Chapter 4
Standards Battles and Design
Dominance
Copyright © 2011 by Professor D. J. Lee, Kyung Hee Univ. All rights reserved.
Prologue 1: VHS and Betamax - A
dominant design in VCR industry
Please watch the video-clip!
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Prologue 2: Blu-Ray versus HD-DVD - A
Standards Battle in High-Definition Video
Please watch the video-clip!
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Questions
1.
2.
3.
4.
Why do most industries adopt a dominant design?
What are the benefits and demerits of being a
dominant design?
Why a particular firms’ technology is adopted as the
dominant design?
How can a firm win the standard battle to possess
design dominance?
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Overview
• Many industries experience strong
pressure to select a single (or few)
dominant design(s).
• There are multiple dimensions shaping
which technology rises to the position of
the dominant design.
• Firm strategies can influence several of
these dimensions, enhancing the
likelihood of their technologies rising to
dominance.
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Concept of dominant design
• Dominant Design: the one that wins the
market competition, the one that competitors
and innovators must adhere to if they hope to
command significant market following (Ex. IBMPC in personal computer market, DOS and
Windows OS in operating system)
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Standard Battle
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Why Dominant Designs Are
Selected
• Why do many markets come together a single
dominant design rather than supporting a
variety of technological options?
• Increasing returns to adoption
• When a technology becomes more valuable the more
it is adopted.
• Two primary sources are learning effects and network
externalities.
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Why Dominant Designs Are
Selected
• Learning Effects - evidence shows that the more a
technology is used the more developed, effective and
efficient it becomes. Learning effects have been
demonstrated in a wide variety of industries including
automobiles, ships, semiconductors, pharmaceuticals, and
even heart surgery
• Learning curves represent the cumulative impact of
learning on production costs and productivity.
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.
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Why Dominant Designs Are
Selected
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Why Dominant Designs Are
Selected
• Network Externalities
• In markets with network externalities, the benefit
from using a good increases with the number of
other users of the same good.
• Network externalities are common in industries
that are physically networked
• E.g., railroads, telecommunications
• Network externalities also arise when
compatibility(exchanging computer files) or
complementary goods (movies for a VCR, film
for cameras) are important
• E.g., Many people choose to use Windows in order
to maximize the number of people their files are
compatible with, and the range of software
applications they can use.
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Why Dominant Designs Are
Selected
• A technology with a large installed base attracts
developers of complementary goods; a
technology with a wide range of complementary
goods attracts users, increasing the installed
base. A self-reinforcing cycle ensues:
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Theory In Action
The Rise of Microsoft
• In 1980, Microsoft didn’t even have a personal computer
(PC) operating system – the dominant operating system
was CP/M.
• However, in IBM’s rush to bring a PC to market, they
turned to Microsoft for an operating system and Microsoft
produced a clone of CP/M called “MS DOS.”
• The success of the IBM PCs (and clones of IBM PCs)
resulted in the rapid spread of MS DOS, and an even more
rapid proliferation of software applications designed to run
on MS DOS. Microsoft’s Windows was later bundled with
(and eventually replaced) MS DOS.
• Had Gary Kildall signed with IBM, or had other
companies not been able to clone the IBM PC, the
software industry might look very different today!
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Why Dominant Designs Are
Selected
• Government Regulation
• Sometimes the consumer welfare benefits of having a
single dominant design prompts government
organizations to intervene, imposing a standard.
• E.g., the NTSC color standard in television broadcasting
in the U.S.; the CDMA standard for mobile
communications in Korea.
• The Result: Winner-Take-All Markets
• Natural monopolies
• Firms supporting winning technologies earn huge
rewards; others may be locked out.
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Why Dominant Designs Are
Selected
• Winner-Take-All Markets
• Natural monopolies
• Firms supporting winning technologies earn huge
rewards; others may be locked out.
• The winning firm enjoys high returns and is well
positioned to affect the development trajectory of the
technology thereby further enhancing its dominant
position in the industry.
• Losing firms, not only have to play catch up after they
adopt the dominant design they also lose the capital,
learning and brand equity invested in their original
technology.
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Why Dominant Designs Are
Selected
• The influence of a dominant design can be far
reaching. Dominant designs affect knowledge
accumulation after their adoption primarily because
firms have a tendency to build on their existing
knowledge base rather than build new ones. This
means that a dominant design will influence the
technological discontinuity that will replace it.
• Winner-take-all markets can have very different
competitive dynamics than other markets.
• Technologically superior products do not always win.
• Such markets require different firm strategies for success
than markets with less pressure for a single dominant
design.
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Multiple Dimensions of Value
• In many increasing returns industries, the
value of a technology is strongly
influenced by both:
• Technology’s Standalone Value
• Network Externality Value
• A Technology’s Stand-alone Value
• Includes such factors as:
• The functions the technology enables customers to
perform
• Its aesthetic qualities
• Its ease of use, etc.
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Multiple Dimensions of Value
• Network Externality Value
• Includes the value created by:
• The size of the technology’s installed base
• The availability of complementary goods
• A new technology that has significantly more
standalone functionality than the incumbent
technology may offer less overall value because it
has a smaller installed base or poor availability of
complementary goods.
• E.g., NeXT Computers were extremely advanced
technologically, but could not compete with the
installed base value and complementary good value
of Windows-based personal computers.
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Multiple Dimensions of Value
• To successfully overthrow an existing dominant technology,
new technology often must either offer:
• Dramatic technological improvement (e.g., in
videogame consoles, it has taken 3X performance of
incumbent)
• Compatibility with existing installed base and
complements
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Multiple Dimensions of Value
• Subjective information (perceptions and expectations)
can matter as much as objective information (actual
numbers)
• Value attributed to each dimension may be
disproportional
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Multiple Dimensions of Value
• Competing for Design Dominance in
Markets with Network Externalities
• We can graph the value a technology offers in both
standalone value and network externality value:
Value to
Users
Value accrued
from network
externalities
Installed
Base
Value
to
Users
Tech.
Value
Value accrued from
network externalities +
Technology utility
Installed
Base
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Multiple Dimensions of Value
• We can compare the graphs of two competing
technologies, and identify cumulative market share
levels (installed base) that determine which
technology yields more value.
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Multiple Dimensions of Value
• When customer requirements for network externality
value are satiated at lower levels of market share,
more than one dominant design may thrive.
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Winning the standard or
dominant design
Capabilities
Strategy
• Size
• Reputation
• Installed base
• Alliance
• Free giveaways
• Scale
Improved chance of
winning standard or
dominant design
Environment
Chance
• Standards bodies
• Government policies
• Related industries
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Winning the standard or
dominant design
• Combined Effect
• It is important to note that although we have listed
these factors separately, more often than not it is a
combination of them that helps a firm’s chances of
winning a standard.
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