Digital Business Strategy

- Chiến lược kinh doanh số

Lecture 3 – Capture value

Assoc. Prof. Pham Quoc Trung

Department of Management Information System
School of Industrial Management, HCMUT (VNU-HCM)
georgew@[Link], @
 Chapter 3-CAPTURE VALUE
1. Uniqueness
2. Complementary
3. Porter’s Five Forces
4. Standard: Access & Control
5. Network externalities: Tipping & Winner-take-all
6. The dynamic of strategic space
7. Open source strategy
8. Vertical & Horizontal strategy
Value Capture: What should Abgenix
do?

How will we
Create value?

How will we How will we

Deliver value? Capture value?
 What Happened?
• JV on ABX‐EGF with Biopharm=Immunex Corp. announced in July 2000

• Phase II clinical studies have been started in multiple cancer indications

• Abgenix’s stock price affected by failure of AstraZeneca’s small

molecule in Phase II

• Ray Withy became CEO in April 2002; Wants to implement shift from
an “ideas‐market strategy” to a “product‐market strategy”

• Acquired by Amgen in 2005

 Value Creation
“Just another drug”?
Performance

Time
 Value Creation
“A whole new way of doing things”?
Performance

Time
 Ubiquitous Partnering
Sources of R&D funding at biotechnology companies

14000
Alliances
12000 Private equity
Public equity
10000
$ Millions

8000

6000

4000

2000

0
91 92 93 94 95 96 97 98 99
Alliance as % 13 25 35 53 56 -- 56 77 41
of total financing:

Image by MIT OpenCourseWare.

 Value Capture: Where is the money?

Target Target Antibody Preclinical Clinical Process

Mfg. Mktg.
Discovery Validation Creation Dev. Dev. Dev.
 Value capture:
Where is the money?
Complementary assets are:
Freely Tightly
available held
Uniqueness is:

Easy to
maintain

Hard to
maintain
 Selling to big pharma
• Pros:
– Maximizes “entrepreneurial energy”
– Minimizes extraneous investment
• Cons:
– Leaves value on the table?
– Problems in the market for IP?
– Does not maximize value: coordination important
• Problem of paying for P and hoping for Q?
– Different views of the future make pricing difficult?
– Integration changes the future
• P vs. Q revisited?
 Joint Ventures
• Pros
– Allows access to unique capability
– Reduces risk, capital investment
• Cons
– Leaves value on the table?
– Reduces entrepreneurial energy by increasing
coordination burdens?
– Potential coordination difficulties
• Problem of paying for P and hoping for Q?
 Looking Forward:
• Introduction to Value Capture in Technology
Strategy:
– Uniqueness
– Complementary Assets
• Bring your reflections to class.
The second of two key questions:

How will we
Create value?

How will we How will we

Deliver value? Capture value?
 Is it the case that
great ideas = pots of money?
Coca
Coca Cola
Cola Xerox
Xerox (early)
(early)
Wal
Wal Mart
Mart
Value Dell
Dell
Viagra
Viagra
Prozac
Prozac
captured

Apple
Apple
Xerox (late)
RC
RC Cola
Xerox (late)Cola

Value created
(through “raw” invention)
 Economist’s View of the World:

• Everybody’s out to • Value Creation is not

enough…
eat your lunch… • …you need to Capture
some of that value to
stay in business.
• How can you fight
back?
 Three key ideas:
• Uniqueness
– Controlling the knowledge generated by an
innovation: being the only game in town
• Complementary Assets
– Controlling the assets necessary to exploit the
knowledge generated by innovation
• Five Forces
– Understanding the dynamics of power in the value
chain
 Uniqueness is very important:
• If a particular innovation, or the knowledge on
which it rests, can be completely
“appropriated” then the innovating firm may
be able to maintain a unique position. This is a
tremendous source of bargaining power.
 Sources of Uniqueness
• Intellectual property protection
– Patents
• Finite length
• The right to prohibit “producing”
– Copyrights
• The right to prohibit “copying”
• Secrecy
– Trade secrets & non compete clauses
– “Tacit” knowledge
• Speed
 Intellectual property protection
• Strengths • Weaknesses
– Legal right – Disclosure requirements
– Can be traded – Costly to enforce
– Buys time to build – Can be invented around
complementary assets – Could be too short
– Provides temporary monopoly – Not everything can be
– Slows competitors down patented
– False sense of security
The Intermittent Windshield Wiper
• 1962: Robert Kearns invented a little switch that
made the intermittent wiper possible
– Fitted car with it and drove it to Ford
– Ford passed on innovation
– Kearns obtained patents

