Chapter 5 TECHNOLOGY AND COMPETITION

8/7/2019 Chapter 5 TECHNOLOGY AND COMPETITION

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TECHNOLGY ANDCOMEPETITION

Chapter 5



Competitive Domains

battle for survival is in institutional arenas;.

Value creation the key

products/services are judged in relation tocompetitors.

Test of competitive domain is the market. gainmarket share, and overcome switching costs.

Success hinges on organizational and technicalfactors



COMPETITIV

E CONS

EQUENCES

OFTECHNLOGICAL CHANGE

In the words of Schumpeter it is ³creativedestruction´.

Four clusters of consequences:

1. creation of new products, 2. Changes in the valuechain, 3. Changes in value constellation, and 4. Competitive rivalry.



Creation of New Products

1. It is to extend market reach. Mature technologies can often berejuvenated. Watch industry is a case in point.

2. Architectural innovations enable companies to reach newer markets changing their competitive positions. Battle between Xerox, Cannon and Ricoh is an example.

3. Technological innovation sometimes spawns totally newproducts. New products extend human mastery over theenvironment. Computers have released humans from routinetasks.

2. Technology integration leads to conver gence. Computers,telecommunications, and entertainment are conver ging to makean entertainment industry of their own.



CHANGES IN VALUE CHAINS

Value chains are reconfigured, cost and speed areinfluenced. TQM is an example of this wherebyincremental productivity embedded in an existing valuechain is captured. Alter natively, substitution of newer technology will enhance the speed. Example:scanners.

Transformation of value chains can be done in twoways: automation and reconfiguration of processes.



Automation

In automation labor is replaced with less expensivecapital-intensive technologies.

In recent years with advances in IT and robotics,automation has been extended to white collar jobs aswell. Whole layers of management have been replacedwith information technology.

Productivity gains have resulted.



Changes In Value Constellation

1. Shifting balance of power . Firms like Big Bazaar withtheir optical scanners develop better consumer information than the neighborhood store which relieson corporate research departments.

2. Potential for Outsourcing. Because of market forces,and standardized products, many activities can beoutsourced.

3. Managing Value Constellation. IT is enabling firmsto better plan and manage their supplier and distributor relationships. JIT and TQM are mandatory.



Competitive Rivalry

Product and process innovations are two ways by

which the competitive game is played and won. Theseinnovations enable firms to;

(1) create entry barriers for competitors, e.g., patents

and R & D (2) to bring about product and process

substitution, e.g., plastic replacing steel, word

processing replacing typewriters and automation androbotics etc.; and (3) to redefine the rules of

competition, e.g., mini steel plants.



TECHNOLOGICAL CHARACTERSTICS OFCOMPETITIVE DOMAINS

(1) Technological Opportunity

(2) Appropriability (3) Resource Requirements

(4) Collateral Assets

(5) Institutional Milieu (6)Speed



Technological Opportunity

Is concer ned with the innovation potential that exists in an

industry. Consider new products, processes and service.

Opportunity for developing competitive advantage may differ fromone domain to the other .

Significant outlay on R &D is usually required in pharmaceutical

industry for developing breakthrough drugs.

Process innovation may be required in commodity chemicals.

In many low tech settings like real estate, faxes, cell phones, voice

mail and the like become competitive tools

Windows of opportunity above are different.



Appropriability

Refers to economic benefits that will accrue to theinnovating firm. It can be high or low.

Patent protection and safeguarding is a means of protecting intellectual property rights to keepappropriability at high levels but if they can beengineered around, advantage is lost.



Resource Requirements

Fundamental research has high resource requirements

where as if product development is the focus, resourcerequirements are not as high. Compare pharmaceutical

industry with software.

Broadly, more the requirement for basic research,

greater the resource commitments requirement to

produce an innovation.



Collateral Assets

Many innovations need collateral assets so that they

give the firm a competitive advantage. Collateral assets are usually complementary products

or complementary value constellations.

Consider the case of high-definition television (HDTV).

It was ten years before the HDTV could make any

inroads in the U. S. because there were no supportive

broadcasts. Superior television was, thus, useless to

consumers.



