Chapter 7
Strategy and Technology
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Learning Objectives
By the end of this chapter, you should be able to:
7.1 Explain the components of high-technology industries.
7.2 Summarize why technical standardization often emerges in industries
and its role in competition.
7.3 Describe the strategies that firms can use to establish their
technology as the standard in a market.
7.4 Explain the cost structure of many high-technology firms, including
the strategic implications of this structure.
7.5 Evaluate the pros and cons of the First-Mover Advantage in high-
technology industries.
7.6 Explain the nature of technological paradigm shifts and their
implications for enterprise strategy.
Hill, Schilling, Strategic Management: An Integrated Approach, Theory and Cases, 14th Edition. © 2024 Cengage. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2
Overview
• Technology refers to the body of scientific knowledge used in the
production of goods or services.
• High-technology (high-tech) industries are those in which the underlying
scientific knowledge that companies in the industry use is rapidly
advancing.
• Technology is revolutionizing aspects of the product or production system
even in industries not typically considered high-tech.
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not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3
7-2
Technical Standards and Format Wars
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Technical Standardization
• Technical standards
− A set of technical specifications that producers adhere to when making
a product or component.
• Format wars
− Battles to control the source of differentiation and the value that such
differentiation can create for the customer.
• Dominant design
− Common set of features or design characteristics.
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not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5
Figure 7.3 Technical Standards
for Personal Computers
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not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6
Benefits of Standards
• Guarantees compatibility between products and their complements.
• Reduces confusion in the minds of consumers.
• Reduces production costs.
• Reduces risks associated with supplying complementary products.
• Leads to low-cost and differentiation advantages for individual companies.
• Helps raise the level of industry profitability.
Hill, Schilling, Strategic Management: An Integrated Approach, Theory and Cases, 14th Edition. © 2024 Cengage. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7
Establishment of Standards
• Standards emerge in an industry when the benefits of establishing are
recognized.
• Technical standards are set by cooperation among businesses, through
the medium of an industry association.
• When the government sets standards they fall into the public domain.
− Public domain – Any company can freely incorporate the knowledge
and technology upon which the standard is based into its products.
Hill, Schilling, Strategic Management: An Integrated Approach, Theory and Cases, 14th Edition. © 2024 Cengage. All Rights Reserved. May
not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8
Network Effects, Positive Feedback,
and Lockout
• Network effects – Network of complementary products as a primary
determinant of the demand for an industry’s product.
• Positive feedback loops – Increase in demand for a technology that
triggers an increase in demand for products that support it.
• Alternative standards get locked out as consumers are unwilling to bear
the switching costs.
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not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9
Figure 7.4 Positive Feedback Cycle
from Indirect Network Effects
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not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10
7-3
Strategies for Becoming
the Dominant Standard
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not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11
Strategies for Dominance
(1 of 2)
• Make network effects work in one’s favor and against competitors.
• Build the installed base for the standard as rapidly as possible.
• Ensure a supply of complements.
• Leverage killer applications.
− Killer applications – Applications or uses of a new technology or
product so compelling that customers adopt them in droves, killing
competing formats.
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not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12
Strategies for Dominance
(2 of 2)
• Pursue aggressive pricing and marketing.
− Razor and blade strategy – Pricing the product low to stimulate
demand, and pricing complements high.
• Cooperate with competitors.
• License the format.
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7-4
Costs in High-Technology Industries
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Comparative Cost Economics
• Many high-technology products have similar cost economics.
− Very high fixed costs and very low marginal costs.
• Law of diminishing returns – Marginal costs rise as a company tries to
expand output.
• Profitability increases when a company shifts from a cost structure with
increasing marginal costs to higher fixed costs with lower marginal costs.
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7-5
Capturing First-Mover Advantages
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First-Mover Advantage
• First mover – Firm that pioneers a particular product category or feature
by being first to offer it to the market.
− Creation of a revolutionary product results in a monopoly position.
• First-mover advantage – Pioneering new technologies and products that
lead to a competitive advantage (slowing the rate of imitation).
• First-mover disadvantages – Competitive disadvantages associated
with being first.
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not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17
Pros and Cons of First Mover Position
Advantages Disadvantages
• Opportunity to exploit network effects • Bear significant pioneering costs.
and positive feedback loops. • More prone to making mistakes.
• Ability to establish brand loyalty. • Risk of building the wrong resources
• Ability to increase sales volume and capabilities.
ahead of rivals. • Risk of investing in inferior or
• Ability to create switching costs for obsolete technology.
customers.
• Can accumulate knowledge.
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not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18
Strategies for Exploiting
First-Mover Advantages
• Develop and market the innovation.
• Develop and market the innovation jointly with other companies.
• License the innovation to others and allow them to develop the market.
• Choice of strategy depends on the answers to these 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?
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Other Considerations for Selecting Strategy
(1 of 2)
• Complementary assets:
− Required to exploit a new innovation and gain a competitive
advantage.
− Help build brand loyalty and achieve rapid market penetration.
• Height of barriers to imitation:
− Higher the barriers, longer it takes for rivals to imitate.
− Give the innovator more time to build an enduring competitive
advantage.
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not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20
Other Considerations for Selecting Strategy
(2 of 2)
• Capable competitors
− Companies that can move quickly to imitate the pioneering company.
− Competitors’ capability depends on their:
research and development skills (ability to reverse-engineer and
develop a comparable product).
access to complementary assets (marketing, sales, manufacturing
capabilities).
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not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21
Table 7.2 Strategies for Profiting from Innovation
Does the Innovator
Likely Height Existence of
Have the Required
Strategy of Barriers to Capable
Complementary
Imitation Competitors
Assets?
Going it alone Yes High Very few
Entering into an No High Moderate
alliance number
Licensing the No Low Many
innovation
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7-6
Technological Paradigm Shift
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not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23
Technological Paradigm Shifts
• Technological paradigm shifts – Shifts in new technologies that:
− revolutionize the structure of the industry.
− dramatically alter the nature of competition.
− require companies to adopt new strategies for survival.
• Occur in an industry when:
− established technology is approaching or is at its natural limit.
− new disruptive technology has entered the marketplace and is
invading the main market.
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not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24
Strategic Implications for Established
Companies
• Being aware of how disruptive technologies can revolutionize markets is a
valuable strategic asset.
• Investing in new technologies that may become disruptive technologies.
• Creating an autonomous operating division solely for the disruptive
technology.
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not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25
Strategic Implications for New Entrants
• Do not face pressures to continue the existing out-of-date business
model.
• Do not have to worry about established:
− customer base.
− relationships with suppliers and distributors.
• Can focus their energies on the opportunities offered by the new
disruptive technology.
• Must decide whether to partner with an established company or go solo.
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