The-Art-of-Standards-Wars-Resumen
The Art of Standards Wars” Shapiro & Varian (1996)
Summary:
Introduction: The authors discuss the prevalence of standards wars in the information age. They claim to have identified strategies that allow one to win through examining past standard wars. They discuss some of the standard wars that were of issue at their time (1996) such as Microsoft Vs. Netscape, DVD Vs. Divx, and Microsoft Vs. Real Networks.
Historical Examples: The authors discuss 3 historical standard wars to help support their winning strategy. They say that winning in a standards battle is simply looking at the past and learning from the mistakes of the loosing company, and gaining insight from the winning companies’ strategy.
North vs. South in Railroad Gauges: The authors discuss the standards war that occurred over railroad gauges. According to the authors, there were up to 7 different gauges used during the time with 5’ gauge and 4’8/12” being the two most predominant. Although there were clearly benefits to standardization, three reasons did not allow for it; Cost, Stubbornness and unwillingness to change, and Workers who made a living from the gauges being different. However, eventually the North won much because of the outcome of the Civil War.
Key Points: 1. Incompatibilities can arise almost by accident, yet persist for many years. 2. Network markets tend to tip towards the leading player, unless the other players coordinate to act quickly and decisively. 3. Seceding from the standard-setting process can leave you in a weak market position in the future. 4. A large buyer can have more influence than suppliers in tipping the balance. 5. Those left with the less popular technology will find a way to cut their losses, either by employing adapters of by writing off existing assets and joining the bandwagon.
Edison vs. Westinghouse in Electric Power: The Battle of the Systems: The authors point out that this battle did not clearly demand a standard as in the case of the railroad gauges, but a standard battle did ensue. Edison pushed his DC system which had pros and cons in comparison to Westinhouse’s A C system. This standardization battle was
not only fought in the market, but in the courthouse and in the public domain; swaying public impressions about the safety of the two systems. Patents were created by Edison, and he even went as far as inventing the electric chair to pose a negative image of AC systems to the public. Eventually, even though Edison had a head start and had a reputation AC systems won. The authors point to three factors that led to the defeat of DC systems; advances in polyphase AC, rotary converter (DC to AC system integration), and Edison selling his interests to GE which produced both systems.
Key Points: 1. Consumer expectations can become self-fulfilling in standards battles. 2. Technologies can seek well-suited niches if the forces towards standardization are not overwhelming. 3. Ongoing innovation can lead to victory in a standards war. 4. First mover advantage can be overcome by a superior technology, if the performance advantage is sufficient and users are not overly entrenched. 5. Adapters can be the salvation of the losing technology and can help to ultimately defuse a standards war.
RCA vs. CBS in Color Television: The authors showcase another standards battle between RCA and CBS over color television. As the story goes, CBS was ahead of the color television game and was able to get the FCC to select their technology over RCA in 1950. However, RCA did not give up and doubled up on their efforts to improve their technology. They also continued to try and sell their b lack and white T.V.’s so that it would be that much harder for CBS to gain market share since their technology was not backwards compatible. In the end, CBS’s poor placement, such as not having manufacturing capability, and the Korean war which put a hold on parts used for color televisions allowed RCA the time to develop their technology and come out as the winner. However, the battle for RCA did not end their because there was not a sufficient amount of programing available at the time, and for consumers the costs to value ratio did not make sense at the time. It wasn’t until 1960, that RCA finally started to make some profits from its investments due to the procurement of “Walt Disney’s Wonderful World of Color”.
Key Points: 1. Adoption of a new technology can be painfully slow if the price/performance ratio is unattractive and if it requires adoption by a number of different players. 2. First mover advantages need not be decisive,
even in markets strongly subject to tipping. 3. Victory in a standards war often requires building an alliance. 4. A dominant position in one generation of technology does not necessarily translate into dominance in the next generation of technology.
War or Peace?: The authors discuss the importance of understanding that not all standards battles are “fight to the death”, and that most would be better off ending peacefully if possible. The authors talk about how Sony and Philips open licensed their CD patents in an effort to get consumers to “take a leap” and purchase CD players and compact disks. The authors also talk about how even bitter enemies such as Microsoft and Netscape have repeatedly cooperated to help establish standards in many different markets;
i.e. Open Profiling Standard, 3-D image viewing, and Secure Electronic Transactions. The authors state that traditional principles of strategy need to be supplemented to account for peculiar economics of networks (pg. 14). It is also said that this sort of collusion between companies will not be seen an illegal acts of antitrust violation, but as beneficial to society if it provides consumers a benefit.