Institutional Milieu

Many times competitive domains are reflective of rivalry not only in the market place but also in theinstitutional arenas.

1. Market participants such as suppliers anddistributors

2. Non-market institutions, such as standard-setting

or ganization and gover nmental agencies 3. Enabling institutions such as trade associations,

scientific and technical associations, data sources asjour nals etc.



Speed

Speed or ³clockspeed´ refers to the velocity of changein a competitive domain that sets the pace of inter naloperations of the competing firms.

In knowledge intensive industries, significant resourcecommitments are required for successful competition and are significantly higher than in capacity- andcustomer- driven ones.



DYNAMICS OF CHANGE INCOMPETITIVE DOMAINS

Patter ns of technological change drive the evolution of competitive domains when radical innovations createupheavals in an industry. When existing characteristicsof industries exert a major influence on technologydevelopment, predictable evolution of technology iswitnessed.

The two periods correspond to two types of innovation identified by Joseph Schumpeter: entrepreneurialinnovation and managerial innovation.





Dynamics of Change in CompetitiveDomains (continued)

During the technology emer gence phase (radical) thereis no competitive domain. When upheavals andturbulence eventually stabilize, a competitive domain emer ges and develops around the innovation. Theconcept of industry begins to take root. Autonomouschanges are the rule.

This is followed by an incremental change phase when technology evolution is relatively predictable. A clear definition of industry emer ges.

Technology evolution is now induced.



The Technology Emergence Phase

Radical innovation often gives rise to an entirely new

competitive domain, new rules of competition areestablished in exiting industries; at other times an

entirely new industry is created.

There is uncertainty which is felt at two levels: 1.

Technical Uncertainty and 2. Market Uncertainty.

Thus, appearance of a radical innovation corresponds

to the early parts of S-corves of innovation and

diffusion.



The Technology Emergence Phase: Four

Major Topics1. Key Time Periods

Begins when a radical innovation first emer ges andends when the market has conver ged on a standardproduct design. This phase has three time dimensions. First, The appearance of Technological Discontinuity :As the technology race begins, new firms are founded,solutions are arrived at through trial and error . There issignificant lear ning about design and production.

Competence can be either enhanced or destroyed. Quartz watch technology, turbo jet engines areexamples.



Technology Emergence Phase

Phase:Four Major Topics

2. Era of Ferment

Each radical innovation begins a cycle with an era of ferment. In the beginning radical innovation is crude. As the innovation is experimented with, less radicaland follow on innovations are introduced. Many newfirms enter the frat and develop their own variants of the basic innovation, which is gradually improvedthrough R & D and closer attention to marketing. Two

distinctive competitive processes characterize the eraof ferment: C ompetition between technologies andcompetition within the radical innovation.



Era of Ferment (continued)

C ompetition between technologies:

F

ierce competition ensues between existing and newtechnologies.

New technologies are disparaged.

New competence is required.

Firms with old technologies increase their

innovativeness. C ompetition within radical innovation: Several versions

of the radical innovation appear both because thetechnology is not well understood and each firm has an incentive to differentiate its variant from the rivals¶.



Technology Emergence Phase: The emergenceof Dominant Design

Variants of innovation appear and firms compete tocapture lar ger market shares. Consumers also

experiment with the products marketed by differentfirms. Eventually, a dominant design emer ges. Definedas µthe product design that wins the allegiance of themarket place , the one that competitors and innovatorsmust adhere to if they hope to command a significant

market following¶ . There could be other designs which some consumers

buy. Dominant design is the one that is bought themost.



The Emergence of Dominant Design (continued)

Dominant design is usually of a new product or a set of features from individual innovations introduced in the

past to the product¶s variants.

A dominant design emer ges not only because of technical excellence of a firm or superior productfeatures, but also on account of influence of marketforces.

IBM-PC, Underwood Typewriters are examples.

Four more factors influence dominant design.

We consider them one by one.



The Emergence of Dominant Design (continued)

C ollateral Assets. A firm with collateral assets such asmarket channels, brand image, customer switching

costs, will have great leverage in enforcing its productas the dominant design.

