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f o r Micro so f t’s Bing Is Failing,” BNET, July 16, 2009. Branding is dif f icult, but if do ne well, even
co mplex tech pro ducts can establish themselves as killer brands. Co nsider that Intel has taken an
ingredient pro duct that mo st peo ple do n’t understand, the micro pro cesso r, and built a qualityco nveying name reco gnized by co mputer users wo rldwide. Scale
Many f irms gain advantages as they gro w in size. Advantages related to a f irm’s size are ref erred to as scale advant ages. Businesses benef it f ro m economies of scale when the co st o f an
investment can be spread acro ss increasing units o f pro ductio n o r in serving a gro wing custo mer
base. Firms that benef it f ro m scale eco no mies as they gro w are so metimes ref erred to as being
scalable. Many Internet and tech-leveraging businesses are highly scalable since, as f irms gro w to
serve mo re custo mers with their existing inf rastructure investment, pro f it margins impro ve
dramatically. Co nsider that in just o ne year, the Internet f irm BlueNile so ld as many diamo nd rings with just 115
emplo yees and o ne Web site as a traditio nal jewelry retailer wo uld sell thro ugh 116 sto res.T.
Mullaney, “Jewelry Heist,” BusinessWeek, May 10, 2004. And with lo wer o perating co sts, BlueNile
can sell at prices that brick-and-mo rtar sto res can’t match, thereby attracting mo re custo mers and
f urther f ueling its scale advantages. P ro f it margins impro ve as the co st to run the f irm’s single Web
site and o perate its o ne wareho use is spread acro ss increasing jewelry sales. A gro wing f irm may also gain bargaining po w er w ith its suppliers o r buyers. Apple’s do minance o f
smartpho ne and tablet markets has allo wed the f irm to lo ck up 60 percent o f the wo rld’s supply o f
advanced to uch-screen displays, and to do so with better pricing than wo uld be available to smaller
rivals.S. Yin, “Repo rt: Apple Co ntro ls 60% o f To uchscreen Supply,” P CMag.co m, February 17,
2011. Similarly, f o r years eBay co uld raise auctio n f ees because o f the f irm’s market do minance.
Auctio n sellers who lef t eBay lo st pricing po wer since f ewer bidders o n smaller, rival services meant
lo wer prices. The scale o f techno lo gy investment required to run a business can also act as a barrier to entry,
disco uraging new, smaller co mpetito rs. Intel’s size allo ws the f irm to pio neer cutting-edge
manuf acturing techniques and invest $ 7 billio n o n next-generatio n plants.J. Flatley, “Intel Invests
$ 7 Billio n in Stateside 32nm Manuf acturing,” Engadget, February 10, 2009. And altho ugh Go o gle
was started by two Stanf o rd students with bo rro wed co mputer equipment running in a do rm ro o m,
the f irm to day runs o n an estimated 1.4 millio n servers.R. Katz, “Tech Titans Building Bo o m,” IEEE
Spectrum 46, no . 2 (February 1, 2009): 40–43. The investments being made by Intel and Go o gle
wo uld be co st-pro hibitive f o r almo st any newco mer to justif y. Switching Costs and Data
Swit ch ing cost s exist when co nsumers incur an expense to mo ve f ro m o ne pro duct o r service to
ano ther. Tech f irms o f ten benef it f ro m stro ng switching co sts that cement custo mers to their f irms. Users invest their time learning a pro duct, entering data into a system, creating f iles, and buying
suppo rting pro grams o r manuals. These investments may make them reluctant to switch to a rival’s
e f f o r t. Similarly, f irms that seem do minant but that do n’t have high switching co sts can be rapidly
trumped by stro ng rivals. Netscape o nce co ntro lled mo re than 80 percent o f the market share in
Web bro wsers, but when Micro so f t began bundling Internet Explo rer with the Windo ws o perating
system and (thro ugh an alliance) with America Online (AOL), Netscape’s market share plummeted.
Custo mers migrated with a mo use click as part o f an upgrade o r installatio n. Learning a new
bro wser was a breeze, and with the Web’s o pen standards, mo st custo mers no ticed no dif f erence
when visiting their f avo rite Web sites with their new bro wser. Sources of Switching Costs
Learning co sts: Switching techno lo gies may require an investment in learning a new
interf ace and co mmands.
Inf o rmatio n and data: Users may have to reenter data, co nvert f iles o r databases, o r may
even lo se earlier co ntributio ns o n inco mpatible systems.
Financial co mmitment: Can include investments in new equipment, the co st to acquire any
new so f tware, co nsulting, o r expertise, and the devaluatio n o f any investment in prio r
techno lo gies no lo nger used.
Co ntractual co mmitments: Breaking co ntracts can lead to co mpensato ry damages and
harm an o rganizatio n’s reputatio n as a reliable partner.
Search co sts: Finding and evaluating a new alternative co sts time and mo ney.
Lo yalty pro grams: Switching can cause custo mers to lo se o ut o n pro gram benef its. Think
f requent purchaser pro grams that o f f er “miles” o r “po ints” (all enabled and driven by
so f tware).Adapted f ro m C. Shapiro and H. V...
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This document was uploaded on 01/31/2014.
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