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McGraw-Hill/Irwin
Agenda
Dominant Designs Multiple Dimensions of Value / Competition Winner-take-all Markets Standard-setting Emergence of Rules and Laws
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If HD-DVD had not pulled out of the market, would the market have selected a single winner or would both formats have survived? Does having a single video format standard benefit or hurt consumers? Does it benefit or hurt consumer electronics producers? Does it benefit or hurt movie producers?
1. Lower cost for single format to have just one development
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Blu
SONY (has blue) If goes to Sony, they win (hypotehtically +$5B) Loss
DVD
Losses (hypothetically 100M investment) Win
Toshiba
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Overview
Many industries experience strong pressure to select a single (or few) dominant design(s). opportunity to sell complimentary products There are multiple dimensions shaping which technology rises to the position of the dominant design. Firm strategies can influence several of these dimensions, enhancing the likelihood of their technologies rising to dominance.
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Dominant Designs I
Increasing returns to adoption
When a technology becomes more valuable the more it is adopted. Two primary sources are
learning effects and network externalities.
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Dominant Designs II
Prior Learning and Absorptive Capacity
A firms prior experience influences its ability to recognize and utilize new information.
Use of a particular technology builds knowledge base about that technology. The knowledge base helps firms use and improve the technology
Suggests that technologies adopted earlier than others are likely to become better developed, making it difficult for other technologies to catch up. *Advantage for original technology producer to push your standards as soon as you can. Otherwise, if its someone elses tech its best to wait until that tech has swung a certain way *Sony gave cheaper incentives to Time Warner (cheaper licensing)
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Network externalities also arise when compatibility or complementary goods are important
E.g., Many people choose to use Windows in order to maximize the number of people their files are compatible with, and the range of software applications they can use.
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Self-Reinforcing Cycle
A technology with a large installed base attracts developers of complementary goods; A technology with a wide range of complementary goods attracts users, increasing the installed base. A self-reinforcing cycle ensues:
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Theory In Action
The Rise of Microsoft
In 1980, Microsoft didnt even have a personal computer (PC) operating system the dominant operating system was CP/M. However, in IBMs rush to bring a PC to market, they turned to Microsoft for an operating system and Microsoft produced a clone of CP/M called MS DOS. The success of the IBM PCs (and clones of IBM PCs) resulted in the rapid spread of MS DOS, and an even more rapid proliferation of software applications designed to run on MS DOS. Microsofts Windows was later bundled with (and eventually replaced) MS DOS. Had Gary Kildall signed with IBM, or had other companies not been able to clone the IBM PC, the software industry might look very different today!
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Dominant Designs IV
Government Regulation
Sometimes the consumer welfare benefits of having a single dominant design prompt government organizations to intervene, imposing a standard.
E.g., the NTSC color standard in television broadcasting in the U.S.; the general standard for mobile communications (GSM) in the European Union. Creates a monopoly and creates barriers to entry
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Dominant Designs V
Increasing returns indicate that technology trajectories are characterized by path dependency:
End results depend greatly on the events that took place leading up to the outcome.
A dominant design can have far-reaching influence; it shapes future technological inquiry in the area. Winner-take-all markets can have very different competitive dynamics than other markets.
Technologically superior products do not always win. Such markets require different strategies for success than markets with less pressure for a single dominant design.
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A new technology that has significantly more standalone functionality than the incumbent technology may offer less overall value because it has a smaller installed base or poor availability of complementary goods.
E.g., NeXT Computers were extremely advanced technologically, but could not compete with the installed base value and complementary good value of Windows-based personal computers.
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Installed Base
Te ch. Val ue
Installed Base
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Challenge is when does dominant platform cause PERVERSE effects versus constructive effects.
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Discussion Questions
1. What are some of the sources of increasing returns to adoption? 2. What are some examples of industries not mentioned in the chapter that demonstrate increasing returns to adoption? 3. What are some of the ways a firm can try to increase the overall value of its technology, and its likelihood of becoming the dominant design? 4. What determines whether an industry is likely to have one or a few dominant designs? 5. Are dominant designs good for consumers? Competitors? Complementors? Suppliers? 6. How does dominant design (or its absence) affect the learning process in an industry? 7. What about disruptors effects?
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Alternative Examples
Dairy: Product quality; labeling Banking: EFT protocols
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Standards-setting bodies
Fields Regulatory body Accounting (US) FASB Electrical connections IEEE Stock markets (US) SEC Broadcasting (US) FCC Food quality (US) US Dept. of Agric. Pharma FDA (US)
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Collective Action
By the industry on itself
Dominated by one firm Democratic: requires cooperation Hardin (1968) Tragedy of the Commons
By government
Local (zoning laws, food inspection) State National
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Frontier Entrepreneurship
No rules in new spaces Initiative wins in vacuums Primitive force-justice Emergence of community standards Creation of policing power Consolidation of community standards Evolution of standards Disruptive forces (social, political, technological, economic)
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