Strategy and Technological Innovation

1. Strategy and technological innovation
Assignment for part-time MBA Competitive Strategies, week 5
By Gulcin Askin, Michelle Donovan, Kivanc Ozuolmez and Peter Tempelman
October 1, 2012

2. In the first part of this paper we explore the difference in perspectives on competitive strategy
between Porter-type IO, the Resource Based View (RBV) and the authors for this weeks
assignment: Porter (1980), Anderson and Tushman (1991), Arthur (1996), Stoelhorst (2004
and 2005) and Christensen, Raynor and Verlinden (2001). The second part of this paper
applies the arguments of Arthur (1996) and Christensen et al. (2001) to the case studies of the
PC and VCR industry.
The articles of Porter (1980), Anderson and Tushman (1991), Arthur (1996), Stoelhorst (2004
and 2005) and Christensen et al. (2001)’s all have certain elements in common. Porter’s
(1980) ‘evolutionary process’, Anderson and Tushman’s (1991) concept of ‘technical
discontinuity’, Christensen et al. (2001) ‘disruptive technology model’ and Stoelhorst’s
(2004) ‘four phases model’ all describe the life cycle of a technical innovation from inception
to maturity. The basic pattern of these cycles is that they start with a revolutionary invention
(phase 1) which is further being developed (phase 2). At some point a winning technology
becomes the standard (phase 3). The technology then reaches a mature stage and
improvements to it are relatively small (phase 4). There are multiple implications for
competitive strategy. Depending on the industry, the duration of these stages varies and
through innovation, the cycle can be influenced. Accordingly at each stage, the nature of the
competition may differ and prediction of forthcoming changes becomes more difficult.
Anderson and Tushman (1991) argue that management can expect the phases to happen. They
clearly define some predictable events which take place after technical discontinuity, one of
which is the emergence of a dominant design which is usually pioneered by veterans in the
industry. Christensen et al. (2001) also argue that management can predict the different
phases. Arthur (1996) has a number of similarities to Porter (1980), Anderson and Tushman
(1991), Stoelhorst (2004) and Christensen et al. (2001), e.g. the possible predominance of an
inferior product (as the dominant design) or multiple potential outcomes, but he adds an
interesting element: the concept of increasing returns which he describes as ‘that which is
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3. ahead to get further ahead’ (Arthur 1991, p. 100) and is rewarded ‘fat profits’ (Arthur 1991, p.
102). The argument is that in knowledge based industries there is a positive feedback loop.
Once a firm has a product that gets ahead of the competition the market tilts in favour of this
product (market instability), the product ‘locks-in a market’ (becoming the winning
technology – phase 3 mentioned above) and generates fat profits for the winner. He puts
product competition in first place ahead of competing firms. Christensen et al. (2001)
elaborate on where the profits of a product go to. In their view, it depends on the phase a
product is in. In the early phases the characteristics of a new technology make it profitable to
operate as an integrated company. Once a product reaches maturity profits are primarily made
in the back end of the value chain by suppliers of subsystems. They do not say whether these
profits are ‘fat’ in the Arthurian sense. Stoelhorst (2005) contests the argument by Arthur that
increasing returns always result in fat profits. The ‘paradox of increasing returns’ (Stoelhorst
2005, p.14) states that in order to set a dominant standard (the winning technology), ubiquity
is needed. It is not guaranteed however that he who sets the standard will be rewarded fat
profits. The fat profits go to the owners of the scarce resources that are needed to produce
products that use the winning technology. Accordingly, the increasing returns argument does
not identify the eventual beneficiaries of profits derived from becoming the standard.
In light of the above, the articles by Porter (1980), Anderson and Tushman (1991), Arthur
(1996), Stoelhorst (2004 and 2005) and Christensen et al. (2001) all describe the competitive
process as a dynamic process. Companies have to battle to make their disruptive technology
(Christensen et al. 2001), technological breakthrough (Anderson and Tushman, 1991) or
embryonic technology (Stoelhorst, 2004) the dominant standard. Whether they succeed
depends on the initial conditions, the sequence of events during the competitive process and
the role of small, random events (Arthur 1996). Additionally, depending on the dynamic
nature of the competition described in each article, adaptation, configuration and repositioning
become significant in order to maintain sustainable profits in the market. Previously discussed
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4. ideas of the Austrian School and Schumpeter (Jacobson, 1992) also emphasize the importance
of entrepreneurial activity and innovation to obtain higher returns. In this respect, managerial
activity which restructures the activities, operations, position, etc. of the company in line with
phases experienced in the market, stands out as a new and dynamic perspective which
contributes to higher returns.