• 1969: Ford and others cracked secret

• 1990: Kearns wins suit against Ford for

potential damages payout of $ 325 million
(eventually gets $ 8 million).
 Secrecy
• Weaknesses
• Strengths
– Difficult to maintain
– No disclosure
– Non‐compete clauses are costly
to enforce
– Good technical people do not
want their work shrouded in
secrecy
 What kind of innovation tend to rely
most on secrecy?
• When the innovation is in process. Steel, paper, textiles. Light
bulbs, for example. There are Siemens plants that you cannot
go into even if you are a Siemens employee from another
division. They make light bulbs in very high volume, and all
the knowledge resides in the process technology, and it’s
shrouded with secrecy. Why? Because you can keep secrets
like that in principle. It’s only a few employees, and you pay
them to stay. And the secret elements are not evident from
the product itself. Contrast the CT scanner with the light bulb.
If I give you a light bulb, there is no information about how it
was made.
• Why don’t these few employees just leave and set up their
own firm? Because you need huge economies of scale to
compete with Philips, GE, and Siemens. They use secrecy in
combination with complementary assets.
 Speed
• Strengths • Weaknesses
– Competitors cannot catch up – Over soon
– Costly to imitate – Diminishing returns
– Quick profits – Difficult to sustain
– Difficult to pull off/Treadmill
– Dissipates industry profits
 Speed
• There is some evidence that in some industries, the move to speed has in fact
destroyed industry profitability. Only the customers benefit.

• Moving towards speed as the primary mechanism for appropriability may be

dangerous, particularly if you have no long‐term way of making sure that it is
going to stay your edge. If you had a choice, you would rather not compete on
breakneck speed, just like you would prefer to compete on advertising rather than
on price if you are Coke and Pepsi. I am aware that this is counter‐cultural. Speed
advantage may be very temporary, and create a bunch of long‐term problems.

• I am not suggesting that companies should be slow. All I am suggesting is that you
think a little bit before moving to speed as the foundation of your appropriability
strategy. It can be extraordinarily powerful, but you want to think about two
things: (1) can we sustain it? and (2) will be build something as we go fast that will
in the long‐term enable us to gain competitive advantage? I recognize that you
may have no choice. There are a whole bunch of people who make a living on
speed. Management Consultants, for instance: “Come up with yet another
framework, go out, sell the framework, Woops, that one’s obsolete, let’s get
another framework.” Because there is no other way!
Unfortunately Knowledge is Often
Very Difficult to Appropriate
• Legal mechanisms can be costly to create, and
then even more costly to enforce: and
sometimes they require public disclosure

• Secrecy is hard to maintain

• Even tacit knowledge often gets diffused

• Knowledge is often difficult to “chunk”

– Value is created by a collection of advances
– Many benefits are delayed
– Many benefits are diffuse
Complementary Assets: Definition
• Those assets that allow a firm to make money,
even if the innovation is not unique:
• The answer to the question:
– If our innovations were instantly available to our
competitors, would we still make money? Why?
 What kinds of Complementary
Assets provide Advantage?
• Things you can do
– Manufacturing capabilities
– Sales and service expertise
• Competencies

• Things you own

– Brand name
– Distribution channels
– Customer relationships
• Resources
In successful firms, competencies
create resources, and vice versa:

Competencies Resources
 In the best case, complementary
assets should be tightly held

• Complementary assets that are tightly held

are not easily available to entrants or to most
competitors
 Complementary Assets and
Incumbent Survival in the
Typesetter Industry
• Waves of innovation
– 1440: manual, Gutenberg
– 1886: ‘hot metal’ linotype machine,
Mergenthaler
– 1949: analog phototypesetting
– 1965: digital CRT phototypesetting
– 1976: laser imagesetting

• One firm, Mergenthaler Linotype,

survived as industry leader
 Mergenthaler’s success
• 1895: recognized need for new font development

• 1902: library of over 100 fonts

• 1913: 1000 typefaces

• 1923: 2000 typefaces

• Would take 20 years for an entrant to duplicate

(with computers, it took Compugraphic a decade
and $23 million to generate 1000 fonts)

• Key fonts trademarked: “Helvetica”

• Did not suffer commercial consequences as a result of their

inferior technological positions.
– Suffered only when both competence was destroyed and the
value of specialized complementary assets was diminished.
 Effect on Specialized
Complementary Assets
Devalue
Specialized Extensive
Sales & Service Specialized
Generation Manufacturing Proprietary
Network Complementary
Capability Font Library
Assets?

Hot Metal High value High value High value N/A

Much lower value Much lower value

Analog Same value as prior
than prior than prior Yes
Phototypesetter generation
generation generation

Same value as prior Same value as prior Same value as prior

Digital CRT generation generation generation No
phototypesetter

Laser Same value as prior Same value as prior Same value as prior
No
imagesetter generation generation generation
How can we assess whether we control
specialized complementary assets?

• Suppose that innovation had been

developed by an “external” start‐up
team
– Would the start‐up consider you the ideal
partner?
– Are there any capabilities for which it is
necessary
to approach a partner? A potential
competitor??
 Who makes money when:

Complementary assets are:

Freely Tightly
available held
Uniqueness is:

Easy to
maintain

Hard to
maintain
 Who makes money when?

