Standardization and competition

We regularly observe that business people feel a tension between standardization and competitive strategy. They reason that applying standards in their products reduces differentiation and makes it harder for them to compete with other brands that would use the same standard. Consequently, their products carry proprietary interfaces and can only communicate within their own ecosystem, not with competitors’. In the old economy, where companies delivered stand-alone or closed-system products in mature, fixed-size, markets and where competition for market-share was a zero-sum game, such reasoning could make sense.

Today, where most industries are going digital or have already been transformed, the relation between standardization and competition has substantially changed, and the “old” way-of-working is counterproductive.

When the core technology of an industry has been made digital (such as the audio in compact disc, or the light source in LED lighting), connectivity inevitably becomes pivotal in business strategy. Interfacing enables products to simply exchange valuable data as well as operate them within a system context. Different systems in the same environment can more easily become connected and integrated as a next step, and new functionality and benefits start to emerge. In this vein lighting, HVAC and occupancy systems are being combined in Smart Buildings, and music tracks have evolved from an album on a compact disc to huge libraries on servers that stream them on individual requests from millions of different mobile devices simultaneously.

Not only does such a digital system need new technical interfaces, the roles of system modules and interfaces between players in the industry’s value chain often must change as well. This unlocks opportunities for newcomers. For example, Building Management Systems for Smart Buildings are often produced by non- traditional equipment suppliers.

Such an environment is not a zero-sum game: this market for new products has huge potential but must be created and grown. Customers look forward to new benefits and system-features but want to avoid having to lock-in to a proprietary solution.

That is where interface standards have a major role to play. Technically developed and – businesswise – broadly supported by an alliance including the industry leaders, these standards provide credibility to the new products and stimulate market growth. The modern business model is to initially cooperate with others to prepare the foundation for a new mass market and share efforts to grow it. This is then followed by competing for market share “within the standard”, the jointly prepared and harmonized market. The other option is to go it alone, or with a small partner group, and then face competition “between standards”. This may become a standards war; think back to the battle between Betamax and VHS or between Blu-ray and HD-DVD. Studies of ‘standards’ wars invariably show that these are costly, they significantly delay the market uptake and have an all-or-nothing outcome.

A milder case of competition “between standards” is where several companies create their own incompatible niches. The result is a market that starts and remains fragmented, and grows very slowly. This is one of the challenges which the Internet of Things faces. Many parties from different industries prepare to get their share (fair or unfair) of the Holy Grail, often by proclaiming their proprietary technologies as an industry standard while in fact the only thing they do is to create a niche. Their promise may initially attract customers, but in the long run they fish in a small pond, foregoing the big sea.

Broad application of a single standard harmonizes a market. It creates “the network effect” and credibility with industry adopters and customers, which enable the new market to grow to its maximum potential. Obtaining a reasonable market share in high-volume markets in most cases is more attractive than 100% share of a small niche; the more so when the main differentiation is deviation from the standard. And certainly, niches take a lot more marketing efforts to establish.
We’ve worked on both sides of the equation, so if you’re interested in our view on your option to create a niche, call us to set up a meeting.

And if you’re aiming to compete “within a standard”, read our next blog about standardization and competition, or attend our Standards-based Innovation Masterclass (SIM) in November, where this will be one the topics we’re going to cover. Check our website www.sim-masterclass.com. For questions, contact us at www.neovate-ip.com.