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Strategy and Technological Innovation

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Strategy and Technological Innovation

Strategy and Technological Innovation

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    Strategy and Technological Innovation Strategy and Technological Innovation Document Transcript

    • Strategy and technological innovation Assignment for part-time MBA Competitive Strategies, week 5By Gulcin Askin, Michelle Donovan, Kivanc Ozuolmez and Peter Tempelman October 1, 2012
    • In the first part of this paper we explore the difference in perspectives on competitive strategybetween Porter-type IO, the Resource Based View (RBV) and the authors for this weeksassignment: Porter (1980), Anderson and Tushman (1991), Arthur (1996), Stoelhorst (2004and 2005) and Christensen, Raynor and Verlinden (2001). The second part of this paperapplies the arguments of Arthur (1996) and Christensen et al. (2001) to the case studies of thePC and VCR industry.The articles of Porter (1980), Anderson and Tushman (1991), Arthur (1996), Stoelhorst (2004and 2005) and Christensen et al. (2001)’s all have certain elements in common. Porter’s(1980) ‘evolutionary process’, Anderson and Tushman’s (1991) concept of ‘technicaldiscontinuity’, Christensen et al. (2001) ‘disruptive technology model’ and Stoelhorst’s(2004) ‘four phases model’ all describe the life cycle of a technical innovation from inceptionto maturity. The basic pattern of these cycles is that they start with a revolutionary invention(phase 1) which is further being developed (phase 2). At some point a winning technologybecomes the standard (phase 3). The technology then reaches a mature stage andimprovements to it are relatively small (phase 4). There are multiple implications forcompetitive strategy. Depending on the industry, the duration of these stages varies andthrough innovation, the cycle can be influenced. Accordingly at each stage, the nature of thecompetition may differ and prediction of forthcoming changes becomes more difficult.Anderson and Tushman (1991) argue that management can expect the phases to happen. Theyclearly define some predictable events which take place after technical discontinuity, one ofwhich is the emergence of a dominant design which is usually pioneered by veterans in theindustry. Christensen et al. (2001) also argue that management can predict the differentphases. Arthur (1996) has a number of similarities to Porter (1980), Anderson and Tushman(1991), Stoelhorst (2004) and Christensen et al. (2001), e.g. the possible predominance of aninferior product (as the dominant design) or multiple potential outcomes, but he adds aninteresting element: the concept of increasing returns which he describes as ‘that which is 2
    • ahead to get further ahead’ (Arthur 1991, p. 100) and is rewarded ‘fat profits’ (Arthur 1991, p.102). The argument is that in knowledge based industries there is a positive feedback loop.Once a firm has a product that gets ahead of the competition the market tilts in favour of thisproduct (market instability), the product ‘locks-in a market’ (becoming the winningtechnology – phase 3 mentioned above) and generates fat profits for the winner. He putsproduct competition in first place ahead of competing firms. Christensen et al. (2001)elaborate on where the profits of a product go to. In their view, it depends on the phase aproduct is in. In the early phases the characteristics of a new technology make it profitable tooperate as an integrated company. Once a product reaches maturity profits are primarily madein the back end of the value chain by suppliers of subsystems. They do not say whether theseprofits are ‘fat’ in the Arthurian sense. Stoelhorst (2005) contests the argument by Arthur thatincreasing returns always result in fat profits. The ‘paradox of increasing returns’ (Stoelhorst2005, p.14) states that in order to set a dominant standard (the winning technology), ubiquityis needed. It is not guaranteed however that he who sets the standard will be rewarded fatprofits. The fat profits go to the owners of the scarce resources that are needed to produceproducts that use the winning technology. Accordingly, the increasing returns argument doesnot identify the eventual beneficiaries of profits derived from becoming the standard.In light of the above, the articles by Porter (1980), Anderson and Tushman (1991), Arthur(1996), Stoelhorst (2004 and 2005) and Christensen et al. (2001) all describe the competitiveprocess as a dynamic process. Companies have to battle to make their disruptive technology(Christensen et al. 2001), technological breakthrough (Anderson and Tushman, 1991) orembryonic technology (Stoelhorst, 2004) the dominant standard. Whether they succeeddepends on the initial conditions, the sequence of events during the competitive process andthe role of small, random events (Arthur 1996). Additionally, depending on the dynamicnature of the competition described in each article, adaptation, configuration and repositioningbecome significant in order to maintain sustainable profits in the market. Previously discussed 3
