The Dynamics and Definitions of High-Tech Industries: Innovation, Environment, and Standards

1. STRATEGY& TECHNOLOGY DR. MARK FRUIN Bus 189, Hill & Jones, CHPT 7 Spring 2014

2. Q: WHAT ARE HIGH-TECH IND? • A: INDUSTRIES IN WHICH UNDERLYING TECHNOLOGIES (SCIENTIFIC KNOWLEDGE) & COMPLEMENTARY PRODUCTS/SERVICES ADVANCE RAPIDLY (SAYS HILL & JONES, p. 210) • BUT HIGH GROWTH DOES NOT = HIGH TECH • OR, A MORE COMPLETE & BETTER DEFINITION OF HIGH TECH: • HIGH GROWTH • HIGH COST • HIGH RISK • HIGH COMPLEXITY

3. WHAT MAKES AN INDUSTRY HIGH-TECH • BESIDES FACTORS JUST LISTED, ALL INTERNAL TO THE INDUSTRY, THERE IS THE EXTERNAL ENVIRONMENT • NORMALLY, FIRMS ADAPT TO ENVIRONMENT OR FAIL, BUT IS ADAPTING TO H-T ENVIRONMENT ENOUGH? • RICHARD D’AVANI & HYPERCOMPETITION, A STATE OF PERMANENT INNOVATION (NO EQUILIBRIUM, NO REST) • GARY HAMEL & STRATEGY AS REVOLUTION • ANNALEE SAXENIAN - SILICON VALLEY AS A REGIONAL RELATIONAL NETWORK OF CAPABILITIES • IN SHORT, ADAPTING TO A H-T ENVIRONMENT MAY NOT BE ENOUGH BECAUSE CHANGE IS RAPID & UNPREDICTABLE!

4. TURBULENT ENVIRONMENTS • BECAUSE OF THE COMPLEXITY & SPEED OF CHANGE, A SINGLE FIRM’S COPING SKILLS ARE OFTEN NOT ENOUGH • IN SILICON VALLEY, LOTS OF HELP AVAILABLE • VENTURE CAPITALISTS & ANGELS • LAWYERS & ACCOUNTANTS • HEAD HUNTERS • INDUSTRY EXPERTS • WISE, KNOWLEDGEABLE, WELL CONNECTED PEOPLE • ELSEWHERE, KEY RESOURCES MAY NOT BE SO READILY AVAILABLE • LOCATION (WHERE YOU ARE) MAY MAKE MORE OF A DIFFERENCE IN HI-TECH INDUSTRIES THAN ANY OTHERS • HENCE, HAVING HELP PLUS BEING IN THE RIGHT PLACE MAY BE MINIMALLY SUFFICIENT CONDITIONS FOR SUCCESS

5. IMPORTANCE OF STANDARDS & DOMINANT DESIGN • TECH STANDARDS, WIDELY ADOPTED FORMATS, & DOMINANT DESIGNS • GENERALLY COME AFTER SHAKEOUT IN GROWTH PHASE • REDUCE CONFUSION • REDUCE COSTS • REDUCE RISK • ENHANCE COMPATIBILITY AND ADVENT OF COMPLEMENTARY ASSETS/RESOURCES/PRODUCTS • INCREASE OPPORTUNITIES TO MAKE MONEY • AGAIN, POST-SHAKEOUT; BEFORE SHAKEOUT, EVERYONE THINKS THEIR IMPLEMENTATION BEST BUT NO AGREEMENT • HARD TO SELL & MAKE MONEY; HARD TO GET INVESTMENT

6. TECH STANDARDS FOR PCs EXAMPLES OF DOMINANT DESIGN (FIG 7.1) & THEIR INTERCONNECTEDNESS TO OTHER PRINCIPAL PIECES OF PUZZLE • OS (WINTEL STANDARD) • MICROPROCESSOR STANDARDS • INTERNAL HARD DRIVE STANDARDS • MONITOR STANDARDS • KEYBOARD STANDARDS • MODEM (TCP/IP) STANDARDS • CD (FLOPPY DISK) STANDARDS • PERIPHERAL SLOTS (USB) STANDARDS

