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Session 8

PARTNERSHIPS & ALLIANCES


27-Jan-15

Copyright: Prakash Bagri (MMI)

Ecosystem

An ecosystem is a community of living organisms interacting with one another and with non-living organisms.
27-Jan-15

Copyright: Prakash Bagri (MMI)

Competitor & Complementor

A player is a
complementor if
customers value your
product more when they
have the other players
product than when they
have your product alone.
27-Jan-15

A player is a competitor if
customers value your
product less when they
have the other players
product than when they
have your product alone

Copyright: Prakash Bagri (MMI)

COMPETITION OR COOPERATION?
27-Jan-15

Copyright: Prakash Bagri (MMI)

Managing Complementors
Hard Power:
Produce some or all strategically important
complements in-house
Threaten to withhold support for a complementors
offerings

Soft Power:
Reduce complementors risk
Articulate a compelling vision driving overall benefit

Combining Hard & Soft Power


27-Jan-15

Copyright: Prakash Bagri (MMI)

Business Ecosystems
What is a Business Ecosystem?
the microeconomies of intense coevolution coalescing
around innovative ideas.
Span a variety of industries.
The companies within them coevolve capabilities around
the innovation
and work cooperatively and competitively to support new
products, satisfy customer needs, and incorporate the next
round of innovation.*

* Source: Moore, James F., The Death of Competition: Leadership & Strategy in the Age of Business Ecosystems

27-Jan-15

Copyright: Prakash Bagri (MMI)

Product leadership has become comparatively easy to dislodge. By contrast, the


environment-shaping leader of a business ecosystem is difficult to dislodge.
Source: Moore, James F., The Death of Competition: Leadership & Strategy in the Age of Business Ecosystems
27-Jan-15

Copyright: Prakash Bagri (MMI)

Factors driving Dominant Design


Open business models
Less radical new products
High R&D intensity

Large number of firms


Emergence of de-facto standards: Get big fast!
27-Jan-15

Copyright: Prakash Bagri (MMI)

Industry Standards
Agreed-upon specifications to ensure technical compatibility
for products across different firms
Presence:
Allows customers to gain
compatibility across various
components of a product
Fear, uncertainty, and doubt
is lessened
Absence:
Customers/ developers of
complementary products
take a wait-and-see attitude

Establish
Industry
Standards

Raise
compatibility of
products for
customers

Increase
likelihood of
addoption

Increased value
to each user

Due to
indirect
network
effects

Due to direct
network effects

Increase
number
of users

Increase incentive
for developers of
complementary

Emergence of Dominant
Design

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Lower fear,
uncertainty
and doubt

Copyright: Prakash Bagri (MMI)

Types of Standard Wars

Key Assets in Network Markets:


1.
2.
3.
4.
5.
6.
7.

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Control over installed base


Intellectual property rights
Ability to innovate
First-mover advantages
Manufacturing capabilities
Strength in complements
Brand name and reputation

Copyright: Prakash Bagri (MMI)

10

Dynamics of Innovation
over a product life cycle

Innovation pace as factor of industrial competition


The Dynamics of Innovation in an Industry
Abernathy & Utterback Model

The rate of major innovation for both products & processes follows a general pattern over time.
Product & process innovation share an important relationship.
Source: Mastering the Dynamics of Innovation: James M. Utterback, 1994

27-Jan-15

Marketing Management in the World of High-Tech & Innovation

12

Rate of Major Innovation

High

Product
Innovation

Stage of Product Life Cycle

Process
Innovation

Low

27-Jan-15

Copyright: Prakash Bagri (MMI)

13

Rate of Major Innovation

Dynamics of the Four Technology Phases


High

27-Jan-15

Product
Innovation

Stage of Product Life Cycle

Process
Innovation

Low

Fluid Phase

Transition Phase

Mature Phase

Discontinuous Phase

Uncertainty in products
and markets
High rate of product
innovation and high
degree of process
flexibility
Fast-growing demand;
low total volume
Greater importance of
product functionality
than brand names
Little direct
competition

Appearance of dominant
design Increased clarity
about customer needs
Increased process
innovation
Importance of
complementary assets
Competition based on
quality and availability

Strong pressure on
profit margin
More similarities than
differences in final
products
Convergence of product
and process
innovations

Invasion of new
technologies
Increasing obsolescence
of incumbents' assets
Lowered barriers to
entry; new competition
Convergence of some
markets as new
technologies emerge

Copyright: Prakash Bagri (MMI)

14

Rate of Major Innovation

Priorities of the Four Technology Phases


High

27-Jan-15

Product
Innovation

Stage of Product Life Cycle

Process
Innovation

Low

Fluid Phase

Transition Phase

Mature Phase

Discontinuous Phase

Development and
preservation of
technology (with a focus
on product development
and aggressive
patenting)
Promotion of
proprietary technology
as industry standard

