and software makers? Which
companies will “win” and “lose” if individuals and businesses continue to shift to using cloud services?
Students’ answers may vary. Adoption of cloud services means that businesses will no longer need
to purchase many software applications. Instead, businesses will utilize a pay-as-you go pricing
model for any applications that they use, which also holds out the promise of reducing costs. Some
studies have concluded that 70% of software purchased by corporations is either underutilized or
not used at all. The Brookings Institute estimates that companies could reduce their information
technology costs by as much as 50% by moving to the cloud. Right now the cloud is small—IDC
indicates that worldwide, cloud services accounted for $40 billion in 2012 (just over 1% of the 3.6
trillion spent worldwide on information technology in 2012), and expects that number to grow to
100 billion by 2016. However, cloud services also threatened to redistribute who earned those
revenues in information technology, attracting the attention of companies such as Microsoft and
Google.
3. What forces would create pressure for a dominant cloud-based operating system to emerge?
A format war is a strong reason for a dominant cloud-based operating system to emerge.
Companies are constantly developing a cloud-based system which allows clients to efficiently run
their custom software applications on the cloud. This strongly suggests that the beginnings of a
format war in cloud computing, much like the format war during the early 1990s between
Microsoft, IBM, and Apple to dominate the desktop computer—a war that Microsoft won with its
Windows operating system. According to business history there cannot be more than three formats
that can survive at a time. Therefore, if companies fail in the race most of their formats will lose
market.
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Chapter 7: Strategy and Technology
4. What individual advantages do you think Microsoft, Amazon, and Google have in promoting their
cloud-based operating systems?
Students’ answers may vary. Software applications that are written for one cloud-based operating
system will not run on another cloud operating system without a complete rewrite—meaning that there
will be significant switching costs involved in moving an application from one cloud provider to
another. Microsoft has developed an operating system, known as Windows Azure, which is designed to
run software applications very efficiently on server farms, allocating workloads and balancing capacity
across hundreds of thousands of servers. Microsoft is rewriting many of its own applications, such as
Office and SQL server, to run on Azure. Google has developed a cloud-based operating system, Google
App Engine, which allows clients to efficiently run their custom software applications on the cloud, and
also offers the Chrome OS for individuals to use on dedicated Chrome tablets. Amazon, too, has its
own cloud-based operating system, known as Elastic Compute Cloud, or “EC2.” Thus it is
advantageous for each company to promote their own cloud-based operating system.
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