7. COMMUNITIES OF PRACTICE • CREATE THE PUSH TOWARDS STANDARDS • CREATE THEIR OWN ECONOMIES THAT ARE NOT OTHERWISE AVAILABLE • BY WORKING TOGETHER INTENSELY, CREATE HIGH PERFORMANCE WORK GROUPS • CAN OCCUR WITHIN AND BETWEEN FIRMS • BOUNDARY SPANNING (BETWEEN SECTIONS, DEPARTMENTS, DIVISIONS & FIRMS) IN THIS SENSE IS OPPORTUNITY ENHANCING • BOTH INTRA- & INTER-ORGANIZATIONAL ACTIVITIES • RELATIONAL PATTERNS BETWEEN WORKERS DEFINED BY SETS OF INTERACTIONS • ORG CHART DOES NOT DEFINE HOW WORK ACTUALLY GETS DONE • TEAMS & COMMUNITIES OF PRACT OFTEN THE SAME

8. MUCH OF THE WORKING OUT OF DOMINANT DESIGN/STANDARDS • IS DONE COOPERATIVELY • SMALL NUMBERS COOPERATION FIRST • STRATEGIC ALLIANCES • JOINT VENTURES • COALITIONS & SUPPLY CHAINS • LARGE NUMBERS COOPERATION NEXT • INDUSTRY ASSOCIATIONS • SPECIAL ECONOMIC ZONES/INDUST. DISTRICTS • GLOBAL FIRMS & NETWORKS OF SUBSIDIARIES • INTERFIRM NETWORKS

9. ESTABLISHING STANDARDS • RECOGNIZING BENEFITS OF STANDARDS: FIRMS IN INDUSTRY LOBBY GOVERNMENTS • RECOGNIZING BENEFITS, FIRMS COOPERATE WITHOUT GOV HELP, OFTEN THROUGH MECHANISMS OF INDUSTRY ASSOCIATIONS • COMBINATION OF PUBLIC/PRIVATE EFFORTS • INDUSTRY STANDARDS EMERGE SELECTIVELY & PRIVATELY • PREEMPT COMPETITION • FIRST MOVER ADVANTAGES • COALITIONS OF RIVAL FIRMS/STNDRDS • BETAMAX (SONY) V. VHS (MATSUSHITA)/INTEL V. AMD

10. NETWORK EFFECTS • WHAT ARE THEY? • 2ND LAW OF SILICON VALLEY • BOB METCALFE, 3COM FOUNDER • AND 1ST LAW IS? MOORE’S LAW • DEFINE 1ST AND 2ND LAWS • EXTERNALITIES AND NETWORK EFFECTS - WHAT ARE THEY? • DEFINE EXTERNALITIES • Externalities can cause market failure if the price mechanism does not take into account the full social costs and social benefits of production and consumption. ... • SOME EXAMPLES

11. NETWORK EFFECTS • INCREASING AND DECREASING BENEFITS POSSIBLE BASED ON NETWORK EFFECTS • SIZE IS IMPORTANT • COMPLEMENTARY PRODUCTS ARE IMPORTANT • HOW MANY DIFFERENT WAYS CAN NETWORK BE ACCESSED & USED? • METCALFE’S LAW (2ND LAW OF SILICON VALLEY) IS ABOUT POTENTIAL, NOT ACTUAL, OUTCOMES • FREE RIDING (FIRMS RIDE ON EMERGING CONSENSUS BUT DON’T REALLY CONTRIBUTE)

