Challenges of industry formation
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Challenges of industry formation

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These slides show how the challenges of industry formation depend on the level of complexity in the relevant products/services and whether a critical mass of users/complementary products is needed ...

These slides show how the challenges of industry formation depend on the level of complexity in the relevant products/services and whether a critical mass of users/complementary products is needed before growth will continue. While the formation of most new industries depends on when a new technology becomes economically feasible and thus potentially provides a superior “value proposition” to an increasing number of users, industries with complex products/services or that require a critical mass of users/complementary products before growth will continue face additional challenges.

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Challenges of industry formation Challenges of industry formation Presentation Transcript

  • Creating New Industries: Different Industries, Different Challenges of Formation Jeffrey Funk Associate Professor Division of Engineering & Technology Management National University of Singapore Mail: etmfjl@nus.edu.sgThese slides summarize ideas that are described in a paper (Complexity, Critical Mass, and Industry Formation:A Comparison of Selected Industries, Industry and Innovation, 2010) and a chapter in a forthcoming book fromStanford University Press (Technology Change and the Rise of New Industries)
  • New Industries• Can be thought of as a set of products or services – based on new concepts and/or architectures – supplied by new collection of firms – and of a significant amount of sales e.g., >$5 billion)• According to Joseph Schumpeter, – waves of new technologies have created new industries – along with opportunities and wealth for new firms as the new technologies destroyed existing technologies and their incumbent suppliers – this process is often called “creative destruction”
  • Timing of Industry Formation• For all industries, industry formation requires – products that are economically feasible and thus offer a superior value proposition to an increasing number of users* – firms to recognize the potential for this superior value proposition and introduce the products• But for other industries, there are additional challenges of industry formation – industries that involve complex products and/services – industries that require a critical mass of users or complementary products for growth to continue Other chapters in “Technology Change and the Rise of New Industries” (and other slides) address this issue
  • Outline• Typology of Industry Formation – degree of complexity – whether a critical mass of users or complementary products is needed for growth to continue• Simple Products• Simple Networked Products• Complex Systems• Complex Network Systems• Conclusions
  • Typology of Industry Formation Simple Network Products Complex Network Systems Digital Video Disc (DVD) Radio (AM, FM) Broadcasting Systems Music Players (Phonograph, Television (Black & White, Color, Yes Cassette Tape, Compact Disc) Digital) Broadcasting Systems Facsimile Fixed-Line Telephone Systems Personal Computer (PC) Mobile Phone (Analog, Digital) SystemsCritical Mass PC Internet, Mobile Internet of users orComplementary Products Simple Products Complex Systemswas Required Refrigerator Washing Machine Electric Power Automated Dryer Air Conditioner Automobile Algorithmic Trading No Vacuum Cleaner Sewing Machine Mainframe Online Universities Video Cassette Digital Watch Computers Biotechnology Recorder (VCR) Nuclear Power Semiconductors Pocket calculator Digital Camera Airline/Aircraft Low High Relative Complexity at Time of Creation
  • Complexity (1)• The complexity of an industry can be measured in terms of the number of – subsystems – processes, and/or – lines of software code in the products or services offered in the industry• Complex systems usually require more – technical, regulatory, and administrative decisions to be made – organizations (including government agencies) and often larger ones to be involved with these decisions – resources for their development and operation (e.g., R&D, land, frequency spectrum) than do less complex systems
  • Complexity (2)• Therefore, the following are more important for industries based on complex than simple systems – government support for R&D – government purchases – government regulations and licenses with respect to limited resources (e.g., frequency spectrum or land including regulated monopolies) – new forms of organizations (including vertical disintegrated ones) and – agreements among firms on standards and methods of value capture
  • Critical Mass (1)• Whether a critical mass of users or complementary products are needed for growth depends on whether – a product by itself has value to users and/or – there are immediate and large benefits to users from an expansion in number of them or complementary products• Some products require a critical mass of users for growth to occur – users only obtain value if there are multiple users and if those multiple users jointly use the products – Examples include telephones, facsimiles, video conferencing, short message services (SMS), Internet mail, dating sites, and social networking sites