Complementary assets are:

Freely Tightly
available held
Uniqueness is:

Easy to The Inventor’s

It Depends!
maintain Dream

Hard to The Asset

No One!
maintain Owner
 Exercise
Position: Complementary assets are:
Frozen foods
Freely Tightly
Publishing available held
Cameras
Music Distribution
Easy to
maintain

Uniqueness is:

Hard to
maintain
 Uniqueness & Complementary
Assets over the Life Cycle:
Complementary
Uniqueness Assets

Maturity

Takeoff

Ferment
 Managing disruptions means
managing complementary assets:
Maturity

Performance

Disruption
Takeoff Which of my complementary
Assets are useful?

Ferment

Time
 Porter’s “5 Forces”:
Thinking about the balance of
power
Political,
“Complementors” regulatory and
Entrants
Entrants institutional
context

Suppliers
Suppliers Rivals
Rivals Buyers
Buyers

Substitutes
Substitutes
C. Assets/Uniqueness speak to
Rivalry and the Threat of Entry.

Entrants
Entrants

Suppliers
Suppliers Rivals
Rivals Buyers
Buyers

Substitutes
Substitutes
 Porter’s Five Forces
• A tool for thinking about the distribution of
power in the value chain
• Appropriability and Complementary assets
speak to Entry and Rivalry
• But 100% appropriability, or complete
control of complementary assets will not
necessarily allow you to extract full value
from an innovation if:
– Substitutes are easily available
– You must negotiate with “powerful others” in
the value chain
Porter reminds us to think about
the structure of the value chain:

Entrants
Entrants

Suppliers
Suppliers Rivals
Rivals Buyers
Buyers

Substitutes
Substitutes
Powerful suppliers and buyers may
constrain profitability

Suppliers
Suppliers Buyers
Buyers
 So may increasingly viable
substitutes

Suppliers
Suppliers Buyers
Buyers

Substitutes
Substitutes
 Making money from Innovation:
Summary
• Creating value is not enough:
• It is important to capture value as well
• Value can be captured through a variety of
mechanisms, including uniqueness and
complementary assets
• Value capture strategies change over the life
cycle
• Technology strategy and business strategy
should thus be intimately linked
 Looking Forward:
• Ember & the Dynamics of Standards‐based
competition
– Should they integrate into Chip Manufacturing?
Why or why not?
Value Capture: What should Ember
do?

How will we
Create value?

How will we How will we

Deliver value? Capture value?
 Ember & Zigbee:
• OEMs and customers will not commit to
proprietary standards from a venture capital‐
backed startup…
• …so Ember does join Zigbee standard
– Had to give away a lot of IP to the Zigbee standard…lot of
debates about this!
– TI & Freescale joined, but really were dragging their feet
• Always late to pay the budget, so Ember is paying most of
it.
• Missed meetings; made Ember do advertising campaign
– But Ember would develop one of the best Zigbee
implementations! How?
Ember partners with Chipcon for Chip
Design
• Chipcon: Biggest chip designer in Norway
– They split design costs, which are large
– But Chipcon want rights to use chips and IP as they see
fit…
– ..a big debate about this inside Ember!
– But they ultimately agree to a deal to share costs in
developing the first robust integrated chip.
– Few years later, Chipcon is bought by TI, who becomes a
major competitor!
– …but the joint venture did get costs down to ~$1 node.
 Ember’s Competition
• Zensys fades away…
• TI and Freescale (who acquired Motorola’s
assets in this area) become the major
competitors
– But Ember is winning 75% of competitive sales…because the
product works well
• Freescale: seems to be not paying attention to the
business
– Software won’t compile…big company problems
• TI:
– Ember better at bug fixing, and may have more software
features
 Which markets? …sales may be
beginning to take off!
• Markets:
– Many of the niche markets in the case fail to grow
dramatically…
– Utility Home Market takes off!
• Eaton’s market!
– But Eaton couldn’t seem to release a low cost (integrated)
solution…they may have lacked effective organization
– Ember moved into the void: branded themselves as the
ultimate Green Energy Solution!
• Reading energy meters
• In commercial apps: are the lights on?
• Basically, can monitor everything, and save energy.
 Looking Forward:
• Competition in Standards‐based Industries:
– Network Externalities and Increasing Returns:
• Small vs. Large company strategies
• Open or closed?
• Public or Private?
• Bring your reflections to class.
 What is a standard?
• A standard is a specification that allows for
interoperability

• Eg:
– Cups and lids
– Pistons and engines
– Telephones and sockets
– Speakers and amplifiers
– Hardware and software
 Outline
• The power of common standards – when (and
why) do industries “tip”?
• Coming soon to an industry near you: the
push for public, open standards
• Making money in an open world
• Standards matter because they create
“network effects,” “tipping,” and “lock‐in”
It’s not just about high technology
• Bicycles
• Financial services
• Health care
• Automobiles
The push for common standards
 The pros and cons of common standards

