Standards and Standards-based Competition Leif Hommen CIRCLE [e-mail]

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Standards and Standards-based CompetitionLeif
HommenCIRCLE leif.hommen_at_circle.lu.se
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Overview

• VCR Standards Beta vs. VHS
• Cusumano, M.A, M. Yiorgos and R.S. Rosenbloom .
  1992. Strategic maneuvering and mass-market
  dynamics The triumph of VHS over Beta. Business
  History Review 66 (Spring) 51 94.
• Competitive Strategy and Standards
• Hill, C.W.L. 1997. Establishing a standard
  Competitive strategy and standards in
  winner-take- all industries. The Academy of
  Management Executive 11 (2) 7 25
• Standards Wars
• Shapiro, C. and H.R. Varian. 1999. The art of
  standards wars. California Management Review 41
  (2) 8 32.

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VCR Standards (1)

• One of the classic cases of standards war is
  the 1970s battle over the VCR market waged
  between Sony (Beta) and JVC-Matsushita (VHS)
• The facts are simple
• Beta reached the market first, taking 58 of the
  emerging VCR market in 1975 77.
• However, VHS gained the market lead in 1978.
• Over the next years, Betas sales continued to
  increase but market share fell steadily.
• In 1984, Beta was outsold by VHS four-to-one, and
  began a rapid decline to extinction.
• The second mover, VHS, had managed to turn a
  slight early lead in sales into a dominant
  position.

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VCR Standards (2)

• The decisive factors ... were few
• In cost and performance, the two designs were
  closely comparable (due to a common heritage in
  terms of their technical origins).
• In timing, Sony (Beta) had a clear lead of two
  years but moving first was not enough.
• In forming alliances, JVC (VHS) was far more
  effective than Sony (Beta).
• Establishing production capacity (via Matsushita)
  was another plus for VHS.
• Aggressive marketing by JVC also pre-empted
  Beta from the lead market Europe.

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VCR Standards (3)

• A few important moves made the difference
• JVC created a winning alliance of VCR producers
  in Japan by ... showing humility and versatility,
  whereas Sony pressed commitment and reputation.
• Matsushita waited until VHS provided a viable
  alternative, then abandoned its own design and
  invested massively in capacity while pushing to
  meet RCAs requirement of a longer recording
  time.
• JVC completed the sweep by moving ahead of Sony
  to enlist European partners behind VHS.
• Sony lost out in the race for distribution rights
  and remained in a minority position in all 3
  major markets.

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VCR Standards (4)

• The case supports theories of bandwagon effects
  and network externalities applied to the
  emergence of dominant designs in mass consumer
  markets.
• Bandwagon effect situations where early sales or
  licensing of one product lead to rising interest,
  and the build-up of momentum.
• Network externalities whether or not there is a
  usage pattern that depends on a complementary
  product, as well as to how and how much customers
  use it with the main product.

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VCR Standards (5)

• In the case of the VCR market, Sonys first
  mover advantage was overturned because initial
  moves by JVC placed VHS in a far better
  competitive position in relation to these
  mass-market dynamics
• A first bandwagon was formed around VHS when
  demand grew so rapidly that it outstripped the
  supply capacities of any one producer but not
  the VHS coalition.
• A second VHS bandwagon arose from demand for a
  complementary product pre-recorded tapes as
  retail outlets chose to stock tapes in the most
  popular format.

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Competitive Strategy (1)

• Hill discusses basic competitive strategies
• The theoretical point of departure is similar to
  that discussed in relation to the VCR case
  product compatibility, increasing returns and
  lock-in.
• Compatibility, critical for complementary
  products to work together, is usually ensured by
  standards.
• In markets where compatibility is important to
  consumers, a products value to consumers is the
  function of availability of compatible products.
• Availability of compatible products, in turn, is
  determined by the products installed base, which
  is often formed by complementary products.
• What results is a set of self-reinforcing
  relationships

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Competitive Strategy (2)

• Increasing Returns in the PC Industry

Size of Installed Base


Availability of Applications Software
Future Demand


Value of Machine to Consumer
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Competitive Strategy (3)

• Based on the self-reinforcing relationships shown
  above, a firm that succeeds in making its product
  a market standard will become even more
  successful in future.
• Where two or more incompatible technologies of
  this kind compete, small changes in initial
  conditions can eventually lead to market
  dominance and lock-in for one of them (not
  necessarily the best).
• Naturally, the outcomes of this kind of
  competition can be affected by strategy.