  • Critical Mass (2)• Other products require critical mass of complementary products – immediate and large benefits to users from expansion in complementary products• Examples include music/video players, video games, computers, radio/TV broadcasting, PC/mobile Internet• One reason for large benefits - users demand wide variety of music, video, programs, computer software• Need for critical mass increases – importance of firms finding agreements on standards and on methods of value capture and creating alliances that support these agreements
  • Outline• Typology of Industry Formation – degree of complexity – whether a critical mass of users or complementary products is needed for growth to continue• Simple Products• Simple Networked Products• Complex Systems• Complex Network Systems• Conclusions
  • Simple Products• Simple products – had low complexity – didn’t require a critical mass of users/complementary products• Timing of formation depended on when – products offered a superior value proposition to users – firms recognized the potential for this superior value proposition and introduced the products• Because such new products are often expensive, – first users were ones with high incomes – and thus, products representing new industries have diffused faster in U.S., Europe, and Japan than in other countries
  • Outline• Typology of Industry Formation – degree of complexity – whether a critical mass of users or complementary products is needed for growth to continue• Simple Products• Simple Networked Products• Complex Systems• Complex Network Systems• Conclusions
  • Simple Networked Products (1)• The difference between simple network-products and simple products is in whether – a critical mass of either users or complementary products is needed for growth to occur – and this depends on whether product by itself has value to users and/or whether there are immediate and large benefits to users from expansion in number of users/complementary products• Local area networks (LANs) and fax machines required critical mass of users – because multiple users were needed for users to obtain value – critical masses of users emerged inside firms and later emergence of standards facilitated communication between firms and in the case of fax machines, between consumers
  • Simple Networked Products (2)• The other products shown in upper left hand quadrant – required critical mass of complementary products to emerge for growth to occur – users have demanded variety of music, movie (e.g., DVDs), and computing software before they adopted new hardware – positive feedback between number of users and variety of software• Some firms have supplied both hardware and software (i.e., vertical integration)• Other firms have created alliances in order to set standards and offer compatible hardware and software
  • Has it Become More Difficult to Create Critical Mass? (1)• Several new music formats - digital audio tape (DAT), digital compact cassettes (DCC), mini-discs – failed and legal on-line music services have grown slowly• For first three – their performance advantages over CDs were small – music companies did not strongly support them – DAT was not backward compatible with cassette tapes albeit DCC was – “switching costs” for CDs perhaps too large for DCC to diffuse• For on-line music, sales lagged until Apple put together a new scope of activities and revenue sharing model
  • Has it Become …..Critical Mass? (2)• PC industry was also temporarily immune to “creative destruction”• Large switching costs and Microsoft’s control of “standard” interfaces slowed introduction of new computers/OS/microprocessors• It has only been increasing compatibility between Wintel and Apple computers and new discontinuities that have reduced power of Microsoft and Intel – Many orders of magnitude improvements in ICs are making compatibility and new discontinuities such as PDAs, tablet computers, and cloud computing possible
  • These Examples Highlight DifferencesBetween Simple and Simple Network Products• With simple products (e.g., hand-held tape players, digital cameras) – it is primarily recognizing when a new product representing a new industry might become economically feasible – and having technical capabilities to introduce product• With simple network products such as PDAs (Palm), tablet computers, and MP3 players (Apple) – capabilities associated with creating standards and alliances are also important
  • Outline• Typology of Industry Formation – Degree of complexity – Whether a critical mass of users or complementary products is needed for growth to continue• Simple Products• Simple Networked Products• Complex Systems• Complex Network Systems• Conclusions
  • Complex Systems (1)• Complex systems have a large number of – subsystems, processes, or lines of software code in products or services offered in the industry• This complexity leads to need for – large amounts of R&D – new regulations with respect to limited resources (e.g., land and frequency spectrum) – price-insensitive customers• Some governments (e.g., U.S. one) have funded R&D, implemented regulations (or deregulation) and been the necessary price-insensitive customers more than have other governments
  • Government Agencies in U.S.• Were major funders of R&D for – aircraft, computers, nuclear power, semiconductors, and bio- technology• Were major (price insensitive) customers for – aircraft, airlines (postal services), computers, nuclear power, semiconductors, and bio-technology• Also implemented favorable regulations for – many of these industries – one example is for limited resources (e.g., land for electric power distribution and regulated monopolies)• These are major reasons for early formation of these industries in the U.S.