The description of the competitive process as a dynamic process is a significant difference
from the RBV as represented by Peteraf (1993) and Barney (1995), and Porter-type IO as
represented by Porter (1979).
Porter (1979) sees (competitive) strategy as fit: the competitive strategy of a firm is to fit to its
circumstances, and a position is sustained by barriers to competition. Competitiveness can be
increased by either producing more value for customers, or produce at lower costs.
RBV sees competitive strategy (obtaining competitive advantages) as resulting from
heterogeneity/valuable and rare resources, ex-post limits to competition/inimitable resources
(Peteraf, 1993/Barney, 1995), ex-ante limits to competition, imperfect mobility of resources
(Peteraf, 1993) and the organization, which should be able to exploit the competitive potential
of resources (Barney, 1995).
As can be concluded from the above both RBV and Porter-type IO are inherently static in
their explanation of difference in competitive advantage. Neither provide insights into where
the barriers to competition that they refer to come from. RBV and Porter-type IO describe the
characteristics of a competitive situation in which a firm takes a favourable competitive
position. The route how to get there however is not provided by them.
Stoelhorst (2004) supports his view on Resource-based competitive advantage over
technology lifecycles by using historical evidence and case studies from the PC and VCR
industries. Both industries widely demonstrate what Arthur (1996) and Christensen et al.
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5. (2001) discussed on highly dynamic industries, increasing returns, disruptive technologies and
changes of the product phases.
Christensen et al. (2001) state that, in the early days, when a product’s functionality does not
yet meet the needs of customers, companies compete on the basis of product performance.
Stoelhorst (2004) builds on this and sees competition as much between the technological
options as it is between firms. In the early days of VCR technology, the technological
differences between Ampex’s “transverse scanner” and Toshiba’s “helical scanner” were the
main performance differentiators and the superior “helical scanner” moved the industry to the
“design competition” phase, and meanwhile pushed the leader, Ampex, down in its market
share.
Later, due to its target of adapting video technology to the mass market, Sony became the
market leader. During this phase, evidence to support Arthur (1996)’s mini-ecologies, loose
alliances and web, Sony, Matsushita and JVC signed a cross-licensing agreement on U-matic
technology, where as a result, Sony, Matsushita and JVC benefitted from amplified markets
and U-matic became the industry standard.
Even though Japanese manufacturers had the U-matic agreement, and enjoyed fat profits for
some time, as there wasn’t one dominant integrated player in the market to lead the
standardization, the VCR industry resulted in three different formats; Sony’s Betamax, JVC’s
VHS and Philips. As Christensen et al. (2001) pointed out on the conceptual level,
standardization helped not only the three companies, but also others like Hitachi, Mitsubishi,
Sharp, Zenith and RCA to adapt and gain share in the VCR market. But three VCR formats
resulted in a “standardization battle” and building wide alliances, as Arthur (1999) states,
allowed JVC’s VHS format to take market leadership.
As discussed at the conceptual level by Arthur (1999) and Christensen et al. (2001) equipment
manufacturers and complimentary products took over important roles and led incremental
returns in the VCR market. Pre-recorded tapes especially, with drive from rental stores,
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6. became an important factor. People had VHS players, and therefore rental shops provided
more diverse content on VHS cassettes than Betamax, and therefore people bought VHS
players instead of Sony’s Betamax….
Another example to support Christensen et al. (2001)’s view on equipment manufacturers
taking innovative roles was also observed on Matsushita’s focus on production automation,
and economies of scale implementations where the VCR market was mainly static after nearly
three decades. With its abilities to deliver low-priced VCRs with variety of features,
Matsushita became the market leader in 1980s.