Classification of Standards Wars: The authors discuss the different types of standards wars that can be fought. The classification is based on the magnitude of switc hing costs and how compatible each company’s proposed technology is with the current.
Evolution strategy: new technology that is compatible with the old; based on offering superior performance with minimal consumer switching or adoption costs.
Revolution strategy: new technology that is incompatible with the old; based on offering compelling performance that consumers are willing to incur significant switching or adoption costs.
Rival Evolutions: competing company’s techn ologies are compatible with the old, but not with each other.
Evolution versus Revolution: your technology offers backward compatibility, but competitor’s does not; contest between backward compatibility and superior performance. Mirror image Revolution versus Evolution is also possible.
Rival Revolutions: neither technology is backward compatible.
Key Assets in Network Markets: The authors describe seven key assets in a standards war; control over an installed base of users, intellectual property rights, ability to innovate, first-mover advantages, manufacturing capabilities, strength in complements, and brand name and reputation. They also mention that no one asset is decisive in the outcome of the war, and that big customers are very powerful when it comes to swaying the final decision.
Control over an Installed Base of Customers: a company with a large base of loyal or locked-in customers can easily position themselves for an Evolution strategy. Control over a large base can prevent competitors from entering the market and forces them to go the Revolution strategy route.
Intellectual Property Rights: Firms with patents and copyrights are in a strong position. Software copyrights can be used to block compatibility and be very valuable.
Ability to Innovate: the ability to create new proprietary extensions to your current product line puts in you in a strong https://www.wendangku.net/doc/546552685.html,scape
First-Mover Advantages: Being farther down in the learning curve and having lots of experience in the product’s development can put you in a strong position.
Manufacturing Capabilities: Being a low cost producer due to scale economies or manufacturing competence puts you in a strong position. Cost advantages can help a company survive a standards war.
Strength in Complements: Having or producing a significant complement for the market will motivate the company in getting started. Microsoft
These compliments will lead to increased sales of other company products in the future.
Reputation and Brand Name: A premium brand name is highly valuable, especially in network markets. It is important to convince customers that you will win.
Preemption: The premise of this strategy is to build an early lead, so positive feedback works for your company and against your rival. The easiest way to preempt is to be first to market by having great product development and design skills, but preempt may have some dangers. Early
introduction can lead to compromises in quality and greater risk of defects. The best way to preempt is to be aggressive and build an installed base of customers early. One way of building this early customer base is by “penetration pricing”; pricing below cost. Some companies can even go as far as paying customers to use their products, but this needs to be thought out thoroughly. Penetration pricing is most effective when used by a company with a proprietary system against a rival touting its openness (pg.
19).
Expectations Management: The second key tactic in a standards war, it is influencing customer expectations to help them make decisions to purchase your product, or to dissuade them from purchasing a competitor’s products. One classic tactic is “vaporware”, where one company announces the future launching of a superior product to freeze a competitor’s
sales. One needs to be wary when using this tactic as to not be seen as “predatory product pre-announcements”. The best way to manage expectations is to assemble allies and make grand claims about your product’s current or future popularity (pg. 20).
Once You’ve Won:How to best proceed after you’ve won the standards war.
Staying on Your Guard: The authors suggest that one must keep looking out for the next generation of technology, and to defuse any threat to one’s core product that may arise from it.The author’s warn that if one had used a preemption strategy in the previous generation to win the standards war, you are more susceptible to an incompatible Revolution strategy against you. The authors also warn against moving early but lacking flexibility and talk about the French Minitel case as an example. One needs to present a migration path or roadmap for one’s own technology.“If you cannot improve your technology with time, while offering substantial compatibility with older versions, you will be overtaken sooner or later. Rigidity is death…” (pg. 22).
Offer Customers a Migration Path: By anticipating the next generation of technology and co-opting it, one can make it hard for rivals to execute a revolution strategy. Offer customers a migration path by giving older members of an installed base, free or inexpensive upgrades to a recent but not current version of one’s product (pg. 22).