    • ideas of the Austrian School and Schumpeter (Jacobson, 1992) also emphasize the importanceof entrepreneurial activity and innovation to obtain higher returns. In this respect, managerialactivity which restructures the activities, operations, position, etc. of the company in line withphases experienced in the market, stands out as a new and dynamic perspective whichcontributes to higher returns.The description of the competitive process as a dynamic process is a significant differencefrom the RBV as represented by Peteraf (1993) and Barney (1995), and Porter-type IO asrepresented by Porter (1979).Porter (1979) sees (competitive) strategy as fit: the competitive strategy of a firm is to fit to itscircumstances, and a position is sustained by barriers to competition. Competitiveness can beincreased by either producing more value for customers, or produce at lower costs.RBV sees competitive strategy (obtaining competitive advantages) as resulting fromheterogeneity/valuable and rare resources, ex-post limits to competition/inimitable resources(Peteraf, 1993/Barney, 1995), ex-ante limits to competition, imperfect mobility of resources(Peteraf, 1993) and the organization, which should be able to exploit the competitive potentialof resources (Barney, 1995).As can be concluded from the above both RBV and Porter-type IO are inherently static intheir explanation of difference in competitive advantage. Neither provide insights into wherethe barriers to competition that they refer to come from. RBV and Porter-type IO describe thecharacteristics of a competitive situation in which a firm takes a favourable competitiveposition. The route how to get there however is not provided by them.Stoelhorst (2004) supports his view on Resource-based competitive advantage overtechnology lifecycles by using historical evidence and case studies from the PC and VCRindustries. Both industries widely demonstrate what Arthur (1996) and Christensen et al. 4
    • (2001) discussed on highly dynamic industries, increasing returns, disruptive technologies andchanges of the product phases.Christensen et al. (2001) state that, in the early days, when a product’s functionality does notyet meet the needs of customers, companies compete on the basis of product performance.Stoelhorst (2004) builds on this and sees competition as much between the technologicaloptions as it is between firms. In the early days of VCR technology, the technologicaldifferences between Ampex’s “transverse scanner” and Toshiba’s “helical scanner” were themain performance differentiators and the superior “helical scanner” moved the industry to the“design competition” phase, and meanwhile pushed the leader, Ampex, down in its marketshare.Later, due to its target of adapting video technology to the mass market, Sony became themarket leader. During this phase, evidence to support Arthur (1996)’s mini-ecologies, loosealliances and web, Sony, Matsushita and JVC signed a cross-licensing agreement on U-matictechnology, where as a result, Sony, Matsushita and JVC benefitted from amplified marketsand U-matic became the industry standard.Even though Japanese manufacturers had the U-matic agreement, and enjoyed fat profits forsome time, as there wasn’t one dominant integrated player in the market to lead thestandardization, the VCR industry resulted in three different formats; Sony’s Betamax, JVC’sVHS and Philips. As Christensen et al. (2001) pointed out on the conceptual level,standardization helped not only the three companies, but also others like Hitachi, Mitsubishi,Sharp, Zenith and RCA to adapt and gain share in the VCR market. But three VCR formatsresulted in a “standardization battle” and building wide alliances, as Arthur (1999) states,allowed JVC’s VHS format to take market leadership.As discussed at the conceptual level by Arthur (1999) and Christensen et al. (2001) equipmentmanufacturers and complimentary products took over important roles and led incrementalreturns in the VCR market. Pre-recorded tapes especially, with drive from rental stores, 5