• Pros • Pros

• Cons • Cons
 Tipping
• Markets “tip” when one standard becomes the
preferred choice of nearly every consumer
– VHS
– Windows on the PC
• Not all markets tip: in some markets multiple
standards co‐exist
– UNIX vs. Windows on servers
– Sony vs. Microsoft in video games
– Palm vs. Windows CE in PDAs
– Multiple standards in cellular phones
 “Great products” vs. “Platforms”
Great Products Platforms
• Consumers base their purchase • Consumers base purchase
decision on the intrinsic value of decisions on the size of the
the product to them (actual or projected) installed
base and/or the (actual or
projected) availability of
network externalities

• What would this be worth to me

if I were the only buyer in the • How many other people are
world? likely to buy this product?

• Competition on the basis of • Competition on the basis of the

features, price etc size of network effects: installed
base, availability of
complementary products etc
 There are two sources of network
effects
• Direct network effects
– Network size
– Value increases with the number of other individuals who own the same product
• E.g.: Telephones, fax machines
• Indirect network effects
– Complementary products/services
– Value increases with the number of complementary products that are available
• E.g.: CDs, software, VHS/Beta
– Learning by using
– Standards mean customers invest only once in learning to use the technology:
• E.g.: Qwerty keyboard, Autocad
With Strong Network Effects Market
Share Itself Creates Value
Value of standards
Driven product
Value to
consumer

Conventional product

Actual (or anticipated) size of the installed base

31
 If network effects are important,
markets may “tip”
1

Probability
the next
consumer
chooses to
buy A

0
28
0 A’s share of installed base 1
 Probability of Purchase vs Share of sales: Betamax

120

100

80
Share of sales

60

40

20

0
0 20 40 60 80 100 120

Share of installed base

 Share of installed base vs purchase probability: VHS

100

90

80

70
Share of sales

60

50

40

30

20

10

0
0 10 20 30 40 50 60 70 80 90 100

Share of installed base

 Annual Production: VHS vs Beta

50000

45000

40000

35000
Annual Production, Thousands of units

30000

25000
VHS
20000

15000

10000

5000 Betamax

0
1974 1976 1978 1980 1982 1984 1986 1988 1990
Year
 Strong network effects and high
switching costs may create “lock‐in”
• All consumers might prefer to adopt a
different standard
• But, if it is expensive to switch between
standards (high switching costs) and
network effects are important and costly to
create, then markets may become “locked
in” to particular standards
• “Lock‐in” has dramatic competitive
implications
 Tipping dynamics differ with the
strength of network effects
Products with
extensive N. effects
Value to
consumer
Products with
“threshold”
network effects

Conventional product

Actual (or anticipated) size of the installed base

 Will this market tip?

Value to
consumer
Products with
“threshold”
network effects

Actual (or anticipated) size of the installed base

Will this market tip?
 What about Blu‐Ray and HD DVD
formats? Did they tip?

z Did either standard hit a market share threshold?

z Or did the market just give up on HD?
z Was this ultimately good for consumers?
z Why couldn’t they make a deal?
 Establishing a standard: Sun
• Sun was founded in 1982 to focus on the
workstation market
• It offered an “open” standard:
– Standard components,
– UNIX operating system
 Sun (2)
• 1980: Apollo founded
• 1983: Apollo has $18m in sales, dominates the
workstation market ‐‐ uses a proprietary
operating system
• 1983: Sun has $1m in sales, mostly to universities
• Lead customer, Computervision “likes the
technology but doesn’t find the company
credible” ‐‐ “we love your technology but there is
no way you can supply it. Apollo is the standard
in the industry, well financed and well managed.”
• What should Sun do?
What should Sun do?
The push for public, open
standards
 Establishing a standard
• Introduce a great “product”
• Come to market ahead of
competition • Sounds great, but this
• Build expectations is expensive!
• …and – these days –
• Develop, or encourage the your competitor is trying
development of, to do the same thing!
complementary products and
services
• Give it away: put the standard
in the public sector
Thinking about the dynamics of the
strategic space
Access is:
Closed Open
Details of standards are
Standards are owned available to all: no
and controlled by the single firm has control
public sector but are not over how they evolve:
freely available no charge for their use
Public
E.g. TCP/IP, HTML
E.g. Cryptography
Control is: Technology may be Details of standard are
standard, but details made available to all:
are not made available but owner has control
beyond the firm over how the standard
Private evolves and may
charge for use
E.g. Landmark Graphics,
IBM 360 E.g. Nintendo, Palm OS
 In practice these boundaries are
fuzzy:
Access is:
More More
Closed Open
More
Public Linux

Control is: Symbian

IBM CDMA
Windows
More 360
Private
 Conventional logic (1):
What do customers prefer?
Access is:

More More
Closed Open

More
Public

Control is:

More
Private
 Conventional logic (2):
What do producers prefer?
Access is:

More More
Closed Open

More
Public

Control is:

More
Private
 How do industries evolve over time?