12. METCALFE’S LAW • COSTS OF NETWORK EXPAND LINEARLY WITH INCREASE IN SIZE, WHILE VALUE OF NETWORK INCREASES EXPONENTIALLY • HOW IS THIS POSSIBLE • DIFFERENT SORTS OF NETWORKS • STAR NETWORKS, THE SIMPLEST • SCALE FREE OR HUB BASED • HIERARCHICAL • RANDOM (NOT REALLY RANDOM BUT LIMITED NUMBER OF MULTIPLE CONFIGURATIONS POSSIBLE)

13. STRATEGIES FOR WINNING FORMAT WARS • ENSURE READY SUPPLY OF COMPONENTS • LEVERAGE KILLER APPS (APPLICATIONS) • AGGRESSIVELY PRICE AND CAPTURE MARKET SHARE • RAZOR & BLADE STRATEGY • COOPERATE WITH COMPETITORS (IMMEDIATELY PRIOR TO MATURE PHASE, BUT NOT AFTER) • LICENSE FORMAT • GET MORE USERS; BUILD CRITICAL MASS OF USERS

14. LAW OF DIMINISHING RETURNS • IN MANY INDUSTRIES, OTHER THAN HIGH-TECH, LAW OF DIMINISHING RETURNS HOLDS: • MARGINAL COSTS RISE AS OUPUT EXPANDS • INVEST MORE, AS IN LABOR, TO PRODUCE MORE • TRADITIONAL ECONOMIES OF SCALE & SCOPE • BUT IN H-T INDUSTRIES, SUCH AS SOFTWARE AND MULTIMEDIA, MARGINAL COSTS ARE ALMOST ZERO • PRACTICALLY SPEAKING, ZERO DIMINISHING COSTS BUT POSSIBILITY OF MAJOR RETURNS • THUS, NETWORK EFFECTS ARE CRUCIAL

15. INTELLECTUAL PROPERTY RIGHTS AND HIGH-TECH • RECOGNIZE DIFFERENCE BETWEEN BIO-TECH AND SOFTWARE, FOR EXAMPLE • R & D INVESTMENT/HUMAN RISK • APPROPRIABILITY OF VALUE • MARKET CONTESTABILITY • THE VALUE OF SOFTWARE, FOR EXAMPLE, IS NOT DIMINISHED BY USE, QUITE THE CONTRARY • OPEN SOURCE SOFTWARE; JAVA, JINI & OTHERS • OLD NOTION OF COMMONS, NEW NOTION OF COMMONS • COMPLEXITY & COMPLEMENTARITY OF KNOWLEDGE

16. FIRST-MOVER ADVANTAGES • FIRST MOVER MORE EASILY EXPLOIT NETWORK EFFECTS (SPEED OF FADS DIFFUSING/SPREADING) • TIPPING POINTS FROM LAST CHAPTER • CREATE BRAND LOYALITY BEFORE RIVALS • HARNESS 4Ss BEFORE RIVALS; WHEN RIVALS APPEAR, CUT PRICES IN LIGHT OF 4S ADVANTGS ALREADY HELD • CREATE SWITCHING COSTS • ACCUMULATE VALUABLE MARKET, CUSTOMER, PROD & PROCESS KNOWLEDGE VIA FEEDBACK • PRE-EMPT VALUABLE RESOURCES/CAPABILITIES • BUT ALSO 1st MOVER DISADVANTAGES

17. FIRST MOVER DISADVANTAGES • FAST FOLLOWER STRATEGIES MAY BE SUPERIOR TO FIRST MOVER STRATEGIES • LEARN FROM MISTAKES OF OTHERS • INVEST LESS & DO MORE • CROSS CHASM ON BACKS OF OTHERS • CHEAPER, BETTER, FASTER ALTERNATIVES EXIT • PRODUCT VERSUS PROCESS INNOVATIONS • ECONOMIC BACKWARDNESS IN HISTORICAL PERSPECTIVE • ALEXANDER GERSCHENKRON, HARVARD U & NOBEL PRIZE WINNER • BUT CATCH-UP REQUIRES MORE & BETTER PLANNING • FALLS TO STATE TO COORDINATE & PLAN IN FAIRLY CENTRALIZED WAY

