Aggressive marketing in the context of format wars

Examples for Managing Innovation
This week’s discussion "see attachment" focus is technology innovation, through the use of examples that we research and share. Before we begin this discussion, please review an example of a company who used strategies to exploit a new era of digitalization and benefited from it, "Lowering the Cost of Ultrasound Equipment through Digitalization.”

This example shows how a company reached a previously untapped market niche by digitalizing a product, which also allows the firm to reduce expenses. Thus, digitalizing can support a firm that is pursuing a simultaneous advantage in differentiation and cost leadership.

No plagiarism

500 words

Managing Innovation Example

The ultrasound unit is an important diagnostic tool, producing images of organs. The technology is very valuable, but the equipment is bulky, heavy, and expensive, so it is used primarily in dedicated hospital facilities. ATL, a leading ultrasound company, decided to reduce the size of an ultrasound set-up to about the size and weight of a laptop computer. This would be accomplished by replacing many of the machine’s solid circuits with software (in a process called “digitalizing”), reducing size and costs. The researchers reasoned that a portable and inexpensive ultrasound unit would find market opportunities in totally new niches. Smaller size and lower cost would allow the units to be placed on ambulances or into physician’s offices - market niches that were impossible to reach with the technology of the day. The researchers later became part of a project team within ATL, and thereafter became an entirely new company, SonoSite. Late in 1999, SonoSite introduced its first unit, which weighed just 6 pounds and cost about $25,000. SonoSite targeted niches that full-sized ultrasound products could not reach: ambulatory care and foreign markets that could not afford the more expensive equipment. In 2010, the company sold over $275 million of product.

Now it's your turn, research a company that has managed an innovation and provide the story. Include, The company, the technology, the impact made with the innovation and short history of the industry and need for the innovation.

Along with providing your example, please answer the following question:

How are companies coming up with strategies to exploit and benefit from the new era of digitalization?

Strategic Framework for Managing Innovation

The focus of this lecture will be on the strategic framework for managing innovation. We will review the nature of competition and strategy in high-technology industries. Technology refers to the body of scientific knowledge used in the production of goods or services. High-technology (high-tech) industries are those in which the underlying scientific knowledge that companies in the industry use is rapidly advancing, and, by implication, so are the attributes of the products and services that result from its application. The computer industry is often thought of as the quintessential example of a high-technology industry. The circle of high-technology industries is both large and expanding, and technology is revolutionizing aspects of the product or production system even in industries not typically considered high-tech. Although high-tech industries may produce very different products, when developing a business model and strategies that will lead to a competitive advantage and superior profitability and profit growth, they often face a similar situation. Technical Standards and Format Wars Technical standards are a set of technical specifications that producers adhere to when making the product or a component of it that can be an important source of competitive advantage. Battles to set and control technical standards in a market are referred to as "platform or format wars" - essentially, battles to control the source of differentiation, and the value that such differentiation can create for the customer. image1.png A standard is a format, an interface, or a system that allows interoperability. Adhering to standards allows us to browse millions of different web pages, ensures the light bulbs made by any manufacturer will fit any manufacturer’s lamps, and keeps the traffic moving in Los Angeles (most of the time). Standards can be public or private. Public (or open) standards are those that are available to all either free or for a nominal charge. Typically, they do not involve any privately owned intellectual property, or the intellectual-property owners make access free (such as Linux). Private (proprietary) standards are those where the technologies and designs are owned by companies or individuals. If I own the technology that becomes a standard, I can embody the technology in a product that others buy or license the technology to others who wish to use it. Thus, in smartphones the major rival standards are Apple’s iOS and Google’s Android. Apple’s iOS is used only in Apple’s mobile devices; Android is licensed widely. Table 9.3 below and in the course textbook page 256, lists several companies which own key technical standards within a particular product category.