Both Arthur (1999) and Christensen et al. (2001)’s strategic views on technology lifecycles
are widely evidenced by the PC industry as aligned with Stoelhorst (2004)’s phases of
technological industry. Since the embryonic phase, the launch of the first computer kit,
disruptive innovations shaped the industry in its first decade. During the first decade, the
industry was dominated by small (or new) players, all in search of market needs. The best
technological design and real user value remained uncertain until Apple, in cooperation with
VisiCalc showed that the PC is an important tool, which can downsize spreadsheets from
mainframes. Later with other programs like word processors and database management
systems, Apple got its dominant market share.
IBM, on the mainframe side, was quite late to join into the PC industry. But when it saw that
Apple’s PC started threatening IBM’s market, IBM saw an opportunity in a dynamic industry.
As Arthur (1999) suggests, by creating “commando units” IBM applied the necessary
management style for dynamically changing industries and allowed a team of engineers to
bypass IBM’s bureaucratic checks, work far from hierarchy and focus on their mission.
With its reputable name, soon after releasing IBM-PC, IBM became the market leader in the
PC industry. With the market dominance, as expected by Arthur (1999)’s conceptual view of
building technological ecologies, IBM profited from an increasing return loop. The more units
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7. IBM sold, the more attractive the platform became for the software manufacturers, the more
software available for the platform, the more consumers preferred IBM-PCs over competitors.
IBM’s increasing return loop depended not only on the software manufacturers. By sharing its
hardware standards, IBM allowed other manufacturers to build complimentary devices. With
that, IBM ensured all participants remain committed to the alliance and created the standards
for the industry. Apple, on the other hand, by closing its Macintosh system to outsiders,
couldn’t create an alliance across the industry, and locked itself to the 8% market share.
This standardization phase clearly evidences Christensen et al. (2001)’s view on “when the
product isn’t good enough, being an integrated company is critical to success” (p.75). Not
meaning that the IBM-PC was not good enough, but it was a single-designed product and
didn’t meet all individual requirements. As IBM was the most integrated company, in terms
of resources, capitalization and know-how (from the mainframe world) in its time, its success
was expected.
In spite of IBM’s big success and leading position, IBM’s quasi-monopoly got broken quickly
by Compaq by using the standards shared by IBM and reverse-engineering some of the
computer code running on the IBM-PC.
Soon after Compaq, other players like Dell and Hewlett Packard joined the competition and
they found better ways to fragment the industry and serve the market. As evidenced by
Christensen et al. (2001), the standardization unveiled by IBM resulted in the displacement of
the dominant, integrated company (IBM) by the specialists (Compaq, Dell).
Although IBM lost its leadership in the market, the technological ecology it created by its
standards dominated the market for longer years and as shown by Arthur (1999), this ecology
resulted in increasing returns.
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8. References
Anderson, Philip and Tushman, M.L. (1991). Managing through cycles of technological change,
Research Technology Management; 34 (3): 26-31.
Arthur, W. Brian (1996), Increasing Returns and the New World of Business, Harvard Business
Review, (July-August): 100-109.
Christensen, Clayton M., Michael Raynor and Matt Verlinden (2001), Skate to Where the Money
Will Be, Harvard Business Review, (November): 73-81.
Jacobson, Robert (1992), The “Austrian” School of Strategy, Academy of Management Review, 17(4):
782-807
Porter, Michael E. (1979), How Competitive Forces Shape Strategy, Harvard Business Review,
(March-April): 137-145.
Porter, Michael E. (1980), ‘Industry Evolution’, From: Bob de Wit and Ron Meyer (1998),
Strategy: Process, Content, Context, 2nd edition, London: Thomson Learning. (Originally from:
Michael E. Porter (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, pp.
156-164, 184-188.)
Stoelhorst, J.W. (2004), Balancing Resource-Based Competitive Advantage over a Technology
Lifecycle, Paper presented at the Strategic Management Society Annual International Conference,
Puerto Rico.
Stoelhorst, J.W. (2005), Competitive Dynamics and the Paradox of Increasing Returns:
Why Winning Markets May Not Lead to Fat Profits, Working paper, Amsterdam Business
School, Universiteit van Amsterdam.
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