Chapter 4 Standard battles, modularity and Platform Competition

Question 1

What is dominant design?

Answer 1

A single product or process architecture that dominates a product category—­usually 50 percent or more of the market. A dominant design is a de facto ­standard, meaning that while it may not be officially enforced or acknowledged, it has become a standard for the
industry.

Question 2

What are increasing returns?

Answer 2

When the rate of return (not just gross returns) from a product or process increases with the size of
its installed base.

Question 3

Why do many markets coalesce around a single dominant design rather than support a variety of technological options?

Answer 3

One primary reason is that many industries exhibit increasing returns to adoption, meaning that the more a technology
is adopted, the more valuable it becomes

Furthermore, as the technology is used, greater knowledge and understanding of the technology accrue, which may then enable improvements both in the technology itself and in its applications.

Finally, as a technology becomes more widely adopted, complementary assets are
often developed that are specialized to operate with the technology.

Question 4

What are the two primary sources of increasing returns?

Answer 4

(1) learning effects and (2) network externalities

Question 5

What happens when a technology is adopted more?

Answer 5

the more a technology is used, the more it is developed and the more effective and efficient it becomes.2 As a technology is adopted, it generates sales revenues that can be reinvested in further developing and refining the
technology.

Question 6

What is the learning curve?

Answer 6

One example of learning effects is manifest in the impact of cumulative production on cost and productivity—otherwise known as the learning curve. As individuals and producers repeat a process, they learn to make it more efficient, often producing
new technological solutions that may enable them to reduce input costs or waste rates.

Question 7

What are the graphs of the learning curve?

Answer 7

page 74 of Schillingn

Question 8

The learning rate is influenced by which factors?

Answer 8

The results suggest the learning rate can be influenced by factors such as the nature of the task, firm strategy, and the firm’s prior experience

Question 9

What is absorptive capacity?

Answer 9

The ability of an organization to recognize, assimilate, and utilize
new knowledge.

Question 10

Why do some firms fall behind the technology frontier find it so difficult to catch up?

Answer 10

Firms that without investment in technology development may find it very difficult or expensive to develop technology in a subsequent period. This explains, in part, why firms that fall behind the technology frontier find it so dif-
ficult to catch up.

Question 11

What do learning effects suggest concerning early technology offerings?>

Answer 11

In sum, learning effects suggest that early technology offerings often have an advantage because they have more time to develop and become enhanced
than subsequent offerings.

Question 12

What are network externalities or positive consumption externalities??

Answer 12

Also termed positive consumption externalities, this is when the value of a good to a user increases with the number of other users of the same or
similar good.

Question 13

What is installed base?

Answer 13

The number of users of a particular good. For instance, the installed base of a particular video game console refers to the number of those consoles that are installed in homes
worldwide.

Question 14

What are complementary goods?

Answer 14

Additional goods and services that enable or enhance the value of another good. For example, the value of a video game console is directly related to the availability of complementary goods such as video games, peripheral devices, and services such
as online gaming.

Question 15

What is the self-reinforcing cycle of installed base and availability of complement goods>?

Answer 15

The availability of complementary goods attracts users, increasing
the installed base

A large installed base attracts producers of complementary
goods.

Question 16

What have prompted a dominant design?

Answer 16

in some industries, the consumer welfare benefits of having compatibility among technologies have prompted government regulation, and thus a legally induced adherence to a dominant design. This has often been the case for the utilities, telecommunications,
and television industries, to name a few.

Question 17

What happens to firms that adopt a dominant design?

Answer 17

A firm that is able to lock in its technology as the dominant design of a market usually earns huge rewards and may
dominate the product category through several product generations

Question 18

What do increasing returns to adoption imply?

Answer 18

Increasing returns to adoption also imply that technology trajectories are characterized by path dependency, meaning that relatively small historical events
may have a great impact on the final outcome

Question 19

What is path dependency?

Answer 19

When end results depend greatly on the events that took place leading up to the outcome. It is often impossible to reproduce the results that occur in such a
situation.

Question 20

What are some factors that influence the fate of a technology?

Answer 20

Though the technology’s quality and technical advantage undoubtedly influence its fate, other factors, unrelated to the technical superiority or inferiority, may also play important roles.12 For instance,
timing may be crucial;
How and by whom the technology is sponsored may also impact adoption.