image2.png A. Examples of Standards A familiar example of a standard is the layout of a computer keyboard. The standard format (QWERTY) makes it easy for people to move from computer to computer because the input medium, the keyboard, is set in a standard way. Examples of products that rely on technical standards include the dimensions of shipping containers such as trucks and railcars, and the components included in a personal computer. When an industry relies upon a common set of features or design characteristics it is called a dominant design. Embedded in this design are several technical standards. B. Benefits of Standards Standards emerge because there are economic benefits associated with them. Following are the benefits: A technical standard helps to guarantee compatibility between products and their complements. Standards help reduce consumer confusion. The emergence of a standard can help to reduce production costs. Once a standard emerges, products that are based on the standard design can be mass produced, enabling the manufacturers to realize substantial economies of scale while lowering their cost structures. The emergence of standards can help reduce risks associated with supplying complementary products, and thus increase the supply for those complements. C. Establishment of Standards Standards emerge in an industry in three primary ways: When the benefits of establishing a standard are recognized, companies in an industry might lobby the government to mandate an industry standard. Technical standards are often set by cooperation among businesses, without government help, and often through the medium of an industry association. When the government or an industry association sets standards, these standards fall into the public domain, meaning that any company can freely incorporate the knowledge and technology upon which the standard is based into its products. Often, however, the industry standard is selected competitively by the purchasing patterns of customers in the marketplace - that is, by market demand. In this case, the strategy and business model a company has developed for promoting its technological standard are of critical importance because ownership of an industry standard that is protected from imitation by patents and copyrights is a valuable asset - a source of sustained competitive advantage and superior profitability. Format wars are common in high-tech industries where standards are important. D. Network Effects, Positive Feedback, and Lockout There has been a growing realization that when standards are set by competition between companies promoting different formats, network effects are a primary determinant of how standards are established. Network effects arise in industries where the size of the “network” of complementary products is a primary determinant of demand for an industry’s product. Network effects are important in the establishment of standards. The classic example of a format war can be considered: the battle between Sony and Matsushita to establish their respective technologies for videocassette recorders (VCRs) as the standard in the marketplace. Sony was first to market with its Betamax technology, followed by JVC with its VHS technology. As more prerecorded VHS tapes were made available for rental, the VHS player became more valuable to consumers, and therefore the demand for VHS players increased. A large number of companies signed on to manufacture VHS players, and soon far more VHS players were available for purchase in stores. Before long, it was clear to anyone who entered a video rental store that there were more VHS tapes available for rent and fewer Betamax tapes available. This served to reinforce the positive feedback loop, and ultimately Sony’s Betamax technology was shut out of the market. The pivotal difference between the two companies was strategy: JVC and Matsushita chose a licensing strategy, and Sony did not. As a result, JVC’s VHS technology became the de facto standard for VCRs, whereas Sony’s Betamax technology was locked out. When two or more companies are competing with each other to get technology adopted as a standard in an industry, and when network effects and positive feedback loops are important, the company that wins the format war will be the one whose strategy best exploits positive feedback loops. As the market settles on a standard, an important implication of the positive feedback process occurs: companies promoting alternative standards can become locked out of the market when consumers are unwilling to bear the switching costs required to abandon the established standard and adopt the new standard. In this context, switching costs are the costs that consumers must bear to switch from a product based on one technological standard to a product based on another technological standard. However, consumers will bear switching costs if the benefits of adopting the new technology outweigh the costs of switching. Strategies for Winning a Format War Firms benefit when they exploit network effects and when positive feedback loops are in operation. The various strategies that companies should adopt in order to win format wars are centered upon finding ways to make network effects work in their favor and against their competitors. Winning a format war requires a company to build the installed base for its standard as rapidly as possible, thereby leveraging the positive feedback loop, inducing consumers to bear switching costs, and ultimately locking the market into its technology. A. Ensure a Supply of Complements It is important for the company to make sure that there is an adequate supply of complements.One way for companies to ensure a supply of complements is to diversify into the production of complements and seed the market with sufficient supply to help jump-start demand for their format. Also, companies may create incentives or make it easy for independent companies to produce complements. B. Leverage Killer Applications Killer applications are applications or uses of a new technology or product that are so compelling that they persuade customers to adopt the new format or technology in droves, thereby “killing” demand for competing formats. Killer applications often help to jumpstart demand for the new standard. C. Aggressive Pricing and Marketing One common tactic to jump-start demand is to adopt a razor and blade strategy: pricing the product (razor) low in order to stimulate demand and increase the installed base, and then trying to make high profits on the sale of complements (razor blades), which are priced relatively high. This strategy owes its name to Gillette, the company that pioneered this strategy to sell its razors and razor blades. Aggressive marketing is also a key factor in jump-starting demand to get an early lead in an installed base. Substantial upfront marketing and point-of-sales promotion techniques are often used to try to attract potential early adopters who will bear the switching costs associated with adopting the format. If these efforts are successful, they can be the start of a positive feedback loop. D. Cooperate with Competitors Companies have been close to simultaneously introducing competing and incompatible technological standards a number of times. They understand that the nearly simultaneous introduction of such incompatible technologies can create significant confusion among consumers, and often lead them to delay their purchases. E. License the Format Licensing the format to other enterprises so that those others can produce products based on the format is another strategy often adopted. The correct strategy to pursue in a particular scenario requires that the company consider all of these different strategies and tactics and pursue those that seem most appropriate given the competitive circumstances prevailing in the industry and the likely strategy of rivals. Although there is no single best combination of strategies and tactics, the company must keep the goal of rapidly increasing the installed base of products based on its standard at the front of its mind. By helping to jump-start demand for its format, a company can induce consumers to bear the switching costs associated with adopting its technology and leverage any positive feedback process that might exist. It is also important not to pursue strategies that have the opposite effect. Capturing First-Mover Advantages Lead Time or "first mover." Tacitness and complexity do not provide lasting barriers to imitation, but they do offer the innovator time. Innovation creates a temporary competitive advantage that offers a window of opportunity for the innovator to build on the initial advantage. The innovator’s lead time is the time it will take followers to catch up. The challenge for the innovator is to use initial lead-time advantages to build the capabilities and market position to entrench industry leadership. Intel in microprocessors, Cisco Systems in routers, and Canon in inkjet printers were brilliant at exploiting lead time to build advantages in efficient manufacture, quality, and market presence. Conversely, innovative British companies are notorious for having squandered their lead-time advantage in jet planes, radars, CT scanners, and genomics.