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Competitive Strategy (4)

• Strategic Options (for installed base)
• Licensing (and OEM) Agreements
• E.g., JVC Matsushita in the VCR case
• Entering into Strategic Alliances
• E.g., Philips Sony in CD disc players
• Product Diversification
• E.g., Apple saved by complementary products
  (including Apple laser jet) in desktop publishing
• Aggressive Positioning
• E.g., Philips launch of DCC tapedecks a failed
  attempt to lower switching costs and ease
  transition based on backwards compatibility

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Competitive Strategy (5)

• Benefits, Costs and Risks

Strategic Options Benefits Costs Risks
Licensing ( OEM) Agreements 1. Distribution 2. Coop-tation 3. Expectations 1. Appropriation of Technology 2. End Market Competition
Strategic Alliances 1. Distribution 2. Coop-tation 3. Expectations 4. Superior Technology 1. Appropriation of Technology 2. End Market Competition
Product Diver-sification 1. Supply of Comple-mentary Products 2. Profit from both Core Complement. Products 1. Additional Capital Commitments
Aggressive Positioning 1. Accelerate Adoption 2. Pre-empt Rivals 1. Loss of Ability to Skim Market 2. High Initial Investments
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Competitive Strategy (6)

• Four factors or contingencies determine the
  appropriate option or mix of options to pursue
• Barriers to Imitation
• High barriers favor a gradual approach
• Capability of Potential Competitors
• Firms with capabable rivals should try to co-opt
  them through licensing or entering into strategic
  alliances
• Complementary Resources of the Firm
• Firms without e.g., manufacturing or marketing
  need licensing agreements or strategic alliances
• Supply of Complementary Products
• If there are no available suppliers, firms may
  have to diversify into producing complementary
  products

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Competitive Strategy (7)

• Given these contingencies, firms can choose among
  four main strategies
• Aggressive Sole Provider
• E.g., Xerox in Japan should have adopted a more
  aggressive positioning stance to pre-empt rivals
• Passive Multiple Licensing
• E.g., Dolby in the audio player market low fees
  forestall rivalry scale of adoption generates
  profit
• Aggressive Multiple Licensing
• E.g., JVC-Matsushita and VHS in the VCR case
• Selective Partnering
• E.g., IBMs partnership with Intel and Microsoft
  to develop the PC Philips Sony in CD disc
  players

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Competitive Strategies (8)
Strategy Main Features Key Contingencies
Aggressive Sole Provider Avoid licensing alliances Pursue aggressive positioning Diversify into comple-mentary products High barriers to imitation Complementary resources Complementary products available No capable competitors
Passive Multiple Licensing License to all comers Licensees develop the market. Low imitation barriers No complementary resources Many capable competitors
Aggressive Multi-ple Licensing License to many firms Pursue aggressive positioning Complementary resour-ces Low imitation barriers Many capable competitors
Selective Partnering Enter into an alliance to promote standard Partner has critical complementary resources High imitation barriers Partner is a capable rival.
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Standards Wars (1)

• Shapiro Varian cover much of the same ground as
  Hill, though they discuss some different examples
  (especially older cases).
• However, in addition to addressing strategy and
  tactics, these authors also take up some
  additional questions
• Classification of standards wars
• Identification of seven critical assets
• Main lessons on standards wars

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Standards Wars (2)

• Classification of standards wars

The Rival Technology
Your Tech-nology Compatible Incompatible
Compatible Rival Evolutions Evolution vs. Revolution
Incompatible Revolution vs. Evolution Rival Revolutions
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Standards Wars (3)

• The classification shown above yields three main
  types
• Rival Evolutions
• E.g., DVD vs. Divx (both compatible with CDs)
• Evolution vs. Revolution
• E.g., Ashton Tates dBase IV vs. Paradox in
  dektop software during the 1980s
• Rival Revolutions
• E.g., Nintendo 64 vs. Sony Playstation (or AC vs.
  DC, for a more historical example)

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Standards Wars (4)