Question 21

What does a dominant design influence?

Answer 21

Thus, a dominant design is likely to influence the nature of the technological discontinuity that will
eventually replace it

Question 22

Which firms do usually win?

Answer 22

Technologically superior products do not always win—the firms that win are usually the ones that
know how to manage the multiple dimensions of value that shape design selection.

Question 23

What is the value of a new technology>

Answer 23

e value a new technology offers a customer is a composite of many different things.

standalone value of the technology combines with the value created by the size of the installed base and availability of complementary goods.

Question 24

What is the technology’s standalone value?

Answer 24

A technology’s standalone value refers to the things it can do or its sources of appeal that are not due to its installed base or available complements

Question 25

What is the value of a technology driven by?

Answer 25

They argue that it is important to consider six different utility levers, as well as six stages of the buyer experience cycle, to understand a new technology’s utility to a buyer. The stages they identify are purchase, delivery, use, supplements, maintenance, and
disposal. The six utility levers they consider are customer productivity, simplicity, convenience, risk, fun and image, and environmental friendliness

Question 26

With what do the new benefits have to be considered to determine the value?

Answer 26

the new benefits have to be considered with respect to the cost to the customer of obtaining or using the technology—it is the ratio of benefits
to cost that determines value

Question 27

why even innovations that offer significant improvements in technological functionality often fail to displace existing technologies
that are already widely adopted

Answer 27

Visualizing the value of technological innovations in this way makes it clear why even innovations that offer significant improvements in technological functionality often fail to displace existing technologies that are already widely adopted: Even if a new innovation has a significant advantage
in functionality, its overall value may be significantly less than the incumbent standard

Question 28

When users are comparing the value of a new technology to an existing technology, they are weighing a combination of….

Answer 28

combination of objective information (e.g., actual ­technological benefits, actual information on installed base or complementary goods), ­subjective information (e.g., perceived technological benefits, perceived installed base or complementary goods), and expectations for the future (e.g., anticipated technological
benefits, anticipated installed base and complementary goods)

Question 29

What is vaporware?

Answer 29

Such a tactic also underlies the use of “vaporware”—products that are not actually on the market and may not even exist but are advertised—by many software vendors.

Question 30

How to use the tactic of the vaporware?

Answer 30

By building the impression among customers that a product is ubiquitous, firms can prompt rapid adoption of the product when it actually is available. Vaporware may also buy a firm valuable time in bringing its product to market. If other vendors beat the firm to market and the firm fears that customers may select a dominant design before its offering is introduced, it can use vaporware to attempt to persuade customers to
delay purchase until the firm’s product is available.

Question 31

when an industry has network externalities, how does the value increase?

Answer 31

the value is likely to increase in an s-shape as shown in Figure­4.6a. Initially, the benefits may increase slowly

However, beyond some threshold level, the network externality returns begin to increase rapidly,

until at
some point, most of the benefits have been obtained and the rate of return decreases.

Question 32

What will happen when 2 technologies compete for dominance?

Answer 32

When two technologies compete for dominance, customers will compare the overall value yielded (or expected) from each technology

Question 33

if both technologies earn similar network externality returns to market share, but one technology offers greater stand-alone utility, what happens to the indifference point

Answer 33

However, if both technologies earn similar network externality returns to market share, but one technology offers greater stand-alone utility, the indifference point will
be shifted in its favor

Question 34

What happens in the graph when customers attain their desired level of network externality benefits at lower levels of market share

Answer 34

In this graph, the curves flatten out sooner, implying that the maximum amount of network externality value is obtained by customers at lower levels of market share.

In this case, customers may face a relatively large indifference region within which neither technology clearly dominates.

Question 35

What happens in markets where a single firm produce both the platform and all the complements?

Answer 35

In markets like these, rather than having a single firm produce both the platform (e.g., the smartphone operating system) and all of the complements (e.g., applications for the smartphone), industry players will instead often use modularity to create a platform ecosystem where many different firms contribute to the product system.

Question 36

What is modularity?

Answer 36

The degree to which a system’s components can be separated and
recombined.

Question 37

How can products be made modular?

Answer 37

Products may be made increasingly modular both by expanding the range of compatible components (increasing the range of possible product configurations), and by uncoupling integrated functions within components (making the product modular at a finer
level)

Question 38

What is modularity and platform ecosystems?