image3.png In high-technology industries, companies often compete by striving to be the first to develop revolutionary new products, that is, to be a first mover. First movers initially have a monopoly position. If the new product satisfies unmet consumer needs and demand is high, the first mover can capture significant revenues and profits. Such revenues and profits signal to potential rivals that imitating the first mover makes money. Despite imitation, some first movers have the ability to capitalize on and reap substantial first-mover advantages - the advantages of pioneering new technologies and products that lead to an enduring advantage. Some first movers can reap substantial advantages from their pioneering activities that lead to an enduring competitive advantage. They can, in other words, limit or slow the rate of imitation. But there are plenty of counterexamples suggesting that first-mover advantages might not be easy to capture and, in fact, that there might be first-mover disadvantages - the competitive disadvantages associated with being first. A. First-Mover Advantages There are five primary sources of first-mover advantages:

1. The first mover has an opportunity to exploit network effects and positive feedback loops, locking consumers into its technology.

2. The first mover may be able to establish significant brand loyalty, which is expensive for later entrants to break down.

3. The first mover may be able to increase sales volumes ahead of rivals, and thus reap cost advantages associated with the realization of scale economies and learning effects.

4. The first mover may be able to create customer switching costs for its customers that subsequently make it difficult for rivals to enter the market and take customers away from the first mover.

5. The first mover may be able to accumulate valuable knowledge related to customer needs, distribution channels, product technology, process technology, and so on.

B. First-Mover Disadvantages Balanced against the first-mover advantages are a number of disadvantages:

· They have to bear significant pioneering costs that later entrants do not.

· They are more prone to make mistakes because there are so many uncertainties in a new market.

· They run the risk of building the wrong resources and capabilities because they are focusing on a customer set that is not going to be characteristic of the mass market.

· They may invest in inferior or obsolete technology.

C. Strategies for Exploiting First-Mover Advantages

First movers must strategize and determine how to exploit their lead and capitalize on first mover advantages to build a sustainable long-term competitive advantage while simultaneously reducing the risks associated with first-mover disadvantages. There are three basic strategies available:

· Develop and market the innovation.

· Develop and market the innovation jointly with other companies through a strategic alliance or joint venture.