18. CAPTURING FIRST MOVER ADVANTAGES • BUILD HIGH BARRIERS TO IMITATION • KNOWLEDGE ABOUT MINOR/MAJOR INNOVATIONS • NEW INNOVATION HARD TO KEEP SECRET, HOWEVER • KNOWLEDGE ABOUT (HOW) & KNOWLEDGE OF, NOT THE SAME THING • KNOW-HOW, KNOW-WHEN, KNOW-WHO, KNOW-WHAT • DEVELOP COMPLEMENTARY ASSETS • MANUFACTURING CAPABILITY, MKTNG KNOWLEDGE, ADEQUATE SALES FORCE, SUPPORT • HARNESS CAPABLE COMPETITORS • A SMALL PIECE OF A BIG PIE IS BETTER THAN…

19. INNOVATION STRATEGIES • GOING IT ALONE • ENTERING INTO AN ALLIANCE • LICENSING INNOVATION • ALL 3 DEPEND ON: • INNOVATORS HAVING REQUIRED COMPLEMENTARY ASSETS OR NOT? • HEIGHT OF BARRIERS TO IMITATION • # OF CAPABLE COMPETITORS

20. INNOVATION TYPES • INCREMENTAL - MOST OF IT; MOSTLY MATURE STAGE OF ILC • RADICAL - ONCE IN A BLUE MOON • SOMETIMES CALLED “BREAKTHROUGH” INNOVATION • BY DEFINITION, REQUIRES LOTS OF RESOURCES • LIKELY TO OCCUR AT ONLY ONE OR TWO POINTS IN INDUSTRY LIFE CYCLE • DISRUPTIVE/DISCONTINUOUS • BUT ONLY OCCASIONALLY IN ‘HIGH-TECH’ INDUSTRIES WHERE COMPETING TECHNOLOGY PARADIGMS & DOMINANT DESIGNS ARE OVERTAKEN • A NEW MARKET SPACE IS CREATED W/I INDUSTRY LIFE CYCLE

21. CHRISTENSEN & DISRUPTIVE TECHNOLOGY • CLAY CHRISTENSEN, HBS, ARGUES THAT ESTABLISHED FIRMS ARE OFTEN AWARE OF NEW TECH BUT TOO INVESTED IN OLD TECH TO PAY HEED TO NEW POSSIBILITIES • PARTLY NIH SYNDROME • PARTLY LACK OF CUSTOMER INTEREST IN NEW, UNPROVEN, EMERGING TECHNOLOGIES • CURRENT PRODUCTS SELL WELL; WHY WORRY? AS A RESULT, ESTAB FIRMS CONT TO IMPROVE (INCREMENTALLY) & INVEST IN OLD TECH UNTIL ONE DAY…

22. DISRUPTIVE TECHNOLOGY • OFTEN TAKES A RADICALLY DIFFERENT VALUE CHAIN TO COMMERCIALIZE A DISRUPTIVE TECHNOLOGY • WHEN MAINSTREAM PRODUCTS ARE EXPENSIVE AND INCONVENIENT; LOOK OUT • ANALOGUE VERSUS DIGITAL IMAGING • NANO CAR FROM TATA; REDUCE PRICE TO $2500 WHEN CHEAPEST ALTERNATIVE WAS $7500 • LOW COST INNOVATION MAY BE THE FUTURE • SMALL FIRMS WITH ENTREPRENEURIAL MANAGERS ARE MORE RISK TAKING • IN GENERAL, IN H-T INDUSTRIES SMALL FIRMS ARE ESTABLISHED TO TAKE RISKS • BIG FIRMS BUY SMALL FIRMS BECAUSE THEY ARE INNOVATIVE & TO REDUCE COMPETITION

23. DIGITAL EQUIPMENT CORP • DEC ENGINEERS COULD DESIGN A PC WITH EYES CLOSED • PLANS FOR SELLING PCs at FOUR DIFFERENT TIMES • At the time, MINICOMPUTERS WITH LARGE SCALE COMPUTING POWER, LARGE SALES FORCE, AND IN-FIELD SUPPORT FOR CUSTOMERS were the industry standard • WHY ABANDON SALES OF HIGH MARGIN, HIGH PRICED Mini-COMPUTERS IN FAVOR OF PCs?