Access is:

More More
Closed Open

More
Public

Control is:

More
Private
Making money in
an open world
 Business models in the different
quadrants
The technology is:

Closed Open

Compete on a
level field
Public
Move to “soft”
standards?

Control is:
Encourage the
Deliver a best in “ecosystem”
Private class system Embrace/extend
 Where’s the money?
Competition in a closed, private world
 Where’s the money?
Competition in an open private world
 Where’s the money?
The challenge of an open public world
Making money in an open public world
• Competing on a level playing field:
– Do it better, faster, cheaper, in a more integrated
way…
– Leverage “complementary assets”

• Be part of the evolution of the playing field:

– Exploring “soft” standards
 Exploring soft standards
• A “soft” standard is a specification that is
completely compatible with current public
standards but offers enhanced functionality and
performance
• It offers customers the security of knowing that
they have avoided being “locked in” and an
upgrade path to the public standard
• Plus the functionality and performance of a more
finely “tuned” technology
• May permit significant premium pricing and the
generation of customer loyalty
 Soft standards in action:
“Soft” standard
Perf.

Public
standard

Time
 Managing soft standards
• Maintaining customer trust is critical:
– The instant they come to believe you’re trying to lock
them in, there will be trouble
• The technology task is complex. The “soft”
standard must be:
– Better than the public standard
– Compatible with the current version
– Compatible with future versions
• Ensuring that the “soft” technology is embodied
in future generations of the technology may be a
central strategic goal
 Standards: Conclusions
• Not all markets “tip”, or move to a common standard:
but as network effects (connectivity, complementary
services, tools, products) become more important,
more and more will.
• Getting a private standard established in these kinds of
worlds is likely to be increasingly difficult
• Fortunately, there are ways to make money in an open
world ‐ but managing a “soft” standard requires
sustained attention
 Looking forward
• Next time, Linux and Open Source:
– How should Red Hat make money?
 Red Hat’s Future:
• Application Development:
– Not clear open source works
– Red Hat doesn’t have requisite skills
– Compete against MSFT Office after the market has tipped?
– Instead, primary focus is corporate servers, not desktops.
– Focus on specific industry verticals!
• Customized server/middleware solutions for Financial Services,
Governments, etc.
• Building a Service Business
– Step 1: Differentiate by access to kernel gurus
– Step 2: View the software itself as a service
• Ongoing challenge is both technical and cultural
Open Source’s Strategy Problem:
• How to appropriate the value of IP when IP
is “free”?
– Linux is the most successful “free IP” in the
world.
• Capturing Value from open IP:
– Brand it and License it (Rambus)
– Bind it to products or services (Red Hat)
– Bundle it in products and services (IBM)
– Leverage IP to lower competitive prices
(customers/Intel)
Open Source’s Strategy Problem:
• Long run value proposition remains unproven:
– Will developer community (complementary asset) stay loyal?
– Are there sufficient incentives to prevent defection?
• In weak IP appropriation regimes (open source is the
extreme!), customers and complementors are the
biggest beneficiaries (depending on how tightly
complementary assets are held)
– Even if Linux fails (long run), it would weaken MSFT,
strengthen IBM/Intel, and lower TCO for customers.
• Biggest challenge: solve the “network effect” problem:
find a market which they can “tip”
– Could be the big contender for “embedded solutions” – e.g.,
TIVO, vertical apps, mobile (Gphone)
Where have we been? Where will we
go?
z Creating Value:
z Technology S‐curves
z Market Diffusion & Industry
Industry
Life Cycles
How will we z Organization Design:
Create value? Structure, Process,
Collaboration, Centralization

z Capturing Value:
z Uniqueness: IP, Speed
z Complementary Assets
How will we How will we z Value Chain
z Standards: Access &
Deliver value? Capture value? Control
z Network Exter nalities:
Externalit ies:
Tipping & Winner-Take-
All
…
 Looking Forward:
• Start thinking about your final project:
– Firm and Industry (can be the same one)
– Same Team?
• Next Session: Google
 Lessons of the Google Case
• Late‐mover advantages:
– Avoid other players errors: “clean, white page”
– Reverse engineer / improve upon pioneer’s offerings:
Overture’s ad ranking…
– $0 advertising dollars to build market
• Licensing partnerships:
– Important in networked markets…
• Create Value: network effects (RPS)
• Capture Value: Deter competition
• Threaten other platforms (MSFT, Ebay, Amazon) at your
own risk:
– Envelop these other platforms with yours
– Avoid competitor responses…stay under the radar, or offer
them value
 Google mini‐update
• Financial performance remains strong:
– Google share of US search traffic is 55% in July 2007…and rises…
– 2007 revenue ~$12B vs. $4 in 2005