· License the innovation to others and allow them to develop the market.

The optimal choice of strategy depends on the answers to three questions:

· Does the innovating company have the complementary assets to exploit its innovation and capture first-mover advantages?

· How difficult is it for imitators to copy the company’s innovation? In other words, what is the height of barriers to imitation?

· Are there capable competitors that could rapidly imitate the innovation?

1. Complementary Assets Complementary assets are the assets required to exploit a new innovation and gain a competitive advantage. Among the most important complementary assets are competitive manufacturing facilities capable of handling rapid growth in customer demand while maintaining high product quality. Complementary assets also include marketing knowhow, an adequate sales force, access to distribution systems, and an after-sales service and support network. All of these assets can help an innovator build brand loyalty and more rapidly achieve market penetration. 2. Height of Barriers to Imitation Barriers to imitation are factors that prevent rivals from imitating a company’s distinctive competencies and innovations. Barriers to imitation give an innovator time to establish a competitive advantage and build more enduring barriers to entry in the newly created market. 3. Capable Competitors Capable competitors are companies that can move quickly to imitate the pioneering company. Competitors’ capability to imitate a pioneer’s innovation depends primarily on two factors:

· Research and development (R&D) skills

· Access to complementary assets

In general, the greater the number of capable competitors with access to the R&D skills and complementary assets needed to imitate an innovation; the more rapid imitation is likely to be. 4. Three Innovation Strategies The competitive strategy of developing and marketing the innovation alone makes most sense when:

· The innovator has the complementary assets necessary to develop the innovation.

· The barriers to imitating a new innovation are high.

· The number of capable competitors is limited.

Complementary assets allow rapid development and promotion of the innovation. High barriers to imitation give the innovator time to establish a competitive advantage and build enduring barriers to entry through brand loyalty or experience-based cost advantages. The fewer capable competitors there are, the less likely it is that any one of them will succeed in circumventing barriers to imitation and quickly imitating the innovation. The competitive strategy of developing and marketing the innovation jointly with other companies through a strategic alliance or joint venture makes most sense when:

· The innovator lacks complementary assets.

· Barriers to imitation are high.

· There are several capable competitors.

Licensing makes most sense when:

· The innovating company lacks the complementary assets.

· Barriers to imitation are low.

· There are many capable competitors.

image4.png As Figure 9.5 shows, different strategies require very different resources and capabilities. Hence, the choice of how to exploit an innovation depends critically upon the resources and capabilities that the innovator brings to the party. Start-up firms possess few of the complementary resources and capabilities needed to commercialize their innovations. Inevitably, they will be attracted to licensing or to accessing the resources of larger firms through outsourcing, alliances, or joint ventures. New industries often follow a two-stage evolution where “innovators” do the pioneering and “consolidators” with their complementary resources do the developing.

Technological Paradigm Shifts Technological paradigm shifts occur when new technology revolutionizes the structure of an industry, dramatically alter the nature of competition and require companies to adopt new strategies in order to survive. An example is the current trend toward digital photography in replacing chemical photography. For over half a century, the large incumbent enterprises in the photographic industry such as Kodak and Fujifilm have generated most of their revenues from selling and processing film using traditional silver halide technology. The rise of digital photography has been a huge disruptive threat to their business models. A. Paradigm Shifts and the Decline of Established Companies

Paradigm shifts appear to be more likely to occur in an industry when one, or both, of the following conditions are in place: The established technology in the industry is mature and approaching or at its “natural limit.” A new “disruptive technology” has entered the marketplace and is taking root in niches that are poorly served by incumbent companies using the established technology. 1. The Natural Limits to Technology The natural limits to technology are very similar to the “S-curves” of adoption and diffusion of innovation “S-curves.” There is a period of early adoption, a steady rate of adoption at an increasing rate, a steady rate of adoption at a decreasing rate, all followed by a “plateau” when adoption (and demand) go flat. 2. Disruptive Technology The term disruptive technology refers to a new technology that gets its start away from the mainstream of a market, and then as its functionality improves over time, invades the main market. Such technologies are disruptive because they revolutionize industry structure and competition, often causing the decline of established companies. They cause a technological paradigm shift. Established companies are often aware of the new alternatives, but do not invest in it because they listen to their customers, and their customers do not want it. Established companies decline to invest in new disruptive technologies because initially they serve such small market niches that it seems unlikely there would be an impact on the company’s revenues and profits.