• Seven key assets in network markets
• Control over an installed base of users
• Intellectual property rights
• Ability to innovate
• First-mover advantages
• Manufacturing capabilities
• Strength in complements
• Brand name and reputation

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Standards Wars (5)

• Control over an installed base of customers
  (Example MicroSoft)
• Large numbers of loyal or locked-in customers
  favor an evolution strategy as well as
  blocking rivals and forcing them into risky
  revolution strategies
• Intellectual property rights (Example Philipss
  and Sonys respective patents in DVDs and CDs)
• Legal protection against imitation by competitors
• Ability to Innovate (Example NBC in color TV)
• Resources capabilities that enable the firm to
  out-engineer the competition.
• First-mover advantages (Example Netscape in
  browsers)
• Technological and market leadership based on
  previous product development work.

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Standards Wars (6)

• Manufacturing capabilities (Example Compaq and
  Dell in computers)
• Efficient production can yield critical cost
  advantages.
• Strength in complements (Example Intels
  promotion of new standards for PC components in
  order to sell CPUs)
• Acceptance of complementary products stimulates
  sales in the market in question
• Reputation and brand name (Examples Microsoft,
  HP, Intel, Sony, and Sun)
• Instant credibility in the marketplace

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Standards Wars (7)

• Two crucial marketplace tactics Pre-emption
  Expectations Management
• Pre-emption is based on an early lead and
  positive feedback
• Techniques Early product launches, marketing
  aimed at pioneers, penetration pricing (below
  cost), etc.
• Expectations Management is about establishing
  credibility with customers
• Techniques Announcing upcoming products to
  freeze rivals sales assembling allies and
  making grand claims for your product.

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Standards Wars (8)

• Defending a dominant (winning) standard
• Stay on your guard (e.g., avoid growing
  rigidities like those of Frances Minitel)
• Offer customers a migration path (e.g.,
  Microsofts embrace and extend philosophy
  towards improvements)
• Commoditize complementary products (e.g., Intels
  support for innovation in complementary products)
• Compete against your own installed base (e.g.,
  Intels constant efforts to drive innovation
  faster)
• Protect your position (e.g., Microsofts use of
  license clauses to ensure that OEMs shipped
  Windows 95)
• Leverage installed base (e.g., control over an
  interface to extend leadership from one side to
  the other.)
• Stay a leader (e.g., Ciscos use of all profits
  from estabished products to buy up firms
  developing the next generation)

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Standards Wars (9)

• Rear-Guard Actions (for those who fall behind)
• These strategies often entail defending remaining
  niche markets, but they may also involve
  leapfrogging. In either case, customer
  management is a key concern.
• Adapters and Interconnection
• Negotiating access to the larger network is
  vital. (E.g., Atari Nintendo). So is
  performance (E.g. Digitals Intel emulator for
  its Alpha chip.)
• Survival Pricing
• A temptation that should be resisted (E.g.,
  Quattro Pro vs. Lotus 1-2-3 and Microsoft Excel
  in 1993)
• Legal Actions
• If all else fails, sue. (E.g. anti-trust
  action against Kodak)

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Standards Wars (10)

• Summing up
• First, It is important to understand what type of
  standards war you are waging.
• The key factor here is compatibility between new
  rival technologies and established products
• Three main types of standards war
• Rival Evolutions
• Evolution vs. Revolution
• Rival Revolutions

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Standards Wars (11)

• Second, seven critical assets determine the
  strength of your position
• Control of an installed base
• Intellectual property rights
• Ability to innovate
• First-mover advantages
• Manufacturing abilities
• Presence in complementary products
• Brand name and reputation.

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Standards Wars (12)

• Third, some main lessons for strategy and
  tactics
• Assemble your allies beforehand
• Consumers, suppliers of complements, even
  competitors
• Pre-emption is a critical tactic
• Rapid design, early deals, and penetration
  pricing
• Managing consumer expectations is crucial in
  network markets
• Early announcements, prominent alliances, and
  visible commitments to your technology
• When you have won, dont rest easy
• Backward compatibility should not block product
  improvement
• If you fall behind, avoid survival pricing, it
  just signals weakness.
• Instead, establish a performance advantage, or
  use converters / adapters to interconnect with
  dominant standard.