Blog: Monday 12 January 2015
VHS versus Betamax, Google versus Yahoo, and more recently the battle between iOS and Android. During the last few decades, format wars have been fought across various forms of technology, usually with fierce battle lines drawn, sides clearly divided by titans of the industry, and millions, or even billions, of dollars at stake. So how can your newly developed technology challenge and beat the established order? New research by PhD candidate Simon den Uijl of Rotterdam School of Management, Erasmus University (RSM) reveals the steps which will make a technology the new norm for the industry and for consumers.
In high-technology industries such as consumer electronics, information technology, telecommunications, and biotech, ‘winner-takes-all’ technology competitions are increasingly seen. These high-stakes games show competitive dynamics that differ from the markets in which many competitors co-exist relatively peacefully, because they often have a single tipping point which shifts market adoption towards one particular technology. With his dissertation The Emergence of De Facto Standards, Simon den Uijl fills the gap of academic knowledge with a robust clarification of how firms can shape the chances of their technology becoming the de facto standard.
Den Uijl’s research shows that although there are many elements involved, companies can shape the chances of their technology emerging as the de facto standard through strategic decision-making. He dispels the hypothesis that there is one winning formula to make a technology a success. The emergence of a de facto standard displays a unique path that can be divided into six phases, and can be influenced by 34 unique elements including market mechanisms, models for creating a ‘technology bandwagon’, and elements for shaping the chances of the technology being selected. Of these elements, 17 were found to be subject to strategic decision-making; for example pricing, entry timing, strategic partnerships, marketing, and technological superiority.
Historically, the emergence of a de facto standard was determined by the consumer; the market determined the winner according to the technology meeting the customer’s needs. However, industries increasingly compete on platforms; technologies that establish a base of users and complementors (e.g. content providers), whereby both groups reinforce each other. Den Uijl found that in the competition between video formats Blu-ray and HD-DVD, the industry itself determined the outcome for the first time. Once the Hollywood movie studio Warner Bros. dropped support for HD-DVD, the network of complementors tipped towards Blu-ray, and technology corporation Toshiba was forced to forfeit its HD-DVD technology – incurring a US$ 1 billion loss.
By combining all these insights, Den Uijl found that companies can enhance the likelihood of winning a format war by applying six steps. These are tightly linked to the six phases, and utilise elements that are subject to strategic decision-making.
In the first phase, while doing research and development, the company needs to determine its technological proposition and the extent to which it would like to engage in collaborative development.
The second phase involves preparing for market entry when the focus should be on building an organisational community of supporters.
Initiating market adoption is the third phase when the firm should focus its efforts on jump-starting the process of increasing returns, for example through setting a low initial price to quickly reach a wide fraction of the market and initiate word of mouth recommendations (penetration pricing).
In the fourth phase, the initiative needs to gain ‘critical mass’ by growing the network of customers or complementors to a point that the market will reach a tipping point.
Winning the mass market is the fifth phase; the technology needs to overtake the incumbent de facto standard by focusing on the ‘four Ps’ of marketing (product variety, price, place, and promotion), harnessing economies of scale, and incremental improvements to the technology.
In the sixth and last phase, post-dominance, the de facto standard has been established and the focus should be on entrenching the technology by creating ‘lock-in’ that dis-incentivises consumers to switch to an alternative technology, and leveraging the strong position of the technology by expanding into adjacent markets.
Increasingly, companies compete on platform technologies that bring together groups of users in two-sided networks. Examples include smartphones and online search engines. In industries governed by platform technologies, it is common to see one emerging as the de facto standard because they are especially prone to network externalities, for example when the benefit that can be derived from a technology increases exponentially with the number of users. Competitions for the de facto standard are high-stakes games. These ‘winner-takes-all’ markets demonstrate very different competitive dynamics than markets in which many competitors can co-exist relatively peacefully, as they often have a single tipping point which shifts market adoption to one particular technology. The academic field lacks a robust clarification on how firms can shape the odds of their technology emerging as the de facto standard.
This study develops an integrative framework and corresponding methodology for understanding the process by which a technology becomes the de facto standard. By applying the framework to several technology competitions, insight is provided in how firm-, technology- and market-related elements influence technology competitions. Results indicate that the emergence of every de facto standard displays a unique path. This path can be divided into six phases, and can be influenced by 40 unique elements, of which 19 are subject to strategic decision-making. Patterns between technology competitions indicate a common set of focal points per phase.
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