Session 7: Managing standards

Question 1

When do network extrernalities (standards) arise?

Answer 1

Network externalities are common in industries that are physically networked.

Network externalities also arise when compatibility or complementary goods are important.

Question 2

Who sets standards?

Answer 2

1. “De jure”
   a) set by governments
   b) enforced by law usually
2. “De facto”
   a) set by market
3. Committees
   a) Set by private “clubs”, industry associations (e.g., IEEE)
   b) Or by public national or international agencies

Question 3

The ability of a firm to establish its technology as an industry standard has…

Answer 3

…become a key determinant of its long-term competitiveness.

Question 4

The outcome of standards wars depends on…

Answer 4

…how compatible each player’s proposed new technology is with the existing one.

Question 5

Key assets for winning standards wars include:

Answer 5

1. control over an installed base of users
2. intellectual property rights
3. ability to innovate
4. first-mover advantages
5. manufacturing capabilities
6. brand name and reputation.

Question 6

What are the market strategies in standard wars?

Answer 6

1. PRE-EMPTION: is based on early lead and positive feedback.
   (early product launch, aiming at early adopters, with penetration pricing)
2. EXPECTATIONS MANAGEMENT: is about establishing credibility with customers.
   (pre-advertising, assembling allies, making ‘grand claims’ about your product current or future popularity.)

Question 7

Key learning points in Standards Management

Answer 7

1. Network externalities: the higher the number of users, the higher the value of a technology for these users.
2. Network externalities often drive standards wars between firms proposing alternative technologies.
3. When the switching costs between technologies are high and the benefits of changing to a different technology are marginal, lock-in may occur, sometimes in inferior technologies.
4. Standards wars are hard to predict, but can make or break companies. Who wins is the outcome of a complex interplay of factors.