    • became an important factor. People had VHS players, and therefore rental shops providedmore diverse content on VHS cassettes than Betamax, and therefore people bought VHSplayers instead of Sony’s Betamax….Another example to support Christensen et al. (2001)’s view on equipment manufacturerstaking innovative roles was also observed on Matsushita’s focus on production automation,and economies of scale implementations where the VCR market was mainly static after nearlythree decades. With its abilities to deliver low-priced VCRs with variety of features,Matsushita became the market leader in 1980s.Both Arthur (1999) and Christensen et al. (2001)’s strategic views on technology lifecyclesare widely evidenced by the PC industry as aligned with Stoelhorst (2004)’s phases oftechnological industry. Since the embryonic phase, the launch of the first computer kit,disruptive innovations shaped the industry in its first decade. During the first decade, theindustry was dominated by small (or new) players, all in search of market needs. The besttechnological design and real user value remained uncertain until Apple, in cooperation withVisiCalc showed that the PC is an important tool, which can downsize spreadsheets frommainframes. Later with other programs like word processors and database managementsystems, Apple got its dominant market share.IBM, on the mainframe side, was quite late to join into the PC industry. But when it saw thatApple’s PC started threatening IBM’s market, IBM saw an opportunity in a dynamic industry.As Arthur (1999) suggests, by creating “commando units” IBM applied the necessarymanagement style for dynamically changing industries and allowed a team of engineers tobypass IBM’s bureaucratic checks, work far from hierarchy and focus on their mission.With its reputable name, soon after releasing IBM-PC, IBM became the market leader in thePC industry. With the market dominance, as expected by Arthur (1999)’s conceptual view ofbuilding technological ecologies, IBM profited from an increasing return loop. The more units 6
    • IBM sold, the more attractive the platform became for the software manufacturers, the moresoftware available for the platform, the more consumers preferred IBM-PCs over competitors.IBM’s increasing return loop depended not only on the software manufacturers. By sharing itshardware standards, IBM allowed other manufacturers to build complimentary devices. Withthat, IBM ensured all participants remain committed to the alliance and created the standardsfor the industry. Apple, on the other hand, by closing its Macintosh system to outsiders,couldn’t create an alliance across the industry, and locked itself to the 8% market share.This standardization phase clearly evidences Christensen et al. (2001)’s view on “when theproduct isn’t good enough, being an integrated company is critical to success” (p.75). Notmeaning that the IBM-PC was not good enough, but it was a single-designed product anddidn’t meet all individual requirements. As IBM was the most integrated company, in termsof resources, capitalization and know-how (from the mainframe world) in its time, its successwas expected.In spite of IBM’s big success and leading position, IBM’s quasi-monopoly got broken quicklyby Compaq by using the standards shared by IBM and reverse-engineering some of thecomputer code running on the IBM-PC.Soon after Compaq, other players like Dell and Hewlett Packard joined the competition andthey found better ways to fragment the industry and serve the market. As evidenced byChristensen et al. (2001), the standardization unveiled by IBM resulted in the displacement ofthe dominant, integrated company (IBM) by the specialists (Compaq, Dell).Although IBM lost its leadership in the market, the technological ecology it created by itsstandards dominated the market for longer years and as shown by Arthur (1999), this ecologyresulted in increasing returns. 7
    • ReferencesAnderson, Philip and Tushman, M.L. (1991). Managing through cycles of technological change,Research Technology Management; 34 (3): 26-31.Arthur, W. Brian (1996), Increasing Returns and the New World of Business, Harvard BusinessReview, (July-August): 100-109.Christensen, Clayton M., Michael Raynor and Matt Verlinden (2001), Skate to Where the MoneyWill Be, Harvard Business Review, (November): 73-81.Jacobson, Robert (1992), The “Austrian” School of Strategy, Academy of Management Review, 17(4):782-807Porter, Michael E. (1979), How Competitive Forces Shape Strategy, Harvard Business Review,(March-April): 137-145.Porter, Michael E. (1980), ‘Industry Evolution’, From: Bob de Wit and Ron Meyer (1998),Strategy: Process, Content, Context, 2nd edition, London: Thomson Learning. (Originally from:Michael E. Porter (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, pp.156-164, 184-188.)Stoelhorst, J.W. (2004), Balancing Resource-Based Competitive Advantage over a TechnologyLifecycle, Paper presented at the Strategic Management Society Annual International Conference,Puerto Rico.Stoelhorst, J.W. (2005), Competitive Dynamics and the Paradox of Increasing Returns:Why Winning Markets May Not Lead to Fat Profits, Working paper, Amsterdam BusinessSchool, Universiteit van Amsterdam. 8