24. DEC & DISRUPTIVE TECHNOLOGY • DEC WAS VULNERABLE TO DISRUPTIVE TECHNOLOGY • RIVALS SEE DIFFERENT SEGMENTS THAT ARE UNDERSERVED IN THE SAME INDUSTRY • NON-MAINSTREAM BECOMES MAINSTREAM • DISRUPTIVE DOES NOT ALWAYS/USUALLY MEAN RADICAL • DISRUPTIVE MEANS PICKING OFF THE LESS ATTRACTIVE SEGMENTS OF A BUSINESS AND RUNNING WITH THEM • IF ENOUGH CUSTOMERS FOLLOW, NEW MARKET SEGMENTS ARE BORN

25. OTHER EXAMPLES • TOYOTA AND CREW MAX • TOO LATE TO THE PARTY? • JUST WHEN TOYOTA MAKES A FULL SIZE PICKUP, THE MARKET FOR BEHEMOTH VEHICLES DECLINES • IS IT TIME TO RE-THINK LARGE PICKUP ((& SUV?) MARKET IN THE U.S.; OVERSEAS, PANEL VANS RULE • 2015 F-150 all aluminum cab and body • HONDAJET • ONE OF THE FEW COMPANIES MAKING BOTH AIRFRAMES AND JET ENGINES • ORIGINALLY, NEEDED AN AIRFRAME TO TEST THEIR ENGINE, SO THEY DESIGNED ONE

26. SOURCES OF INNOVATION • INNOVATIONS ARISE THROUGH INTERACTIONS • INNOVATIONS OFTEN STIMULATED WHEN INTERACTIONS BTWN HETEROGENEOUS ACTORS • HOMOGENEOUS ACTORS ARE NOT AS LIKELY TO ROCK THE BOAT • EFFORTS TO CLARIFY, ALIGN, RE-ALIGN, RE-INTEGRATE, & RE-CALIBRATE RESULT IN INNOVATIONS • ON THE OTHER HAND, IT’S A LONG WAY FROM A BETTER IDEA TO A BETTER PRODUCT

27. CAUSES & CONSEQUENCES OF INNOVATION • WHAT ORGANIZATIONAL, INSTITUTIONAL & INDUSTRY CONDITIONS DRIVE INNOVATIONS? • ORGANIZATIONAL? • INDUSTRY? • INSTITUTIONAL? WHAT ARE THESE? • ATTITUDES OF MANAGERS TOWARDS DIFFERENT SORTS OF INNOVATION • WHAT SORT OF FIRMS, IF ANY, SHOULD PURSUE INNOVATION-BASED B-L STRATEGIES? • SUCH AND SUCH FIRMS AT SUCH AND SUCH MOMENTS IN THE INDUSTRY LIFE CYCLE??? • ARE THERE FIRMS THAT FIT THE PART/ROLE?

28. INDUSTRY & BUSINESS PLAN MODELS • INDUSTRY: SWOT, 5 FORCES, STRATEGIC GROUPS, ILC ANALYSIS, VALUE CHAIN & PROD/MKT SEGMENTATION ANALYSIS • COMPANY: BEGIN W/ ANALYSIS OF VISION, MISSION & GOALS & KEEP GOING • PHASE GATE MODEL: 2 STAGES, 2 PHASES EACH, 30 STEPS • HOW TO INNOVATE INSIDE & OUTSIDE THE FIRM (GETTING OUT OF THE BOX) • UC DAVIS/PWC MODEL • ANALYSIS BY CATEGORY WITH HISTORICAL DATA (TREND ANALYSIS)