  • More Specific Examples• Biotechnology (late 1970s) – first emerged in U.S. due to strong universities, a venture capital market, and favorable regulatory system that protected intellectual property and that enabled universities to benefit from federally-funded research• Automated algorithmic trading (in 1990s) – first emerged in U.S. due to strong universities (i.e., finance departments), venture capital market, and favorable regulatory system (or lack of regulations)• Online universities (in 2000s) – first emerged in U.S. partly due to existence of government subsidized loans for private universities (i.e., policy)
  • But none of these Industries Required Critical Mass of Users/Complementary Products• Some complex systems used in combination with existing products/services – automobiles used existing roads, fuel sources, repair shops – mainframe computers initially used punch cards – nuclear power stations used existing steam turbines and transmission lines – semiconductors used in existing electrical systems• Some initially introduced as stand-alone systems – mainframe computers, electric power (for street lighting) – in stand-alone systems, integrated supplier provides all hardware and software and thus there are only supply-based economies of scale
  • But such Network Effects or Switching Costs May Emerge……• Network effects did later emerge for mainframe computers as vertical disintegration occurred, which enabled different firms to provide computer, peripherals, and application software• Network effects also emerged for automobiles in the form of gasoline and service stations – will these network effects make it difficult for electric or hydrogen vehicles to diffuse? – many automobile users may expect battery recharging stations or hydrogen refueling stations to be available
  • Outline• Typology of Industry Formation – Degree of complexity – Whether a critical mass of users or complementary products is needed for growth to continue• Simple Products• Simple Networked Products• Complex Systems• Complex Network Systems• Conclusions
  • Complex Network Systems (1)• Combines the challenges of – complex systems – creating a critical mass of users or complementary products• Complex systems often require – large amounts of R&D, new regulations with respect to land and frequency spectrum, or price insensitive customers• Creating a critical mass of users often requires – firms to agree on standards and methods of value capture and create alliances to support these agreements
  • Complex Network Systems (2)• Governments have needed to – facilitate agreements on standards – manage limited resources of land or frequency spectrum – but encourage competition• Examples include – Radio (AM, FM) and Television (Black & White, Color, digital) Broadcasting Systems – Fixed-Line and Mobile Phone (Analog, Digital) Systems – PC Internet and Mobile Internet
  • Complex Network Systems (3)• Recently – Agreements on standards have become easier – While choices of standards have increased dramatically – This seeming contradiction comes from greater firm formation, more standard setting agencies, and other institutional changes• But this was not always the case• And agreements on standards do not always come easy……
  • Example of PC Internet in U.S. (1) • Federal government funded development in universities • Universities developed and implemented open standards • Early deregulation of telecom industry and firms’ early implementation of PCs and LANs – contributed to interlinking between government-funded, commercial, and corporate networks • Easy dissemination of browsers over inter-linked networks in early 1990s and lifting of restrictions on commercial activities in mid-1990s – triggered an explosion in Internet activity, or in this presentation’s words, the formation of the Internet industryFor more details, see: Mowery, D. & Simcoe, T 2002, Is the Internet a US invention? – an economic and technological history of computer networking, Research Policy, vol. 31, pp. 1369-1387
  • Example of PC Internet (2)• Europe (outside of Scandinavia and UK) and Japan were slower to fund implementation of Internet infrastructure and when they did – they focused on proprietary technologies that were supported by their “national champions”• Their universities were also slower to implement information technologies – their governments funded less university research and were slow to liberalize their telecommunications industries• This allowed other countries – like Korea, Singapore, and Hong Kong to experience faster diffusion of Internet services than did Japan and many European countries
  • Example of Mobile Phones• Scandinavia (followed by U.S. and UK) experienced earlier growth than did other countries – government-sponsored entities created open standards, licensed service providers, allowed competitive sale of phones• Their service providers also – set lower prices than did other countries• On other hand, most Western European countries had earlier growth in digital phones than did U.S. – they chose single standard and began licensing new entrants in the late 1980s long before U.S.For more details, see: Funk J and Methe D. 2001. Market and Committee Based Mechanisms in the Creation and Diffusion of Global Industry Standards: the case of mobile communications, Research Policy 30 (4): 535-708
  • Example of Mobile Internet (1) • Mobile Internet has seen completely different process of formation than did the PC Internet – firms and not universities initially created the mobile Internet • Japanese service providers created a critical mass of users in 1999 and 2000 with – phones that displayed content in a consistent manner (i.e., using standards) – entertainment content that was supported by a micro-payment system – inexpensive Internet mail – site access via the input of a URL • The Japanese service providers were able to do these things partly because they still dictated phone specifications to manufacturersFor more details, see: Funk, J. 2012. Multiple Standards and Critical Masses, and the Formation of New Industries: The case of the Japanese mobile Internet, European Journal of Innovation Management 15(1): 4-26
  • Example of Mobile Internet (2)• Western firms had trouble creating critical mass of users due to – lack of agreement on standards – lack of inexpensive Internet mail – little revenue sharing with content providers by service providers• Phone manufacturers failed to agree on standards in WAP (Wireless Automation Protocol) Forum primarily because – large ones such as Nokia did not want open standards to emerge – and lead to market for phones that is similar to PCs
  • Example of Mobile Internet (3)• Service providers did not want Internet mail to cannibalize SMS revenues and make them a “pipe” as in PC Internet• These problems were finally solved by – improvements in ICs and displays – that made it possible for new entrants such as Apple and Google to introduce phones that can access PC content on a phone – this eliminated the necessity of creating a critical mass of mobile Internet content, users and phones
  • Conclusions• For all industries, industry formation requires – products that are economically feasible and thus offer a superior value proposition to users – firms to recognize the potential for this superior value proposition and introduce the products• But for other industries, there are additional challenges for industry formation – industries that involve complex products and/services – industries that require a critical mass of users or complementary products for growth to continue
  • These Additional Challenges Include• Simple Network Products – agreements on standards and methods of value capture and alliances to support these agreements• Complex Systems – Governments fund R&D, be a price insensitive customer, and implement appropriate regulations (or deregulation) for scarce resources such as land or frequency spectrum• Complex Network Systems – Combines challenges of network and complex systems – Governments must often: 1) facilitate agreements on standards; 2) manage limited resources of land or frequency spectrum; and 3) encourage competition