Realignment of
technological
capabilities with the
dominant design
Continued exploration
of technological
opportunities
Pursuit of a growth
strategy (by building
capacity aggressively or
supplier/ customer
relationships)

Cost control throughout


the value chain
Strong customer focus
Lean and efficient
organization

A need for incumbents


to identify new
technologies and realign
core competencies
An option for
incumbents to exit the
market
Attackers' need to gain
market recognition
Attackers' need to focus
on product
development

Copyright: Prakash Bagri (MMI)

15

Rate of Major Innovation

Alliances in the Four Technology Phases


High

27-Jan-15

Product
Innovation

Stage of Product Life Cycle

Process
Innovation

Low
Fluid Phase

Transition Phase

Mature Phase

Discontinuous Phase

Formation of alliances to
promote technology as
the industry standard
Adoption of licensing
strategies
Formation of marketing
alliances
Formation of technology
alliances with
established companies

Winners' aggressive
licensing to customers
and to companies that
lost the dominantdesign battle
Formation of joint R&D
ventures with existing
companies in the market
Formation of marketing
alliances and signing of
supply agreements to
guarantee product
consistency

Formation of joint R&D


ventures to share risks
and development costs
Formation of marketing
alliances to attack latent
markets or lure
customers
Manufacturing alliances
to ensure availability of
essential products
Open alliances with
suppliers and
customers

Attackers' formation of
marketing alliances to
gain market recognition
Attacker agreements to
supply technology
leaders
Incumbents' acquisition
of the disruptive
technology through
license agreements

Copyright: Prakash Bagri (MMI)

16

The Product Life Cycle: Fluid Stage


Why Partner?
Alliances are valuable among potential competitors to
establish industry standards with:

27-Jan-15

Licensing agreements
Strategic alliances
Diversification into complementary products
Aggressive product positioning

Copyright: Prakash Bagri (MMI)

17

Licensing Agreement:
Company licenses its technology to other manufacturers &
competitors in order to establish its technology as the standard

Advantages

Drawbacks

Ensures wide supply base


for the technology
Limits customer choice of
technologically
incompatible products
Hastens market acceptance
Possibility of larger installed
base
Incentivizes suppliers of
complementary products to
pursue development

Attempt to alter technology


to avoid paying or royalties
Loss of possible monopoly
position
Competition leading to
lower profits

27-Jan-15

Copyright: Prakash Bagri (MMI)

18

Strategic Alliance:
Cooperative agreement with one or more actual or potential
competitors to jointly sponsor development of a particular
technological standard

Advantages

Drawbacks

Help ensure a wide supply


base for the technology
Build positive expectations
for market demand
Co-opt competitors
Reduce confusion in
marketplace
Combined knowledge may
produce superior product

Partner may appropriate


the firms know-how in an
opportunistic fashion

27-Jan-15

Copyright: Prakash Bagri (MMI)

19

Go it alone Strategy for standard-setting


Diversification
Company offers multiple elements of the whole product
solution
Ex: iPod/iTunes, cpu + c/s

Aggressive Product Positioning


Company maximizes size of installed base by penetration
pricing, wide distribution, and many models/versions of
product

Both strategies have pros/cons


27-Jan-15

Copyright: Prakash Bagri (MMI)

20

Reasons for Partnerships


Advantages

Drawbacks

Access resources and skills


Gain cost efficiencies
Speed time-to-market
Access new markets
Define industry standards
Access resources and skills
Gain cost efficiencies
Speed time-to-market
Access new markets
Define industry standards

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Increase project complexity


Loss of autonomy & control
Decisions must be made jointly
External dependency for success
Loss of trade secrets
Attempts to disarm
competition
Dilution of competitive
advantage
Legal issues & antitrust concerns
Failure to achieve objectives due
to Incompatible cultures, trust
issues

Copyright: Prakash Bagri (MMI)

21

Rate of Major Innovation

27-Jan-15

High

Product
Innovation

Stage of Product Life Cycle

Process
Innovation

Low

Copyright: Prakash Bagri (MMI)

22

Rate of Major Innovation

M&A Activity in the Four Technology Phases


High

27-Jan-15

Product
Innovation

Stage of Product Life Cycle

Process
Innovation

Low
Fluid Phase

Transition Phase

Mature Phase

Discontinuous Phase

Acquisitions of startups
by well-established
technology companies
from a more mature
high-tech industry
Corporate equity
investment by wellestablished high-tech
companies

Acquisitions of
competitors by the
winners of the dominant
technology battle
Acquisitions by
established technology
companies entering the
market

Horizontal mergers
between companies
with complementary
products and services
Divestiture of
manufacturing
capabilities that are not
essential
Acquisition of
technology startups
making products that
would be difficult to
develop in-house

Possible equity financing


for attacker from
established companies
Established companies'
move into new markets
through acquisition of
niche technologies
Established companies
acquisition of companies
having product
capabilities
Divestiture of companies
as priorities shift with
market convergence

Copyright: Prakash Bagri (MMI)

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Questions