Complements

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Complements

• A complement to one product or service is any
  other product or service that makes the first one
  more attractive

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Classic Example

• Computer hardware and software
• Window 95 is far more valuable on a
  Pentium-powered machine than on a 486 machine
• Pentium chip is far more valuable to someone who
  has Window 95 than to someone who doesnt

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Other Examples

• Hot dogs and mustard
• Cars and auto loans
• TVs and Videocassette recorders
• TV shows and TV Guide
• Fax machines and phone lines
• Digital Cameras and color printers

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Complements to Cars

• Paved roads
• In 1913 General Motors, Hudson, Packard, and
  Willys-lights, set up the Lincoln Highway
  Association to catalyze development of Americas
  first coast-to-coast highway
• Auto loans
• Automobile credit companies provide better and
  cheaper access to car financing
• General Motors created General Motors Acceptance
  Corporation in 1919
• Ford Motors formed Ford Motor Credit in 1959
• Auto insurances

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Missing Complements Failure of some
businesses

• Alfa Romeo and Fiat
• Lack of spare parts and qualified mechanics
• Sony Betamax videocasette recorder
• Lack of rental movies in the Betamax format

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Intel

• According to Andy Grove "Microsoft doesn't share
  the same sense of urgency (to come up with an
  improved PC). The typical PC doesn't push the
  limits of our microprocessors. . . . It's simply
  not as good as it should be, and that's not good
  for our customers."

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• If software applications don't push the limits of
  existing microprocessor chips, then Grove has to
  find something else that will. Otherwise, his
  customers won't feel the continued need to
  upgrade. If they don't keep upgrading, not only
  will the market become saturated but the other
  chip manufacturers?AMD, Cyrix, and NexGen?will be
  able to catch up.

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Intel

• This is not a new problem for Intel processing
  capabilities have always led the software
  applications. For example, although 32-bit
  processing has been a technological reality since
  1985, Microsoft's first 32-bit processing
  system?Windows NT?didn't appear until 1993. Intel
  has always been on the lookout for applications
  requiring massive processing capabilities.

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New Modes of Competition

• Grove (1996) contrasts the vertical structure
  of the old computer industry to the horizontal
  structure of the new one

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New Modes of Competition

• Vertical structure means vertically integrated
  suppliers
• e.g. IBMs mainframe business
• Customers face full-service, all products vendor

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New Modes of Competition

• Horizontal structure is characterized by
  specialized firms
• e.g. PC business
• Customers may mix and match from a wide variety
  of vendors
• A computer platform is a shared, stable set of
  hardware, software, and networking technologies
  on which users build and run computer applications

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New Modes of Competition

• A number of firms supply, in the short run, and
  invent, in the long run, platform components
• Strategically, firms in different layers share
  common customers, they have strong reasons to
  cooperate. At the same time, they have incentive
  to grab the rents of firms in another layer.

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• With the popular usage of the Internet (in
  particular emails and the WWW) and the emergence
  of new Internet-based applications, the
  vertically related components and layers quickly
  expanded. The main layers and structures of the
  computing industry as of the end of the 1990s are
  given in Figure 3 (taken from a paper written by
  Timothy Bresnahan of Stanford University).
  Notice the presence of Microsoft in many
  different layers.

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Figure 3. Major Horizontal Layers in Networked
Computing.
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New Modes of Competition

• Divided technical leadership
• the supply of key platform components by multiple
  firms
• No single vertically integrated firm with control
  over direction of a platform

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New Modes of Competition

• Divided technical leadership enhances competition
  for control of a platform (Vertical Competition)
• Technically, there are no given and exogenous
  boundaries between the layers. Similar technical
  capabilities enable firms to take over functions
  performed by others.

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New Modes of Competition

• Divided technical leadership offers two kinds of
  vertical competition
• Within an era, there are constant border wars at
  the boundaries between layers
• The other suppliers in a platform provide a stock
  of ready and able entrants to trigger epochal
  competition