• Pace of new product development slows

somewhat:
– Web Calendar in 2006
– Docs & Spreadsheets in 2006/07
– Checkout in early 2006 rival to PayPal
– Targeted advertising

• Two Key Acquisitions:

– YouTube…$1.6B in 2006
– Doubleclick $3.1B in 2007

• More about Google Phone later…

 Looking forward
• Next session: Platforms and the Evolution
of Value Chains
• Paragraph describing Industry/Firm, Team,
and Topic of interest for Final Project due
next session.
 Outline
• Strategy fundamentals
– Creating, capturing and delivering value
• Technology strategy:
– Taking value creation for granted now
– Exploring the dynamics of value capture
– Moving too organizational dynamics as a
fundamental source of long term competitive
advantage – integrating value delivery into value
capture
Strategy Fundamentals
Strategy fundamentals

How will we
Create value?

How will we How will we

Deliver value? Capture value?
 Strategy Fundamentals
• Create value: Choose a “good” industry
– One with a large “PIE”

• Capture value: Create a source of sustained

competitive advantage
– Choose/create a “favorable” industry structure
– Build assets/competencies/resources that cannot be bought on the open
market
– Build assets/competencies/resources that cannot be instantaneously built

• Capture value:
– Align the organization with the strategy
 “Choose” an industry with a “favorable” industry
structure

Low threat of entry

Many, fragmented Weak Many, fragmented

Suppliers Rivals Buyers

Weak
Substitutes
Technology Strategy: What’s new?
 Thinking explicitly, about dynamics:
S‐curves, industry lifecycle, chasm,
innovators dilemma, effective
organization processes
Performance
Maturity

Discontinuity
Takeoff

Ferment

Time
Taking value creation for granted…

How will we
Create value?

How are technologies Will this technology serve

likely to evolve? an addressable market?
How will we How will we
Deliver value? Capture value?
 Two key ideas:
• Uniqueness
– Controlling the knowledge generated by an
innovation

• Complementary assets
– Controlling the assets that maximize the profits
from innovating
 Thinking about tightly held
complementary assets
• “Raw” first mover advantage: acquiring an
asset before others realize its value
– Land, location, people….
• Building an asset that others cannot imitate
– Tacit skills? Company cultures? Ways of doing
things?
• More sophisticated “first mover” advantage:
taking advantage of increasing returns before
others
– Learning curves, Network effects, Brands,
Technological skills….
 The best complementary assets are
tightly held
Tightly held
Only we can do it

Only we have
access to it
Only people in our
industry can do it

Only people in our

industry can access it
Anyone can do it

Anyone can access it

Freely available
The sources of advantage usually change over time…

Complementary assets are:

Available Tightly
held

Possible
$
Uniqueness is:

Very
Difficult
 Platforms and Network Effects
• Winner‐Take‐All and Network Effects: Will it tip?
– Are their direct network effects?
• Markets where $/user depends on number of users
• Example: Fax Machines
– Are their indirect network effects?
• 2‐sided markets like eBay
– What are the costs of multi‐homing?
• Example: Video Game Consoles
• That is, users and suppliers switching back and forth
– Demand for differentiated platform?
• Can you differentiate?
 Where we’re going next…
• Value Capture:
– More to know about platform‐based industries…
– …foreshadow some “value delivery” by thinking about
how to manage platforms and ecosystems.
– Rethinking the Value Chain
• Value Delivery:
– Making Decisions in High Velocity Environments
– Product Development & Organizational Rhythms
– Overload and Commitment
– Managing Partnerships: Alza/Ciba Two‐Day Alliance
Role Play
 Agenda
• Evolving Ecosystems and Value Chains
• Technological Convergence
• Vertical and Horizontal Strategies
 Digital Convergence
• Convergence: when technologies become
similar, functionalities of different products
can merge
• Uniting the functionality of computers, TVs,
and telephones.
• Implication: digital content changes value
creation
– New S‐curves create new markets
– Faster and higher market evolution curves
Problem with Convergence: everyone
knows it’ll happen, but when, where,
and how?!
• Most predictors of convergence have been
wrong!
– ….we’ve been predicting it since the 1960s!
– Failed to see massive managerial creativity and
inter‐firm coordination barriers
– Convergence may be non‐linear and partial (some
parts converge while other do not) because it is a 2
sided market:
• Requires content to develop to make the products
worthwhile!
Be Vertical if you Can…it Creates Value
that you can Capture
• Customers want full solutions
– Cross the chasm with complete bundles of product
and service
• Components not widely available
– Lack of modularity
– Difficult to transact with suppliers and
complements
• Hold‐up problems
– Small number of suppliers can extract all of the
value
– High transaction costs to coordinate with suppliers
 The logic of vertical solutions
• Vertical also works if:
– Tight integration between layers produces
superior performance
• Game machines
– hardware is highly optimized for specific applications
(graphics and visuals)
– Razor & blades business models
• Give away hardware (software) to sell the complement
– iPod (“give away” the music to drive hardware sales)
– Game machines (subsidize the hardware to sell software)
 Vertical Examples

