Technology Leapfrogging
1. Of the strategies mentioned in the article, which ones deal with technology (supply-side) and which ones deal with increasing customer willingness to pay (deamand-side).
2. Identify two other industries besides the video game industry where these strategies will work. Why?
State your answer with claim, reasons, evidence and qualifiers.
Technological Leapfrogging
1.
• “Create a technological gap that is significant, and ensure that the technological
advantages offered by the new offering are well understood by
customers.”
This strategy deals with technology push, although the point of making a technological gap is to increase customer adoption. I think that it is a false distinction, because all strategies of a new entrant should be focused on increasing customer adoption. A better question might be, “Of the three strategies new entrants use to increase adoption, which are dependent on technology, and which are independent of technological superiority?”
• “Build installed base and availability of complementary goods through strategies such as:
o making the new technology compatible with the incumbent’s installed base and complementary goods,
o forming alliances with manufacturers of complementary goods and distributors,
o using attractive licensing and distribution policies to attract third party developers and distributors,
o sponsoring production of complementary goods or producing the in-house,
o using aggressive discounting to promote rapid adoption by consumers, and reducing resistance by offering guarantees to distributors and customers.”
These strategies are completely independent of technological superiority. They are purely strategic business decisions that boost customer adoption through the way in which the product is positioned in the market. For example, aggressive discounting does not allow for high margins which are typically highly sought after for technologically superior goods, but it does allow the product to undercut the competitor’s price and appear more attractive to the customer.
• Shape perceptions and expectations through signaling through strategies such as:
o advertising and vaporware to inflate “mindshare” and promote an impression that the installed base is (or very soon will be) very large,
o leveraging the firm’s reputation for success in prior markets to the current market, and
o using credible commitments to signal the market that this is a battle the entrant intends to win.
These strategies are also independent of technological superiority. Although having a technically superior product may increase credibility for some, these are additional ways to show credibility. Nintendo NES successfully uses these strategies to overcome the technically superior Sega Master system.
2.
Personal computers are an interesting strategic industry. Software must be made to run on a specific operating system, and in some cases the operating system is specific to the computer itself, such as in the case of Apple.
In the early days there was a significant battle for the “technology gap,” but as the industry matured and especially after Apple switched to Pentium processors, there is little technological difference, and many pcs have sunk to the level of a commodity.
Complementary goods is a huge distinction in this market. Each operating system company has created software applications that are specific to their product. Microsoft has bundled the Office Suite while licensing to every developer, and Apple has focused on creating a set of applications that are fully controlled in house, and which are the high standard in their category, such as Garage Band. Apple has done a good job of getting Microsoft’s killer apps (office) while keeping theirs to themselves, creating an asymmetric advantage to using an Apple computer.
The US cell phone industry is dominated by network externalities. There is a high fixed cost to put up towers in the United States because the country covers so much land area. Because high fixed costs require companies to have a steady stream of revenue, companies try hard to establish loyalty through various means.
Each company has protection on their phones that allows the phone to only be used with their own network. This makes it harder to switch, and in the case of the iPhone and AT&T, it is also a significant attraction for new customers.
Contracts are written to subsidize the cost of the phones, and also to encourage friends and family to keep with the same provider. They do this by offering discounted family plans and free calling to those on the same network. Subsidizing the cost of the phone lowers the switching cost for new customers.
Finally, each company spends heavily on advertising, and there is huge incentive to be seen as “the largest” provider. They battle for mindshare by making claims about the size and reliability of their coverage area, and they continue to acquire each other in an attempt to signal that they are in it to win.
Joe Mullenbach
Good points Joe. The PC industry is huge and it might be better to segment this industry by say operating systems industry which exhibits these network externalities for the reasons you have mentioned. But maybe component manufacturers have become a commodity and consequently may not be able to create much value.
I agree with the contention that the main challenge of disruptive strategies is to increase customer adoption in your favor. Understanding whether your advantage is on supply-side or demand-side, however, has an effect on your overall strategy. Developing technology gaps will likely result in a business model that emphasizes R&D and continuous innovation. Building installed base and complementary goods necessitates focus on a multitude of business functions. Signaling would require significant marketing expertise.
I think a surprisingly analogous industry is the smart-phone application industry. mxapp can apply some of these principles to the (for now) blue ocean of mobile restaurant information. Though creating a technology gap is likely difficult due to constraints on hardware, reducing perceived risk of adoption and especially signaling strike me as important to capitalizing on a first-mover strategy.
A trend i find very interesting is the rise of open-source freeware. Firefox, for example, epitomizes continuous innovation by having access to nearly infinite developers. Because of its nature it is also extremely compatible (with notable proprietary exceptions) and has low switching costs because it will always be comfortable for users (or else someone will fix it). User-developed programs seem to escape many of the innovation difficulties of company-driven projects.
Yes this is a good observation Todd about open source. In fact there is a saying the eyeballs reduce bugs-very true for open source as a host of users and developers ensure that bugs are idenitifed early and patched in no time. However, there are contingencies to when open source works, for instance only when the design rules (something we did not get into in our class) are clear. So people know what a web browser should be and should do and a dominant design has emerged. Now entrepreneurs can take advantage of readily available talent which thanks to communication channels is easily accesible and autonomously assemble some product via open source. This class is a very crude attempt to have open source learning where we learn from each other and we benefit from each other’s knowledge and insights. We also share videos and ratings to quickly identify the ones that are most useful. However here to the design rules are clear. Can there be open source in industries where design rules / interfaces are not known or where communciation channels about expertise are difficult ? Probably not yet for say aircraft manufacture.