Technology markets and positive feedback
We all agree that the markets for technology products are often characterized by instability, unpredictability of its evolution, the ability of competitors to block market access, the ability to dominate the end product and lower profits for the generous the winner. And much of this behavior is due to the effects of positive feedback that occurs between actors in these markets and the economists known as increasing returns on the demand side. This positive feedback is responsible for a product that is beginning to evolve to succeed sole better (and that one with a bad position tends to worsen their situation) and is the cause of market movement, for example, to a certain operating system or a DVD made from among several competitors.
Unfortunately, with this being one of the circumstances that influence the success or failure of a technological product is also one of the worst managed by innovative companies. A classic article on the subject Brian Arthur, “Increasing Returns and the New World of Business”, stresses the importance of properly managing these increasing returns. For the author, the presence of positive feedback in the market based on technological knowledge for several reasons:
* The high cost of the first unit of a product (e.g. R & D), compared with the marginal cost of each additional unit.
* The network effects, both direct and indirect, and its influence on the emergence of standards.
* The costs of changing the products in sophisticated lead users.
While competing in these markets is important to enter the first and have an excellent technology, this does not guarantee success. The key is to manage an active and growing returns that are achieved through:
* Discounting prices aggressively in order to quickly penetrate the market and build installed base (and overcome temptation in the opposite direction of normal pricing to recover higher costs for prior R & D). However, this strategy can be ineffective or even counterproductive if we do not use the active client base to fire the feedback.
* The products do not exist alone, but as part of ecosystems integrated with other products that complement, support and improve. The ecosystem becomes the basic unit of the strategy and the key is to build networks and create products and manage a positive feedback between them that will benefit everyone. If we aspire to be the dominant player that can mean that we should cede benefits to other participants to ensure their commitment to the alliance.
* Under a situation of increasing returns are rivals to withdraw from a market access only if it is locked, but if you think it will be blocked by others. It is important to achieve a psychological position in which we perceive as competitors (future) leader, hence the need for pre-announcement of products, alliances and proclaim sell vaporware.
As in traditional markets is the key optimization (quality, cost …) in emerging markets is in the adaptation, but in a proactive way: identify the new wave coming, and properly positioning the company to take advantage. No wonder Arthur representing traditional industries as well as a factory and technology sectors as a casino where the rules are being defined in the development of the game.
The article ends with some questions that should be the CEOs who work in this new world of increasing returns, some questions still have a total force:
* Do I understand the effects of feedback in my market? Are no longer enough to understand my clients, my dealers and my competitors, it is also necessary to understand the mechanisms of self-enhancement and self-denial that operate among all participants.
* What ecosystems belong? Success or failure depends on my own company but of the network (or networks) to which we belong. It is imperative to actively manage the network.
* Do I have the resources needed to play? Among these we can count: excellent technology, ability to enter the market at the right time, pockets, price strategy and a willingness to sacrifice current profits in exchange for a future advantage. It is not just a question of resources but also of courage, resolution and determination. And part of that value is far out of the market returns to a positive turn. It is better to leave when you can still maintain financial dignity.
* What is the next game? The technology is moving in waves and the ability to obtain benefits under increasing returns depends on being able to see what comes next in this cycle and position – from a technological point of view, psychological and cooperation.
What we said Brian Arthur in 1996 is that there is a new economy and that is not the old textbooks. Only those who understand this new way of thinking will be successful.
Related posts: