1	Innovation and Competition Are technology markets different?
2	Contents Different Competitive Environments Traditional market trajectories Technology or knowledge markets Competitive Implications Strategic Implications Innovation: The Track Record Areas for Study
3	Traditional Competitive Environments The Protected Market National Oligopoly High Entry Barriers Government Regulation Competitive Advantage from Market Power Limited Price Competition Non-Price Competition High Profits Incremental Innovations (Not Rule Breaking) Equilibrium Conditions Prevail
4	Traditional Competitive Environments The Protected Market: Examples Autos & Steel in 1950s and 1960s Airlines Prior to 1979 Electric Utilities until 1991 Computers in 1960s and 1970s Telephone Services until 1970s Pharmaceuticals until 1980s
5	Traditional Competitive Environments The Competitive Market More Fragmented Market Structures Lower Entry Barriers Competition on Price and Perceived Quality Lower Industry Profits Competitive Advantage from Productive Efficiency Incremental Innovation Episodic Quantum Innovation Rule Breaking Punctuated Equilibrium
6	Traditional Competitive Environments The Competitive Market: Examples Airlines in 1980s and 1990s. Electric Utilities in 1990s Steel in the 1970s and 1980s. Autos 1973-1985 Soft Drinks 1977-1985 Telephone Services 1980s and early 1990s Pharmaceuticals 1980s onwards
7	Traditional Competitive Environments The Hypercompetitive Market Continual Innovation Drives Competition Innovation is Multifaceted Products, Processes, Strategies, Structures Incremental and Quantum Innovation are Commonplace Creative Destruction Disequilibrium Conditions Prevail Price and Quality Play a Supporting Role
8	Traditional Competitive Environments The Hypercompetitive Market Entry Barriers Unsustainable Invented Around Imitation is Rapid Market Power is an Illusion Productive Efficiency not Sufficient for Survival Competitive Advantage from… Innovative Efficiency Adaptive Efficiency Productive Efficiency
9	Traditional Competitive Environments The Hypercompetitive Market: Examples Computers and Peripherals After 1981 Retailing in the 1980s and 1990s Automobiles from 1985 onwards Telephone Services mid 1990s onwards (hah!) Pharmaceuticals late 1990s?
10	Market dynamics over the last 80 years 1917 Forbes 100 published 1987 39 still existed 18 still on Forbes 100 2 performed better than the market over the period S&P 500 in 1957 1997 74 remained 12 outperformed the index Group performance 20% less per year than S&P 500
11	Change in S&P 500 7-year moving average
12	Average lifetime span of S&P 500 companies
13	Economic forces driving discontinuity Increasing efficiency of business Increasing efficiency of capital markets Globalization and deregulation of markets Fragmentation of Markets All lead to: Increased Competitive Pressures
14	Economic forces driving discontinuity Accelerating pace of technological change
15	Economic forces driving discontinuity Accelerating Pace of Technological Change Surge in Base Technologies with Wide Application Microprocessors, Software, Fiber Optics, Biotechnology, Composite Materials, Nanotechnology “Creative Destruction” Innovation Creates New Opportunities and Destroys Old Positions Which leads to :Increased Competitive Pressure
16	Are technology markets different? Distinction between physical products and technology is not always easy to make Blueprints There’s a clear line between the product and the technology. Technology can be embodied in the physical artifacts . Method for screening biological compounds can be embedded in a chip. Algorithms in software, Purchase of the software includes the right to use the embodied knowledge -so software is usually licensed rather than sold.
17	Are technology markets different?
18	Implications Increased Importance of Innovation No Sustained Advantage No Safe Profit Fortresses Shorter Product Life Cycles Smaller Market Niches Increase in Break-even Market Share
19	Why does it seem to be happening so fast? The phenomenon of exponential progress Every year or two, the amount of processing speed you can buy for a dollar doubles ... Every year or two, the amount of memory you can buy for a dollar doubles It's been going on for several decades It's likely to keep going on for at least one more
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21	Grasping the rate of progress Pioneers' covered wagon: 20 miles a day Early automobiles: 20 miles an hour Supersonic aircraft: 20 miles a minute That's a factor of 1000. Squeeze that into 10 or 15 years. That's how fast information technology is moving.
22	Grasping the rate of progress If, over the past 30 years, transportation technology had improved at the same rate as information technology with respect to size, cost, performance, and energy efficiency, then an automobile would ... be the size of a toaster cost $200 go 100,000 miles per hour travel 150,000 miles on a gallon of fuel
23	Competitive Implications
24	Strategic Implications Advantage Goes to the Innovative Where and How R&D is Spent Matters Cycle Time is Important: Quick Innovators…. Amortize Fixed Costs Before Next Generation Capture First Mover Advantages Experience Curve, Brand Loyalty, Pre-Emption… Establish Standards Dominant Design and Network Externalities Experiment Economize on Development Costs
25	Strategic Implications
26	Strategic Implications Failed Product Introductions are Expensive Maximize Fit with Customer Requirements In Addition to Speed of Development.. Quality Matters (TQM, etc…) Features Matter (Match Customer Demands) Maximize Ability to Produce Production Costs Matter Impact on Price & Profit Ability to Execute Production Ramp up Matters. Satisfy Demand
27	Strategic Implications Product Launch Strategy is Critical Producing Product only Half Task Maximizing Market Penetration Important Depends on Collaboration Strategy.. Licensing, Alliances, Go it Alone. Depends on Positioning Strategy Pricing, Promotion, Distribution, Product Functionality
28	Need to abandon assumption of continuity Age of discontinuity Corporations’ survival goal is continuity Cultural “lock-in” Evolve into entities of convergent thinking Discontinuity thrives on divergent thinking May use private equity or venture as future models for corporations
29	Areas for Study Competition in Technology Driven Industries Relationship Between Tech Change and Competition? Technology Strategy How to Make Appropriate R&D Investments? Product Development Process How to Simultaneously: Minimize Time to Markets, Maximize Fit with Customer Requirements & Ability to Produce? Product Launch Strategy How to Maximize the Probability of Success?
30	Contents Dominant Design The Evolution of Competition Network Externalities Technology Paradigm Shifts
31	Dominant Design Technology-based industries tend to be characterized by a dominant design. Dominant Design…… A range of basic choices about a design that are not revisited in every subsequent design Model T AC power system Quartz watches TCP/IP TV: PAL, SECAM, NTSC
32	Dominant Design How does a dominant design occur? By exclusion and synthesis Not in a pre-determined way A “satisficer”; Not necessarily optimal Emerges from Problem-solving in the design stage Some core concept narrow the product design criteria
33	Evolution of Competition
34	Number of firms in the US Typewriter Industry
35	Number of firms in the US Auto Industry
36	Evolution of Competition Embryonic Stage Fluid Lots of experimentation Period of rapid learning Standards wars Wireless: AMPS, GSM, TDMA, CDMA PCs: C/PM, Apple, DOS, Tandy, DEC Uncertainty About Future Standard Huge technical and market risk Feature and product-based competition
37	Evolution of Competition Transitional Stage Dominant Design Emerges PCs mid 1980s Competition Centers Around Perfecting Design and Reducing Prices Favors firms with better technical and engineering skills Attention Shifts to Process Innovation Goal: Drive Down Cost of Producing Dominant Design PCs in early 1990s Competition population curve peaks Industry consolidates around most efficient producers
38	Evolution of Competition Mature Stage Both Product & Process Features Standardized Market an Oligopoly: “Rule of three” Back to incremental innovation Period of incremental innovation broken by next technological discontinuity New technology emerges to supplant previous one Transistors over vacuum tubes Wireless over wireline?
39	Discontinuities start technology cycles
40	Evolution of Competition Product Life Cycle and Product Applications
41	Evolution of Competition As Product and Process Technology Matures Performance/Price Ratio Becomes Favorable Applications of Technology Widen Example: Carbon Fiber Specialty Applications - Aerospace Broad Applications - Automotive, Transportation. Example: Satellite Positioning Devices Specialty Applications - Military, Commercial Marine Broad Market - Outdoor Sports, Auto Navigation Fortunes Made Pioneering Broad Application
42	Network Externalities Result in the Emergence of a Dominant Design. 2 types of Network effects: Direct Value of Product = f(Installed Base) Examples: Phone, fax, some software Indirect Price(complementary goods)= f (1/(Installed Base)) Examples: razor blades, toner cartridges, DVD
43	Network Externalities Increasing Returns to Installed Base
44	Network Externalities Firms (and superior technology) can be locked out Firms that owns dominant standard can monopolize market due to Switching costs: learning, accumulated assets, transaction costs Eg: phone number portability, lotus etc.
45	Technology Paradigm Shifts All Technologies have their Limits
46	Technology Paradigm Shifts
47	Technology Paradigm Shifts After ‘A” Performance Gains Difficult to Attain. Examples: Diminishing R&D in Pharmaceuticals Rise of “me too” Drugs & Increased Price Competition Prozac (Lily), Zoloft (Pfizer), Praxil (SKB) Limits to Line Width Reduction in Semiconductors Photo-lithography facing Diminishing Returns Can we go below 0.1 microns? Rising R&D Costs in Microprocessors 386 $100m, 486 $1 billion, Pentium, $5 billion Line width in semiconductors Probability of Paradigm Shift Increases
48	Technology Paradigm Shifts
49	Technology Paradigm Shifts Examples Analog to Digital (Wireless and Recording) Chemical Synthesis to Biotechnology (Small to Large Molecule) 16 to 32 to 64 bit Video Games During Discontinuity Defenders of Technology 1 Reluctant to Change Fear of: Cannibalization, Channel conflict, Earnings dilution Attacker can take the Advantage Leapfrog Technology
50	Technology Fusion Paradigm Shifts often Born out of the Fusion of Independent Streams of Technology. Fiber Optics: Fusion of glass, cable, and microelectronics AM-LCD screens: Fusion of electronic, crystal, and optics. Micro-processors: fusion of ceramics, optics, micro-electronics, and software engineering. Achieving Fusion Intelligence Gathering Capability Collaborative Research Strategic Alliances (Marry Complementary Technology)
51	Takeaways Technology evolves through cycles: Discontinuous innovation Leads to dominant design Dynamics and focus of competition changes Network externalities may lead to monopoly Leads to a mature market immobilized by fear of Product cannibalization Channel conflict Earnings dilution Provides opportunity for attackers and markets win