The dominant design model is better suited to massmarkets, where consumer preferences are relativelyhomogenous.

R egulation and government intervention. Regulatorshave the power to enforce a standard and define adominant design.

PAL/SECAM standards are examples of this.

HDTV is now influencing dominant design.



Emergence of Dominant Design (continued)

S trategic Maneuvering at the Firm Level. Occasionally,a firm pursuing a particular strategy may succeed with

its design as a dominant one. S ony¶s betamx lost toJV C ¶s VHF system.

C ommunication between Producers and Users.Staying close to customers brings in enough feedbackand a firm can evolve design changes as its productgoes through evolution. A dominant design emer gesand the firm can impose the design on other firms.

Managers will not be able to forecast emer gence of dominant design with confidence because of technicaland market uncertainties.



Emergence of Dominant Design (continued)

Four functions

Provides for standardization of the product, reducing uncertainty.

Standardization permits a firm to design standardizedand interchangeable parts to optimize or ganization design for volume and efficiency.

Permits stable relationships with suppliers, vendorsand customers are developed.

Consumer is benefited as dominant design reducesconfusion among products and decreases in costscome about sooner .



Technology Emergence Phase:3.

Technological Communities

The battle for markets is fought in arenas often far removed from R & D laboratories. These arenas are:

1. Regulatory Bodies where Firms battle for standards;

2. Trade Associations where firms in the industrygather to promote their product designs; and

3. Scientific Advisory Boards, which provide sources of

information as well as legitimacy to emer gentdevelopments in technology.



Technological Communities (continued):Perform several Functions

Information transfer

Forums for testing ideas Legitimize technology and product

specifications

Serve as arenas for standard setting

Participation in these communities enablemanagers to skew the competitive domain in their favor .



Technology Emergence Phase: 4.Response of Threatened Industries

New innovation stimulates improvements in existing technology.

If the firm stays with older technology, it may donothing or monitor developments or fighting it withpublic relations and/or legal action or increase flexibilityand respond swiftly or decrease dependence on themost threatened submarkets or expand work on improvement of existing technology or maintain salesby promotion and price cutting.

Should managers be fighting a losing battle?



Response of Threatened Industries (continued)

If a threatened firm decides to adopt the newtechnology it has to consider the following:

1. Time of entry : early or later, after the technologicaluncertainties are over .

2. Magnitude of commitment : determine the amount of resources to be committed.

3. Degree of technological separation: coupling withexisting lines has to be decided.

Three types of errors can occur . Shown in the nextslide.



Response of Threatened Industries (continued)

Early entrants often underestimate resourcerequirements and technical skills needed to overcome

initial technical obstacles. If at a later stage firm pursues the new technology

vigorously, the gap is formidable.

Linkages between new and the traditional is very close

in these firms folding the new product in old strategiesoften at a loss.

It is usually best to go with new technology, especiallyif there are signs of a dominant technology emer ging.



INCREMENTAL CHANGE PHASE

Numerous incremental innovations follow dominantdesign. Major changes in design and specification are

a hindrance to standardization. Focus shifts to lowering costs, differentiating the

product via small design variations and strategicpositioning tactics.

In Schumpeter¶s words these are managed innovationsand persist until they are ended by another major innovation.

Focus of R & D is also on incremental innovation. Smaller firms find it difficult to enter; and ineffective

firms are eliminated.



INCREMENTAL CHANGE PHASE (continued)

Expensive specialized and automated

equipment is brought in. The rate of productinnovation decreases but there is a

corresponding increase in process innovation.

Automobile industry is an example.

A small number of firms begin to dominate theindustry and competitive shifts are unlikely.



Product Versus Process Innovation

Illustrated by a diagram in the next slide.

During the incremental innovation phase twotypes of product innovations may upset the

competitive equilibrium within industries

Architectural Innovation and

Sustained innovation.

Slide after the next one contains the basic

points.





Competitive Dynamics of ArchitecturalInnovation

Architectural innovations invoke different (new)linkages. Spotting them is difficult.