Answer 38

A. Traditional integrated product bundle:
* Provider tries to meet buyers needs itself
* No customization, no
external compatibility

B. Product bundle with third-party complements: * Compatibility with thirdparty choices expands
options for customers

C. Product bundle with third-party components and complements:
* Customer has even Example: Android device
greater range of
configuration choices

Question 39

How are the majority of products modular at some level?

Answer 39

The majority of products are modular at some level.
There are a great many more products that are modular in that the customer can choose components but not assemble the end product themselves.

Question 40

What are the advantages of tightly integrated product systems and modular systems?

Answer 40

A tightly integrated product system might have components that are customized to work together, which may enable a level of performance that more standardized components cannot achieve. The producer of a tightly integrated system also has more control over the end product, which can enable them to better
monitor quality and reliability.

An integrated product may also be more attractive to a customer that does not want to choose or assemble components themselves. Modular products, on the other hand, often offer more choices over function,
design, scale, and other features, enabling the customer to choose a product system that more closely suits their needs and preferences.

Second, because components are reused in different combinations, this can achieve product variety while still allowing scale economies in manufacturing the individual components. This is known as economies of substitution.

Question 41

What is economies of substitution?

Answer 41

components are reused in different combinations, this can achieve product variety while still allowing scale
economies in manufacturing the individual components

Question 42

When does modularity become increasingly valuable in a product system?

Answer 42

(a) diverse technological options available to be recombined, and

(b) heterogeneous customer preferences

Question 43

What are platform ecosystems?

Answer 43

refers to a system where elements share some form of mutual dependence. A platform in this context is a stable core that mediates the relationship between a range of components, complements, and end users. Thus platform ecosystem refers to a system of mutually dependent entities mediat­ed by a
stable core.

Question 44

How can the platform’s boundaries be well-defined ?

Answer 44

A platform’s boundaries can be well-defined with a stable set of members dedicated wholly to that platform, or they can be amorphous and changing, with members
entering and exiting freely, and participating in multiple platforms simultaneously.

Question 45

On what does the success of individual members depend?

Answer 45

Because it is the overall appeal of the ecosystem that attracts end users to the platform, the success of individual members depends, at least in part, upon the success of other members of the ecosystem—even those with which they may be simultaneously competing. Furthermore, in many platforms there are switching costs that make it difficult or costly to change ecosystems. Platforms and their complements often make investments in co-specialization or sign exclusivity agreements that bind them into stickier, longer-term relationships than the market contracts used in typical reseller
arrangements.

Question 46

How is a platform ecosystem a hybrid organizational form?

Answer 46

It is, in essence, a hybrid organizational form.26 It strikes a compromise between the loose coupling of a purely modular system and the tight coupling of a traditional integrated product.

It enables customers to mix and match some components and complements, while still enabling some co-specialization and curation of the complements and components available for the system

Question 47

Why are platforms more are valuable than a tightly integrated product?

Answer 47

First, platforms will be more valuable than a tightly integrated product when

(a) customers are diverse and want more choices than a single firm can provide,

(b) when third-party options are diverse and high quality,

(c) when compatibility with third-party products can be made seamless without integration, and/or

(d) when the platform sponsor is powerful enough that it can retain control over quality and the overall product architecture without producing the complements itself

Question 48

Why will platforms be more valuable than purely modular systems?

Answer 48

Looking at it from the other direction, platforms will be more valuable than a purely modular system when

(a) complements are nonroutine purchases with uncertainty (and thus the customer prefers to have some shepherding by the platform sponsor),

(b) when some integration between the platform and its complements provides performance advantages, and/or

(c) when important components of the ecosystem require subsidization (e.g., the market is unlikely to provide all the complements the end customer needs at adequate quality or value).

Question 49

How are platforms a compromise between pure modularity and pure integration?

Answer 49

Pure Integration *
* *
Combinations determined by producer
High co-specialization Producer controls quality
and compatibility

Pure modularity
-More choice and configurations
-No co-specialization
-Quality and compatibility
may be uncertain

Platforms *
* *
Third-party components and complements curated by platform sponsor
Choice and reconfigurability but shepherded by platform sponsor
Some co-specialization