• Ford Motor Company

– Backward integrated into rubber and steel to ensure
high quality supply
• IBM
– Largest manufacturer of ICs from 1960s to mid‐1980s
• AT&T
– Made everything from ICs to service for all customers

...BUT NOTICE THAT THEIR VERTICAL

STRATEGIES ALL DISAPPEARED…
Be Vertical if you can…but it is hard to
be Vertical forever!
• Customer’s needs change, and your solutions aren’t
as desired…
– Disruptive technologies
• Uniqueness is eventually imitated
• Complementary assets become less tightly held
• Scale and Scope economies can become really
important in one of the horizontal layers…
– E.g., Microprocessors, Operating Systems, Genomics
• Potential Worst Case Scenario: convergence allows a
large firm from another ecosystem to come and eat
your lunch!
– e.g., Apple and Google invade Nokia’s space!
 Why go horizontal?
H=Horizontal Solutions
ƒ Huge scale in components has led to horizontal solutions in
computers
- CPUs--- $1 billion to design, $3 billion to build
– LCDs--- $1 billion million to build
– OSs--- $1+ billion and 4 yrs to design, $100
million/yr to support
– No company can internalize the scale requirements
ƒ Availability of credible suppliers, declining transactions cost
(facilitated by IT), growing modularity, makes horizontal strategies
feasible
 Horizontal: Advantage to those solving the
problems

n Coordination is still a nightmare in the horizontal

model
u who is responsible?
n Competitive advantage comes from:
u dominant scale & solving coordination problems
F common interfaces/ plug & play
F opportunities for coordinators & contractors
F Business process outsourcing

F Accenture, IBM Global Services, Wipro

 Solve horizontal problems through:
Externalities & Standards
• Standards & network effects generate Lock‐in & Lock
out:
– Lock‐in:
• customer sinks so much investment in complementary
assets, it is cheaper to stick with known migration path than
switch to (even) superior technology
– Lock‐out:
• exclusion from a standard can be very difficult to reverse
• Standard setters can change the direction of their
industries
 Scale & Scope=
The Incumbent Advantage

Start-ups pioneer
But scale and scope allow
incumbent firms to imitate
and overwhelm

Incumbents grab the advantage by exploiting their

advantages in size (scale) & their advantages of
breadth (scope)
 Advantages from Scale & Scope
n Scale is only an advantage if managers will:
• cannibalize themselves
– E.g., will Microsoft drive virtualization?
– E.g., will Oracle drive on-demand CRM?
• cross-subsidize
– Internet Explorer vs. Netscape Nav Naviigator
gator

n Scope is an advantage if there are

opportunities to:
• bundle
– Microsoft Office
– Intel – Centrino & WiFi
– IBM - Linux
 Looking forward
• Read the Nokia case and Phone article packet
• Next session: Last IT/Communications Case:
• Apple, Google, Nokia Phone Strategy Comparison
 What is a Platform? What is
Modularity?
• Product is a Platform if:
– It is functionally interdependent with most of the
other parts of a technological system
– When end‐user demand is for the overall system
• Some product platforms possess Modularity:
– Parts of the system can evolve without changing
the core platform and visa versa
• Advantages of (Modular) Platforms:
– Efficiency introduce new product versions
– Others can help you create value!
 Platforms Involve Ecosystems of
Complementors
• Ecosystem of Complementors:
– Firms who produce other products that use the
platform

• Managing the ecosystem is critical because these

complementors create products that sell more
platforms!
– E.g., Ecosystem of Software Applications increases
value of OS and Microprocessors
Managing Platforms Involves Industrial
and Technological Leadership in Four
Areas
• Four Levers of Platform Leadership:
– Scope of activities: in‐house vs. ecosystem activities
– Technology design and IP: features/functions in
platform
– Encouraging relationships with complementors
– Internal organization that facilitates platform
changes

Gawer & Cusumano, “Platform Leadership: How Intel, Microsoft, and Cisco Drive Industry Innovation,” Boston:
Harvard Business School Press.
 How to build a platform? Coring and
Tipping
• Coring (creating a new platform): identify a part of the system that all (most)
of the others depend on
– Technological:
• Solve an essential system problem
• Facilitate “add‐ons” by others

– Industrial:
• Create high switching costs from your platform
• Tipping (win platform wars against other platforms): build market momentum
– Technological:
• Develop unique features that are hard to imitate and attract users
• Absorb and bundle features from adjacent markets

– Industrial:
• Provide more incentives for your complementors than competitor product