B. Strategic Implications for Established Companies Established companies must meet the challenges created by the emergence of disruptive technologies: Companies should have access to knowledge about how disruptive technologies can revolutionize markets because it is a valuable strategic asset. Established companies should invest in newly emerging technologies that may ultimately become disruptive technologies. When established companies undertake R&D investments in potentially disruptive technologies, they often fail to commercialize those technologies because of internal forces that suppress change. C. Strategic Implications for New Entrants The new entrants or attackers have several advantages over established enterprises. New entrants must manage the organizational problems associated with rapid growth; most important, they may need to find a way to take their technology from a small out-of-the-way niche into the mass market. One of the most important issues facing new entrants is the choice of whether to partner with an established company or go it alone in an attempt to develop and profit from a new disruptive technology. Although a new entrant may enjoy all of the advantages of the attacker, it may lack the resources required to fully exploit them. In such a case, the company might want to consider forming a strategic alliance with a larger, established company to gain access to those resources.

Strategic Implementation Concepts

The focus of this lecture will be on the ideas of strategy implementation and reviews a series of questions that identifies who must carry out the strategic plan and what must be done to align the company operations in the intended direction. It stresses the importance of finding synergy among organizational activities. The rest of the lecture emphasizes organizing activities by looking closely at the design of organizations and jobs.

Strategic Planning vs. Strategic Implementation

Key questions to consider:

1. In the phases of strategic management, which phase is considered to be primarily focused on planning?

2. What is the difference between strategic planning and strategic implementation?

Question 1 Summary

Following the basic management functions of planning, organizing, directing, staffing, and controlling, the text views strategy formulation (Phase 2) as primarily composed of planning activities; strategy implementation (Phase 3) as primarily composed of organizing, directing, and staffing activities; and evaluation and control (Phase 4) as primarily composed of controlling activities. The topics for Week 5 and 7 focus on implementation of strategy. Evaluation and control, sometimes considered a part of implementation, is discussed during Week 7.

Question 2 Summary

Strategy implementation is where “the rubber hits the road.” Environmental scanning and strategy formulation are crucial to strategic management but are only the beginning of the process. The failure to carry a strategic plan into the day-to-day operations of the workplace is a major reason why strategic planning often fails to achieve its objectives. It is discouraging to note that in one study nearly 70% of the strategic plans were never successfully implemented. For a strategy to be successfully implemented, it must be made action oriented. This is done through a series of programs that are funded through specific budgets and contain new detailed procedures.

Strategic Implementation

Who are the individuals who will carry out a strategic plan?

What must be done to align a company’s operations in the intended new direction?

How should everyone who is part of the company work together to do what is needed?

To begin the strategic implementation process, strategy makers must consider these questions:

Who implements strategy?

· Depends on how a corporation is organized

· In most large, multi-industry corporations, the implementers are:

· Everyone in the organization

· Vice presidents of functional areas and directors of divisions or strategic business units (SBUs) work with their subordinates to put together large-scale implementation plans.

· Plant managers, project managers, and unit heads put together plans for their specific plants, departments, and units.

· Every operational manager down to the first line supervisor and every employee is involved in some way in the implementation of corporate, business, and functional strategies.

What must be done?

· The managers of divisions and functional areas work with their fellow managers to develop programs, budgets, and procedures for the implementation of strategy.

How should everyone work together?

· Synergy must be achieved among the divisions and functional areas in order to establish and maintain a company’s distinctive competence.

These questions and similar ones should have been addressed initially when the pros and cons of strategic alternatives were analyzed. They must also be addressed again before appropriate implementation plans can be made. Unless top management can answer these basic questions satisfactorily, even the best-planned strategy is unlikely to provide the desired outcome.

