Standards,
Innovation, and Survival The role of dominant standards in the life cycles of industries
We're part of a highly innovative industry and the creative folks among
us have a love/hate relationship with standards. Managers tend to see the
benefits of standards: they reduce learning requirements and improve quality.
Engineers tend to be more ambivalent because standards appear to limit
their creative choices.
In 1984 I attended
a management seminar at which Prof. Jim Utterback of MIT gave a talk on
the life cycles of industries. He described the critical the role that
dominant standards play in those life cycles. He emphasized the similarities
in the life cycles of several industries including the automobile, airplane,
typewriter, photography, and ice making. (He published a book on this subject
in 1994: Mastering
the Dynamics of Innovation, Harvard Business School Press) It struck
me at the time that his analysis applied directly to the Personal Computer
business in particular, and to high technology in general.
A typical example
of his thesis is illustrated in the curve of Fig. 1 which shows the number
of automobile manufacturers in the US over a 60 year period
Fig. 1: Number of US Automobile Manufactures from 1900
to 1960
The Automobile Industry circa 1923
In 1923 there were some 75 manufacturers, and Ford had more than a 40%
market share with the Model T, a car that it had produced since 1909! By
1925 the number of manufacturers had shrunk to 38. In 1926 Ford made no
cars for several months as it desperately sold off inventories of the Model
T and retooled to build the Model A. If Ford had not had $300 million cash
in the banks in 1925, it would not have survived. It took Ford over 50
years to rebuild its market share to a mere 17%!
The event that
precipitated this consolidation and the perilous decline in Ford's fortunes
was the introduction of the closed-steel-body chassis in 1923 by the Dodge
brothers. By 1926, 80% of automobiles sold in the USA had closed-steel-body
chassis. (According to Jim Utterback, two other standards, the internal
combustion engine and rear-wheel drive, were dragged along with the closed-steel-body
chassis.) The customers made this innovation a dominant standard by voting
with their wallets. Ford's Model T didn't meet the standard with its assembled
chassis, high off the ground and far less comfortable. Neither Ford's market
share nor its dominant distribution system slowed the stampede to the dominant
standard.
Prior to 1923
the automobile industry was in what Prof. Utterback calls the product
innovative phase of its life cycle: when a variety of technically
changing products are supported by a multitude of suppliers. The suppliers
make relatively small numbers of widely varying products. New suppliers
enter the market on the basis of technical innovations that create products
with unique advantages.
After 1923,
when the dominant standards emerged, the automobile industry moved into
what Prof. Utterback calls the process innovative phase.
In this phase, successful innovation is limited to product improvements
that enhance the standards, to manufacturing improvements, and to improvements
in marketing and distribution. Products that directly attack the market
standard are doomed. (Front wheel drive and the Stanley Steamer died in
1923.)
Once a market
standard emerges, the number of suppliers shrinks and those who survive
must effectively produce and sell large quantities of standardized products.
Their manufacturing efficiencies and the effectiveness of their distribution
channels determine their relative market shares and profits
The Computer Industry circa 1983
The computer business had its 1923 in 1983 when the IBM PC emerged as the
industry standard. Apple, like Ford had a dominant market share in 1983
but lost it because it failed to adapt to the dominant market standard
for personal computers: Open Architecture.
Open Architecture
computers are those which have hardware, software, and add-ons supported
by a multitude of vigorously competing suppliers! Open Architecture dragged
along the IBM PC technical standards (including the PC bus, Intel's 8088
architecture, and MS-DOS) just as the closed -steel-body chassis dragged
along the internal combustion engine and rear wheel drive.
Apple has spent
the last decade losing market share with its proprietary products. Its
sales pitch has been that its products are easier to use. Apple is probably
right; but it doesn't matter. Ease of use is less important to the market
than Open Architecture. Now it is also less important than being the overwhelming
market standard that generates a revenue stream in excess of $150 Billion
per year. This revenue stream continues to attract and pay for the latest
and best innovations in hardware and software.
IBM, like Apple,
squandered its opportunity to dominate the very standard it, accidentally,
created. It tried to regain control of the market with proprietary technology
(like Micro-channel, VGA graphics and OS/2) and its (then) dominant distribution
system. It even wasted time with sub-standard products like PC Junior.
(We're probably seeing other companies reprising this error with their
proposed $500 Internet terminals.)
Both Apple
and IBM thought they could get the customers to trade Open Architecture
for ease of use or improved technical performance. They were wrong. Some
day this reality will sink-in on their highly paid executives. Their legions
of ex-customers figured it out years ago.
The companies
that have succeeded in the PC business have done so by enhancing the market
standard without replacing it, and/or by developing superior manufacturing
and distribution systems for the market standards. Intel has aggressively
enhanced the performance of its market standard CPUs. Microsoft, at an
arrogantly leisurely pace, continues to improve the performance of its
operating systems. Companies like WordPerfect, Intuit, and Lotus succeeded
(for a few years) because their products enhanced the standards. Compaq
succeeded at first because it enhanced the standards with improved portability.
It sustained its success in a commodity market by improving its own manufacturing
and distribution systems.
Dominant standards thrive for decades
Once a dominant standard emerges, technical improvements to non-standard
alternatives are largely irrelevant as far as the market is concerned.
This fact has been demonstrated time and again, as the following three
examples illustrate.
