INTRODUCTION

Topic 1 Topic 2
Inventing, innovating and
competitive advantage
Competitive advantage in
technology intensive industries Chapter 4

IDENTIFYING INNOVATION OPPORTUNITIES STANDARDS

Topic 3
Technology change
Topic 4
Standards control and
CONTROL AND
NETWORK
management and transition: network effects
how leaders fail

Topic 5 EFFECTS
Technology acquisition
strategies

HARVESTING INNOVATION Reflecting on the

Topic 6 Topic 7
Reaping innovation benefits Technology sale tradeoffs that
management face in
markets where
CREATING AND MANAGING AN INNOVATIVE COMPANY
Topic88
Topic Topic 9 standards are being
External andinternal
External and
innovation
internal
incentives: people
innovation
Topic
Organizing to9innovate
Organizing to innovate
created
management
incentinves:people
management
 Norm CCS / THE
1. Electric COMBO
car charging
systems

Japan (since 2008) EUROPE and U.S.A. (since

•Nissan (Leaf) 2011)
•Mitsubishi (i-MiEV) • Renault (ZOE)
•Others: Honda, Suzuki, • Audi, BMW, Ford, GM,
Mazda… Daimler, Porsche and
Volkswagen.
How about alternatives like induction technologies (Opel Rak, Audi
Urban Concept), supercharging systems like Tesla or the
“Train2Car” proyect of Metro de Madrid?
How is this conflict going to end?

INTRODUCTION: Acknowledging the problem

 2. Mobile
operating
systems

Source: http://www.gartner.com/ [ November 2015]

• Clash between platforms or

“ecosystems”
• Will similar past trends be repeated
or is there a margin for co-existence?
• Other connections? Smart TV?
Smart Cars?
• Co-existing means betting on several
options to avoid risks…. And costs?

INTRODUCTION: Acknowledging the problem

INTRODUCTION: Acknowledging the problem
 3. Browser war

4. DVD war

INTRODUCTION: Acknowledging the problem

• Defining the technology standard…
why is it important? Under what conditions
are they useful?
• Recognizing the relationship between
standard and adoption in the market.
• Different mechanisms by which technology
standards emerge.

• Defining network effects… How can

they become a competitive advantage?

• Describing the “standards war” How to

increase success probabilities? What are the
strategies if the war is lost?

TOPIC OBJECTIVES
1. Link between standard generation and the adoption of
a technology / innovation
 IMITATION ADOPTION
— Implies costs to discover or — Adoption by demand
decipher someone else’s occurs when consumers
technology (reverse demand the innovative
engineering, industrial spying, product, accepting it as it
etc..) whilst via adoption is.
the technology is known — Adoption by offer occurs
and available. when competitors adopt
the standard.

1. Link between standard generation and the adoption of

a technology / innovation
CONQUERING STANDARDS IS AN INNOVATOR’S KEY SUCCESS
FACTOR BECAUSE …

— The massive market is risk-averse and hopes for

technology uncertainty to be resolved.
What if my bet is incompatible?

— This is more relevant when systems innovations are

involved (sum of components that to work
functionally must be used at the same time)
What are the links between capture, processing, storage and
reproduction of images?

— They contribute to make a product more functional.

Would a phone be useful without a communication standard?

— They facilitate complementary product development.

Contents and programs for different tv formats?

1. Link between standard generation and the adoption of

a technology / innovation
The relevance of TECHNICAL STANDARDS
Pre-determined technical specs to which companies can adhere to
manufacture their own products or associated components.

QWERTY system as technical standard

The technical standard based on the keyboard letters found

on writing machines and computers, as defined by the first six
letters found on the top line of the keyboard

Consequences
è Customers: universal knowledge; easy of use
è Producers: compatible systems Survival of
è Network effects current systems

è Blocking of the alternative standard: Dvorak system

2. When does a standard or dominant design appear?

 OPPORTUNITY
• Current circumstances and placing make a particular proposal become
dominant.
• Steel chasis in automobiles (cheaper than aluminum).

TECHNOLOGY’S NATURE
• Some technical solutions are better than others and win.

• Not always the best technical solution win as standard (due to lobbying,
agreements or market dynamics).
• This is the case with QWERTY.

GOVERNMENT INTERVENTION OR REFERENCE

INSTITUTIONS
• As early adopter it generates a relevant installed base.
• To cover incentive gaps by other agents (companies and private
consumers).
• Industry Associations or of Experts which get involved.
• The role of the EU to promote HDTV

2. When does a standard or dominant design appear?

— Network effects are those that
make «the user value of a product
or service depend not only on the
product or service itself but also
on the number of users that use
such product or service»(1).
— In terms of econometrics, it could
be argued that there are network
effects when the number of actual
users is an intrinsic value of the
product or service.
(1) Arroyo & López (2005): “Estrategias competitivas y capacidades clave en
mercados electrónicos sujetos a Efectos de Red”, Universia Business Review, second
trimester, 68-79.