Boeing¶s rise to prominence is frequently attributed tothe failure of incumbent firms to grasp the potential of jet engines.

A new lear ning cycle has to begin if a firm is to apply

new architectural knowledge effectively. Resources have to be diverted for new lear ning. New

firms can optimize on resources, existing firms cannot.



Competitive Dynamics of ArchitecturalInnovation (continued)

Architectural innovations may upset the equilibriumwithin an industry by favoring new entrants.

Established firms frequently interpret the innovation asan incremental step, underestimating the potential of the innovation.

New entrants are not handicapped by existing

technologies and can exploit it well. Japanese makers were able to upstage Xerox with

their small copiers.



Competitive Dynamics of SustainedInnovation

If there are sustained innovations in competitive

domains, improvements in products persist for a

prolonged period of time.

Generations of new products appear with enhanced

performance.

This movement is responsible for changes in the

characteristics of competitive domains.

From 1934 to 1988 Dynamic Random Access Memory

went from 4K to 4Mb.



Competitive Dynamics of SustainedInnovation (continued)

Competitive position of firms within the industry shifts.

An innovative firm, in the presence of sustainedinnovations, grows at the cost of non innovative firms.

They will generate more resources with growth ,

continue innovations and emer ge winners.

Each new innovation is an opportunity for a firm

lagging behind to attempt to gain on the leading firmand overtake it with next generation products.



A FRAMEWORK FOR THE ANALYSIS OF

TECHNOLOGY EMERGENCE: InstitutionalArrangements

Serve to regulate, regiment and standardize newtechnology. Ultimate authorities are gover nment and its

agencies, professional and trade association, andscientific communities. Firms compete for technologicalcommunities along with the market place.

It is possible for firms to collectively manipulate their institutional environment to get the resources for their

collective survival and legitimize their innovations.






TECHNOLOGY EMERGENCE ResourceEndowments

Resources critical to the development of almost everytechnological innovation are:

1.Advancements in basic scientific or technicalknowledge;

2. Financing and an insurance mechanism; and

3. A pool of competent human resources.

Public or ganization play a major role in creating andproviding these public resources. They are technologyfacilitators in the technological environment.




TECHNOLOGY EMERGENCE TechnicalEconomic Activities

Consists of a set of firms developing productinnovations that are related or are substitutes for each

other . With persistence a line of products is developed,

access is gained to complementary functionsnecessary to establish an economically viablebusiness.

The three elements continue to evolve and influenceeach other during the course of technologyemer gence.




TECHNOLOGY EMERGENCE: three major managerial challenges

Points to set of forces firms need to track in order to be successful.

Highlights strategic uncertainties faced by thefirms.

Highlights the role played by technological

communities. It suggests that firms need tocompete in this arena to gain endorsement andlegitimacy for for products, get scarce talentand venture capital funds.



Influence of Environmental Trends

on Competition: Globalization

The whole World is a battleground. Firms from varying cultural environments, different assumptions and styles

of competing, increasing diversity among competitors. Competition also extends to institutional milieu. There

are different practices, regulation and approaches.

Globalization has provided opportunities for rapidlyacquiring collateral assets, because number of alliances has increased rapidly.



Influence of Environmental Trendson Competition: Time Compression &Technology Integration

Technology emer gence phase has to be rapid, timecompression is creating the need for rapid responses.

Technology evolution opens up possibilities of technology integration. During technology emer gencesmaller firms can join bigger firms and bigger firmsmay find smaller firms attractive for their technologyportfolio. At the product level technology integration

potential continues well after the formation of an industry. Microsoft and Artemis is an example.



MANAGERIAL IMPLICATIONS

C ompetitive strategy . Strategy must change in accordance with shifts in competitive domains, over

time. During technology emer gence competition isplayed out in product design and the technologicalcommunities. However, focus shifts to market placeduring incremental era of innovations and processinnovations assume importance.

I nvestment in I nnovation. R apid Learning.

I nternal Operations.

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Chapter 5 TECHNOLOGY AND COMPETITION