In the early
days of electrical power, there were a variety of voltages and frequencies;
each advocated for various technical and/or marketing reasons. Thomas Edison,
for example championed DC as the best method based on technical considerations.
Once 60 Hz, 115 Volts AC became the power standard in the USA, the technical
advantages of DC or of other frequencies and voltages of AC became irrelevant
to the US market.
Prior to 1911
every typewriter manufacturer promoted different arrangements of keys on
their keyboards. Each manufacturer argued technical advantages, but, in
fact, each knew that once a typist learned to use its keyboard, she was
unlikely to buy another product because she would have to relearn to type.
The QWERTY typewriter keyboard happened to be on the first typewriter in
which the typist could see a character immediately after typing it. That
typewriter was introduced in 1911 and became wildly popular because of
the visibility of the typing. The QWERTY keyboard was dragged along as
a market standard, learned by the vast majority of typists. Other manufacturers
were forced to adopt the QWERTY keyboard in order to have a chance at selling
to the majority of trained typists.
In the 1930s,
a man named Dvorak introduced a technically superior typewriter keyboard.
The Dvorak keyboard enables one to type 20% faster, go for hours without
fatigue and learn typing in half the time. Today, it is used by less than
0.01% of the market!
The TV picture
standards of the United States were established in the late 1940's when
technology was limited. Picture quality is marginal. Significant improvements
in picture quality have been available for decades. The European standards,
which were adopted much later, have significant improvements in picture
quality. Those improvements aren't used here because adopting them would
require us to abandon technical standards that connect content producers,
broadcasters, audiences, and TV manufacturers. The
requirement for backwards compatibility with existing standards seriously
limits what can be done to upgrade or change our TV standards, typewriter
standards, power standards, and Personal Computer operating system standards.
Successful
companies, like Sony with its VHS video recording technology and Netscape
with its Internet browser technology, have recognized the importance of
market standards to their long term success. They made "establish
a market standard" their first order of business.
In the battle
between VHS and Betamax video recording standards, VHS won as the market
standard because of the marketing skills of its proponents; Betamax was
technically superior (like Apple's PC) but it didn't matter once the market
standard was established.
Netscape, while
it was still a start-up with virtually no assets, gained an 84% market
share in Internet Browsers by giving away its products. Now that it has
the dominant position, and tons of IPO money in its coffers, it charges
for those products while it vigorously improves their performance. It doesn't
surprise me that Microsoft missed the boat on this one.
What you might do
Ask yourself: Is my industry in its product innovative phase or have market
standards emerged? If there are no market standards, consider likely candidates
and then work to establish them. This might require working with your competitors.
You probably wont control market standards, but if you're worth your salt
you'll get a jump on your competition and rapidly improve your products,
manufacturing, and distribution to sustain your success in the marketplace.
If standards
have already emerged in your markets, adopt them, don't waste time trying
to replace them with your "technically superior" proprietary
products. If you choose to attack a vibrant market standard with an alternative,
you are doomed to failure, or condemned to a relatively trivial niche market.
Your company will probably be among the walking dead.
Jim Utterback
showed the futility of attacking an established standard. He gave historical
examples of the persistent attacks by alternate solutions and successful
responses by companies supporting the established standards. By the way,
there is a way to replace an existing standard with a new one under certain
conditions. However, it is not accomplished by directly attacking the existing
standard. If you're interested in finding out what it is, give me a call.
Miscellaneous thoughts
1. The Intel CPUs are
somewhat proprietary and the Microsoft Software is fully proprietary. However,
the consumers and business customers don't see this when they buy computers.
They select from a variety of fiercely competitive systems that are IBM
PC compatible. The suppliers of these systems are captive OEMs of Intel
and Microsoft. They are forced to deal with proprietary products, and they
shield the end users from most of this humiliation. As a result, the OEMs
do most of the work, take most of the heat from users, and receive relatively
little of the profits.
If either Intel
or Microsoft were foolish enough to eliminate its OEMs, it would be in
Apple's position and eventually vulnerable to a competitor willing to play
the open architecture game. Their current OEM distribution strategies are
downright brilliant. (Note: I discuss the OEM distribution channel and
Intel's strategy at greater length in my book The
Handbook of Channel Marketing.)
2. Motorola's 68000
architecture was cleaner and technically superior to Intel's 8080 architecture.
Unfortunately, it was used in proprietary products (primarily Apple Computers),
so its technical merits relative to Intel's products became irrelevant.
In 1995, Motorola
gave up its race with Intel to develop increasingly more powerful CPUs.
It didn't have the market share, income stream, to continue to fight its
uphill battle. Motorola's fig leaf is to make and use the PowerPC. This
strategy is probably doomed because it's unlikely that the PowerPC will
ever generate a sufficient income stream to keep up with Intel.
3. I first wrote
this article in 1986. I changed very little to update it to 1995, especially
my comments about Apple.
4. For a religious
slant on the standards battle, see my companion essay "The Computer
as God?" That essay deals with the same business issues from a religious
viewpoint: we technologists just reenacted the Protestant Reformation.
IBM was the Roman Catholic church, and Steve Jobs was Martin Luther. Although
this is a humorous look at recent history, it reveals the theology and
fervor of the participants which has driven them to make sub-optimal business
decisions.
5. Jim Utterback
still teaches at MIT. I highly recommend him as a speaker.
Copyright © 1986, 1994,1995 Edwin Lee, All rights reserved.
You may download and reprint this essay provided you include this copyright
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