3. Network effects
METCALFE LAW
Revised
Metcalfe

• Metcalfe Law states that the value 1

of the network effect in a product
increases proportionally to the
number of potential
connections.
10
• The value increases
exponentially with the
addition of new customers.
66

3. Network effects
METCALFE LAW
600000

500000
Number of connections

400000

300000

200000

100000

0
1 101 201 301 401 501 601 701 801 901
Number of users

3. Network effects
DIFFERENT TYPES OF NETWORK EFFECTS
1. Direct network effects
— Increasing the number of users increases
the value of the network.
2. Indirect network effects
— Increasing the number of users
decreases the price.

3. Learning network effects

— Increasing the number of users
reduces maintenance cost.
Can this be applied
to mobile
telephony?

3. Network effects
THE FEEDBACK PROCESS
— Network effects make the strongest even stronger, and the weakest even
weaker, in such a way that in many cases only one single technology is
adopted eliminating all others, a phenomena known as "winners take all"

Examples…

Positive
feedback
proces Technology is more valuable

Technology is attractive to new

Installed base grows
users

Technology gets most of the new

sales

Virtuous cycle for the strongest Vicious cycle for the weakest

3. Network effects
POSSIBLE EVOLUTION OF TWO TECHNOLOGIES EXPOSED TO NETWORK EFFECTS

• For each market where network effects are present, there

is a level of market share above which a specific
technology will become a standard (through the virtuous
cycle): the tipping point

• The higher the performance of the technology, the lower

the tipping point

• This said, a technology doesn’t have to be better than the

competition to become a standard. It can reach the
tipping point through different strategies:
• Aggressive market penetration
• Complementary products
• Enrolling other industry players (alliances)
• etc

3. Network effects
POSSIBLE EVOLUTION OF TWO TECHNOLOGIES EXPOSED TO NETWORK EFFECTS
Market
share

+
When performance
of a technology is In most cases, the
worse than the differences in
alternatives, the performance are not
tipping point is high: relevant, and the
it needs a higher technology that is able When performance of
market share to win to get a small a technology is much
the standards war. It advantage in market better than available
is difficult but can be share gets away with options, then even a
done (eg. VHS vs. the standard low market share can
Betamax, Windows be a tipping point (eg.
vs. Mac) Whatsapp vs SMS,
Google vs. Yahoo)

- Relative
performance
- +

3. Network effects
 • The relevance to get to critical mass quickly forces
companies to establish aggressive pricing schemes at start
PRICE with network effects.
• Zero Price (paying to incentivate usage); Penetration Price
(below the mkt); Low cost licencing

• If potential clients are convinced of the success

possibilities of a product or service, the network effect
benefits will multiply.
SUCCESS • Some key success factors: Brand reputation; installed base;
EXPECTATIONS value proposition; patents; competitive response; strategic
alliances
• OLED Technology

• The larger the complementary product offering, the larger

the client base.
COMPLEMENTARY • Example, for a HW buyer the quantity and variety of the
PRODUCTS compatible SW will be an important factor in the buying
decision process.
• 4K Technology

4. Network effects key factors

STANDARDS WARS
A standards war happens when
there is a market fight to
impose supremacy between
two rival technologies. Rival technology

Compatible Uncompatible

Evolutionary Evolution vs.

Own technology
Compatible rivalry revolution

Where do Uncompatible
Revolution Revolutionary
you place vs. evolution rivalry
the mobile
telephony
operating
systems?

5. Strategies to win standard wars

HOW DOES A STANDARDS WAR ENDS?

— Armistice, an agreement betw een

competitors.

— Duopoly, both technologies stay on

market regardless of incompatibility.

— Death fight, one technology is

erradicated.

¿How about the mobile

telephony operating
systems?

5. Strategies to win standard wars

 WINNER’S STRATEGIES
— Protect from future wars; continue innovating (constant threats)

• Warning, new technology generation may come from anywhere..

• Foster quick innovation.
• Protect the market position (attractive conditions for providers with complementary
products or services)

— Offer migration to users (free or cheap updates).

— Maintain complementary products market competitiveness.

• Apple through vertical integration (Claris for apps development, currently FILEMAKER INC.)
• Microsoft buying startups that develop successful apps (“produce product, capture emerging
market, be bought by Microsoft”)

— Standard dissemination (controlled) with licenses or opening the standard

5. Strategies to win standard wars

 SURVIVOR STRATEGIES

— Keep close to the client

— Add adaptors that allow standard product compatibility (lotus, Word perfect
compatibility with windows)
— Be alert (VIDEOGAMING: Atari, Nintendo, Sega, Sony, Microsoft…
Nintendo again…Sony and Microsoft catching up)

— ESTABLISH A SURVIVAL PRICING POLICY

— TAKE LEGAL ACTION VS. WINNER (in case the dominant Company did promise
openess)

6. Strategies to survive failed standard wars