Anthony J. Pennings, PhD

WRITINGS ON DIGITAL ECONOMICS, ENERGY STRATEGIES, AND GLOBAL COMMUNICATIONS

Determining Competitive Advantages for Tech Firms, Part 2

Posted on | May 15, 2024 | No Comments

In a previous posts on competitive advantages, I discussed some structural characteristics for digital media firms. Using the framework laid out in Curse of the Mogul: What’s Wrong with the World’s Leading Media Companies as a point of departure, I was able to extend their analysis of traditional media companies to the more dynamic realm of digital media and tech firms.

For tech companies to thrive, it’s crucial to grasp the strategic significance of fortifying barriers to entry. This understanding not only solidifies their positions but also paves the way for profitability. In the competitive landscape, it’s vital to comprehend how companies can fend off potential threats from others eyeing their market share. In this post, I delve into the analysis of competitive advantages, broadening the scope to encompass the dynamic world of “tech” companies.

The authors critiqued media moguls for not paying adequate attention to four general categories of competitive advantages: economies of scale, customer captivity, cost, and government protection. Previously, I covered economies of scale and customer captivity. I paid particular attention to network effects, one of the tech firms’ most critical determiners of success. Customer captivity in terms of habits, search costs, and switching costs are also important determinants of success for companies dealing with digital applications, media programming, and physical products.

In this post, I focus on innovation, cost, and government protection. Tech companies need to proactively develop and protect new technologies as well as instill a culture of rapid learning and implementation. They also need access to vital resources, whether raw minerals or refined human knowledge and skills. Lastly, government support can help a firm develop a competitive advantage.

Innovation involves developing, utilizing, and protecting technologies, implementing a climate of learning, and applying new knowledge to fundamental production and work processes. While the book puts these under the category of cost, I thought it might be more beneficial to examine these processes through the lens of innovation. This rationale is partially due to the changes in GDP measurement that now include many aspects of research and development – as well as media production – as capital expenditures and not expenses.

Tech and digital media firms need to develop key proprietary technologies that they can use and protect. This process increasingly involves software enhancements to core production techniques and digital innovations such as recommendation engines and other “big data” solutions, including new developments in AI.

Guarding the firm against cyber-espionage and techniques like reverse engineering have also become a high priority. By disassembling and studying competitors’ hardware or software products, companies can uncover design secrets, algorithms, and proprietary technologies. When startup Compaq reversed engineered IBM’s BIOS, it destroyed Big Blue’s major advantages in the personal computer (PC) industry, allowing many companies to use software designed for the IBM PC on other PCs with Microsoft’s operating system.

Utilizing intellectual property protections such as copyrights, trademarks, and the use of patents, including the business method patent can provide legal protection for a product and protect against encroaching companies. Patents, for example, give the owner the exclusive use of a technology for 14-20 years.

Tech firms should strive for constant improvements in production and efficiencies to separate themselves from the “pack” through organizational learning. They should also be cognizant of the opportunities inherent in disruptive innovations that may initially offer poorer performance, but that may improve or reach new audiences over time.[2] Disruptive innovations can redefine market leadership, create new value propositions, alter industry standards, impact business models, encourage agile strategies, and increase competitive pressure. Companies that can anticipate, adapt to, and leverage these innovations are better positioned to maintain and enhance their competitive advantages.

As digital media and tech companies traffic in various types of communication and content, it is crucial that they find new ways to produce, package and monetize media. The authors are wary of business models based on content “hits” and stress instead the importance of producing continuous media and a “long tail” of legacy content. The long tail refers to unique items that may individually have low demand but can generate significant cumulative market interest or web traffic. This may require innovations in digital media production, programming, and ways to utilize user-generated content. By acquiring and offering a vast library of legacy media content, streaming platforms like Amazon Prime, Hulu, and Netflix can attract a wide range of subscribers, including niche audiences who are fans of older or less mainstream content that might not be available on competing platforms.

Cost issues involve ensuring access to essential resources or what economists call “factors of production” (land, labor, capital, entrepreneurship). These might be cheap energy and other natural resources, talented labor, sources of investment as well as expertise in startups. Google’s Finland data center and the Green Mountain Data Center in Norway are good examples of attempts to use the cold waters in those areas to cool thousands of servers and reduce energy costs.

Raw materials are critical for the high tech sectors and are threatened by geopolitical factors. Rare earth elements (REEs) are especially critical in the manufacture of various high-tech products, renewable energy technologies, and defense systems. Products like EVs, headphones, smartphones, and windmills are reliant on a number of raw minerals including indium niobium, platinum, and titanium. Indium, for instance, is used in touchscreens, liquid crystal displays, and to manufacture microprocessors. Africa and China have been major supplies of critical raw materials for the high-tech sector but Australia, the US, and places like Greenland are increasing production. Ukraine and Russia used to collaborate on the production of neon, a major factor in lasers and semiconductor photolithography, but lately South Korea has successfully sourced locally produced neon.

Access to skilled labor and a climate of intellectual discussion are also important factors to consider. Richard Florida’s thesis that working talent congregates around creative clusters is instructive. He encourages areas interested in developing their creative economies to follow this advice: “To develop economically, Florida encourages nations and regions to support their universities, particularly faculties that do science and technology; cultivate new industries that capitalize on creativity; prepare people for a creative global economy, and foster openness and tolerance to attract the creative class.”[3]

Government protection can also impart benefits to a tech business or be a deterrent to its competitors.[4] From the perspective of an individual firm, it can benefit from outright subsidies, grants, or guaranteed loans. The National Telecommunications and Information Administration (NTIA) is the most supportive US agencies for digital enterprises. The Small Business Administration (SBA) provides investment capital and loans

Preferential purchase policies can give companies an edge. Governments often list specific advantages they are willing to provide smaller to medium-sized enterprises (SMEs), especially those related to specific sustainability, or gender/minority diversification programs. Often, these are advertised as support for specific products or services.