Gawer & Cusumano, “How Companies Become Platform Leaders,” MIT Sloan Review, 49(2), 28-35
 How to manage a platform

• Create Value:
– Improve your platform!
– Encourage complements
• Capture Value:
– Grow the platform to include critical technologies/
features
– Squeeze value from the complementors

• So, is capturing value mostly about

dominating the ecosystem?
 Ecosystem dilemmas of Platform
Leaders
• On the one hand, platforms create enormous incentives
to “squeeze” your ecosystem:
– Extending the platform into their space – e.g., envelopment
• e.g. Microsoft: Windows platform now includes important
middleware not originally part of the platform
– Releasing your own complementary products in the critical
areas (high growth, or strategic control points)
• e.g., Microsoft: enters key complementor markets that are high
growth (Office suite) or offering strategic control points (IE & the
browser wars)

• But complementors must have an incentive to

innovate…if you squeeze them they’ll exit! They create
much (if not most) of the value for the platform!
 How to resolve this dilemma? We’ll
examine Intel’s solution, 1990‐2004
• Dilemma: Capture value from Microprocessor platform, but don’t
curtail value Creation by Ecosystem in many complementary markets…
– E.g., Security, PCI, USB, DVD, Video, Motherboards, Audio, and
many others…

• Step 0: Consider entering markets where you have competencies

– Avoid markets where Intel has no competency, no matter how
tempting at the time (e.g., internet software)
• Hard to resist temptation: 5 failed entries into
internet software became quick exits
– Consider entering some complementor markets…but do so
carefully… (the rest of the strategy is about how to do so)

The rest of this deck adapted from:

Gawer & Henderson, 2007, “Platform Owner Entry and Innovation in Complementary Markets: Evidence From Intel”
Journal of Economics and Management Strategy, Vol 16, Number 1, 1-34
How to enter complementor markets
gingerly…
• The Goal: capture value, but convince
ecosystem firms they should still create value
– “make some money but not too much”
– Credibly claim that Intel won’t “eat their lunch”

• How to credibly claim that Intel won’t eat their

lunch and “squeeze them” at a later date?
– Complementors fear Intel will just “wait and see”
which markets are most successful and then enter
on their own
 Intel creates new BUs with Separate
P&Ls to compete with complementors
• Step 1: Create specialized business units with
separate Profit and Loss responsibly to convince
ecosystem that Intel will compete “fairly” with them
– Definition of Fair: won’t try to include complementor
features/functions inside the Intel Microprocessor
• New BUs signal techs won’t be brought into the core
platform
• These BUs will compete head‐to‐head with
complementors, when necessary, though!
• Especially target important complementor markets
that Intel fears ecosystem will be slow push
– e.g. Redesigning the “bus” component that allows new
Microprocessor speed to be recognized.
 Facilitate Ecosystem Innovation

• Step 2: Give away your IP about platform

“connectors” (interfaces) to encourage potential
entrants in complementary markets

• Step 3: Subsidize their efforts, but not too much!

– Loan engineers, make introductions, aid in marketing,
release SDKs
– Insist that complementors always “put some skin in the
game”
• “I will help you mitigate the risk. I’ll pay for half of it. But you
pay the other half. I want you to have some skin in it. So you
are interested in making it successful.”
– Help them fight with Intel’s own competing BUs!
Enable competing complementors

• Jim Pappas, director of Platform Initiatives

at IAL (Intel Architecture Lab):
– “We developed the [USB] code and we gave it
to our internal chipset business group in
Chandler, Arizona, who used it to do their chip.
And we also made it available to anybody in the
industry. I can guarantee that there were times
where the group in Chandler was livid with me
for freely distributing this. They have
competitors out there who are building
products”
Organize for Ecosystem Facilitation

• Step 4: Create a separate group for

facilitation…without P&L responsibility
– “Intel Architecture Lab”
– Enough power to fight with the Business Units
– “We had a very clear separation [between BUs
and facilitation]. We had a group defining the
specification, and we had other groups
implementing products. They would take our
specification and implement the products, but
we kept a sort of wall between the two.”
Credibility with the Ecosystem is key

– “For USB to be successful, it needs to be available

to the industry…even though we would develop
products, at the same time we would lose our
credibility if we were saying that this is something
we’re only going to do for our internal products and
we’re not going to enable any competition here.”

– This strategy makes it hard to “make too much

money” and can “make the BUs livid”
– BUT it lets complementors know there will be space
for them…they won’t be squeezed
• Ongoing Value Creation balanced against Value Capture
 How will Apple, Google, and Nokia
balance Value Creation and Value
Capture in their Mobile Platforms?

• What types of complementor markets will

each be most likely to enter?
– How big is the temptation for each firm to enter
complementor markets?
• What will they do to convince
complementors that they won’t squeeze
them?
 Looking forward
• Putting IT to rest.
• Value Delivery
– Medtronic:
• What were the biggest problems?
• What were the best solutions?