The common strategy implementation problems:

A survey of 93 Fortune 500 firms revealed that more than half of the corporations experienced the following 10 problems when they attempted to implement a strategic change. These problems are listed in order of frequency:

1. Implementation took more time than originally planned.

2. Unanticipated major problems arose.

3. Activities were ineffectively coordinated.

4. Competing activities and crises took attention away from implementation.

5. The involved employees had insufficient capabilities to perform their jobs.

6. Lower level employees were inadequately trained.

7. Uncontrollable external environmental factors created problems.

8. Departmental managers provided inadequate leadership and direction.

9. Key implementation tasks and activities were poorly defined.

10. The information system inadequately monitored activities.

Developing Programs, Budgets and Procedures

Matrix of Change

· Provides guidance on where, when and how fast to implement change

· Offers useful guidelines on where, when, and how fast to implement change

The matrix of change can be used to address the following types of questions:

Feasibility:

· Do the proposed programs and activities constitute a coherent, stable system?

· Are the current activities coherent and stable?

· Is the transition likely to be difficult?

· Sequence of execution

· Where should the change begin?

· How does the sequence affect success?

· Are there reasonable stopping points?

Location:

· Are we better off instituting the new programs at a new site, or can we reorganize the existing facilities at a reasonable cost?

Pace and nature of change:

· Should the change be slow or fast, incremental or radical?

· Which blocks of current activities must be changed at the same time?

Stakeholder evaluations:

· Have we overlooked any important activities or interactions?

· Should we get further input from interested stakeholders?

· Which new programs and current activities offer the greatest sources of value?

Budgets

· After programs have been developed, the budget process begins.

· Planning a budget is the last real check a corporation has on the feasibility of its selected strategy.

· An ideal strategy might be found to be completely impractical only after specific implementation programs are cost in detail.

Procedures

· After the program, divisional, and corporate budgets are approved procedures must be developed.

· Procedures must be updated to reflect any changes in technology as well as in strategy.

Types

· Standard operating procedures (SOPs) typically detail the various activities that must be carried out to complete a corporation’s programs.

· Organizational routines are the primary means by which organizations accomplish much of what they do.

Importance of Synergy

Key question to consider:

1. How should a corporation attempt to achieve synergy among functions and business units?

One of the goals to be achieved in strategy implementation is synergy among functions and business units. This is one reason why corporations commonly reorganize after an acquisition. If some sort of synergy cannot be achieved, there is no real reason to acquire another firm – other than trying to exit one business and enter another.

Question Summary

The extent to which synergy should be achieved depends upon the strategy being pursued. A lot of synergy is needed in vertical and horizontal growth as well as in concentric diversification. The corporation pursues these strategies in order to achieve the benefits of efficiency coming from marketing, operating, investment, or management synergy. The firm is looking for advantages of scale or scope. If, however, the corporation is pursuing conglomerate diversification as a strategy, top management may only wish financial synergy in which high cash flow from one unit makes up for low cash flow from another unit. In this case, there is no attempt to combine any activities across business units (in this case usually called subsidiaries) because of the holding company nature of the corporation. Management’s philosophy is one of buying and selling companies without much attempt to gain the benefits of synergy

Synergy

· Exists for a divisional corporation if the return on investment (ROI) of each division is greater than what the return would be if each division were an independent business.

Synergy can take place in one of six forms:

Shared know how:

· Combined units often benefit from sharing knowledge or skills.

· This is a leveraging of core competencies.

Coordinated strategies:

· Aligning the business strategies of two or more business units may provide a corporation significant advantage by reducing inter-unit competition and developing a coordinated response to common competitors (horizontal strategy).

Shared tangible resources:

· Combined units can sometimes save money by sharing re-sources, such as a common manufacturing facility or R&D lab.

Economies of scale or scope:

· Coordinating the flow of products or services of one unit with that of another unit can reduce inventory, increase capacity utilization, and improve market access.

New business creation:

· Exchanging knowledge and skills can facilitate new products or services by extracting discrete activities from various units and combining them in a new unit or by establishing joint ventures among internal business units.

Summary

This lecture expands on the ideas of strategy implementation and reviews a series of questions that identifies who must carry out the strategic plan and what must be done to align the company operations in the intended direction. It stressed the importance of finding synergy among organizational activities emphasized the need for organizing activities by looking closely at the design of organizations and jobs.

image5.jpg image6.png