Commoditize Complementary Products: Keeping an eye on complementary products as well as your own is important to open up revenue streams and market space. One needs to maintain a competitive market in complementary products, but not meddle in the affairs of the complement producers. Apple is given as an example where flip flopping and meddling in their developer relations lead to loss of market
share. Improving complementary products can lead to more demand of your core products.
Competing Against Your Own Installed Base: The authors talk about market saturation, and eventually having to compete against customers that see no more need to purchase your products, because their needs have been fulfilled. The answer in this situation is to innovate better and faster to create new products that would fulfill needs that the customer would want fulfilled. Another method is to discount one’s product to attract the remaining c ustomers that haven’t already purchased the product. However, this can be dangerous as it may lead to customers that will wait for discounts rather than purchase when needed. Economists recognize this as a “durable-goods monopoly”; where consumers come t o anticipate price reductions and hold off buying until prices drop. A common prescription to this is “renting” one’s product, but this does not work for all types of goods.
Protecting Your Position: The authors point out that it is illegal to maintain a monopoly through anticompetitive means. However, to overcome this, it is recommended that one offer attractive terms to complementors and gain strong distribution. This however can cross into illegal territory once “exclusive benefits” come i nto play. Another method to protect your positions is to maintain and manage IP within the company as to make sure that you don’t infringe on other company’s patents; thus eliminating any future holds on being able to sell your product.
Leveraging Your Installed Base: The authors talk about leveraging into adjacent product spaces using the strong base of customers and competencies that the company already has. The authors also mention geographic expansion to widen one’s network, however there a re dangers when entering regions where there is a very strong rival.
Staying a Leader: In order to stay a leader one needs to think towards the future with a good development team. A good development
team can help a company cede current control over a technology through an “openness” approach while keeping control over improvements and extensions. This allows one to preserve important future rights as well as partnerships and alliances. If control over one’s technology starts to sway, developing proprietary extensions is one good method to regain partial control. However, one needs to be wary when using these tactics especially if a technology becomes too successful. This is because resource allocation becomes difficult and most resources will be eaten up to meet current demand rather than investing in future products.
Rear-Guard Actions: If one falls behind in the war and network externalities are not crushing, protection of a niche market may be possible and will lead to the potential for a run at leadership in the next generation of technology. Having even a small base of niche customers can prove to be beneficial in the future in the form of branding and reputation which can be a base to introduce new products. The danger of stranding even a small base of customers can be detrimental if not properly managed.
Adapters and Interconnection: Another way to survive if falling behind is using adapters and interconnections. This is basically a means to try and connect to a larger network using converters that link one’s technology to a larger customer base. The most important factor in this strategy is knowing whether one is able to or allowed to create such an adapter. However, sometimes even when an adapter or converter is in place, customers may question the quality of the connection and transfer. A key example of this is how Digital has been trying to interconnect into Intel’s large network. The bottom line is that adapters add some value, but can undermine confidence in the smaller network itself (pg. 29).
Survival Pricing: Another method one can use when falling behind is “survival pricing”. However, even though the tactic seems logical to try and attract customers through offering a cheaper product, the authors warn against it. “Survival pricing is unlikely to work. It shows weakness, and it is hard to find examples where it made much difference.” (pg. 29). The authors give examples like the “Simply Money” case, and the spreadsheet war between Borland, Lotus, and Microsoft. It is also important to note that “survival pricing” is different from “penetration pricing”.
Legal Approaches: “If all else fails, sue.” (pg. 30). This is only viable if a dominant company promises to be open with its technology, but reneges on that promise.
Structure of the Paper:
This paper focuses mostly on the software or electronic components industry other than the first 3 examples given at the very beginning. The paper is written without any empirical data, and is primarily a strategy and example paper. This is probably because it is a management paper. Most of the examples seem to be a summary and explanation of what happened without an in depth analysis. The overall layout of the paper goes from historical examples, oldest to most recent, then moves on to discuss the different classifications of standards wars, methods and requirements to win a standards war, how to protect your position when ahead, and finally how to make progress when falling behind. In my opinion, this paper would have been far better if examples from other industries were explained to emphasis the strategies.