Exclusive licenses have been a historical reality in the media business, primarily due to the importance of a scarce resource – the electromagnetic spectrum. This key media resource has gone primarily to television and radio operators, but the interest in mobile services and Wi-Fi has opened up new frequencies for use. When we created PenBC (Pennings Broadcasting Corp. – seriously), the prime asset was the FCC license for microwave transmission from the satellite dishes to high rise buildings throughout Honolulu.

The 2015 FCC auction of low-frequency spectrum was interesting to watch as incumbents AT&T and Verizon fought off other mobile carriers such as T-Mobile and satellite TV provider Dish Network that have garnered US Justice Department support to achieve a more level playing field. Verizon was the only wireless operator to win a nationwide license in the 700MHz auction in 2008. The new spectrum it won with US$ 20 billion in the 2015 auction allowed it to offer faster speeds on its 4G LTE network, so customers to do more bandwidth-intensive like watching video on their smartphones and tablets.

A government may also erect barriers to entry in favor of domestic industries to support local media content and tech industries. It may utilize import tariffs and/or quotas such as President Biden’s recent tariffs on China’s EVs and semiconductors.

Movies, games, and search engines are some of the areas that have experienced difficulties in breaking into certain markets. Google service in China is extremely limited. Google Maps operates under restrictions in South Korea which refused to export the country’s detailed mapping data to Google due to national security concerns.

Whether environmental, safety-related, procedural, or otherwise, regulations typically impose stricter burdens on some organizations than others. Regulations are often written up by specific companies or related trade associations beholden to specific companies. They are often aided by employees who formerly worked with related government agencies. They often write policy prescriptions and may lobby for government administrative support or legislation. The authors are somewhat glib about government intervention and recommend hiring very good lobbyists.

In “Determining Competitive Advantages for Digital Media Firms, Part 1,” I discussed barriers to entry related to economies of scale such as fixed costs and network effects. I also discussed how different forms of customer captivity can be beneficial for a digital firm. Above, I looked at innovation, cost, and government regulation. It is also important to understand that two or more competitive advantages may be operating at the same time. Recognizing the potential of reinforcing multiple barriers to entry and planning strategies that involve several competitive advantages will increase a company’s odds of success.

Citation APA (7th Edition)

Pennings, A.J. (2024, May 15). Determining Competitive Advantages for Tech Companies, Part 2. apennings.com https://apennings.com/digital-media-economics/determining-competitive-advantages-for-tech-firms-part-2/

Notes

[1] Jonathan A. Knee, Bruce C. Greenwald, and Ava Seave, The Curse of the Mogul: What Wrong with the World’s Leading Media Companies. 2014.
[2] Christensen, Clayton M. The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Boston, MA: Harvard Business School, 1997.
[3] https://apennings.com/meaningful_play/floridas-creative-class-thesis-and-the-global-economy/
[4] The history of early digital innovation and development is a case study in government involvement. IBM got its start with the national census and social security tabulation. The microprocessor and the PC industry emerged through the Space Race and MAD (Mutually Assured Destruction) and the Internet can be said to have taken off after the Strategic Defense Initiative or “Star Wars” required supercomputers at different universities to use the NSFNET. National defense/security spending and other policies can help a company shore up its own defenses against competition.

Share

© ALL RIGHTS RESERVED



AnthonybwAnthony J. Pennings, PhD is Professor and Associate Chair of the Department of Technology and Society, State University of New York, Korea. Before joining SUNY, he taught at Hannam University in South Korea and from 2002-2012 was on the faculty of New York University. Previously, he taught at St. Edwards University in Austin, Texas, Marist College in New York, and Victoria University in New Zealand. He has also spent time as a Fellow at the East-West Center in Honolulu, Hawaii.

Comments

Comments are closed.

  • Referencing this Material

    Copyrights apply to all materials on this blog but fair use conditions allow limited use of ideas and quotations. Please cite the permalinks of the articles/posts.
    Citing a post in APA style would look like:
    Pennings, A. (2015, April 17). Diffusion and the Five Characteristics of Innovation Adoption. Retrieved from https://apennings.com/characteristics-of-digital-media/diffusion-and-the-five-characteristics-of-innovation-adoption/
    MLA style citation would look like: "Diffusion and the Five Characteristics of Innovation Adoption." Anthony J. Pennings, PhD. Web. 18 June 2015. The date would be the day you accessed the information. View the Writing Criteria link at the top of this page to link to an online APA reference manual.

  • About Me

    Professor at State University of New York (SUNY) Korea since 2016. Moved to Austin, Texas in August 2012 to join the Digital Media Management program at St. Edwards University. Spent the previous decade on the faculty at New York University teaching and researching information systems, digital economics, and strategic communications.

    You can reach me at:

    apennings70@gmail.com
    anthony.pennings@sunykorea.ac.kr

    Follow apennings on Twitter

  • About me

  • Writings by Category

  • Flag Counter
  • Pages

  • Calendar

    May 2024
    M T W T F S S
     12345
    6789101112
    13141516171819
    20212223242526
    2728293031  
  • Disclaimer

    The opinions expressed here do not necessarily reflect the views of my employers, past or present.