Intergenerational Competitive Strategies for Industry Standards

: This paper first presents the following as obstacles to the generational switch of industry standards: (1) magnitude of installed base, (2) ample scope for technological progress based on existing standards, (3) limited applicability of accumulated technology to new standards, and (4) lack of investment capability. Next, we examine strategies to overcome such obstacles and migrate to new standards. Finally, we analyze the cooperation between a company that advocates new standards and one that produces complementary products when implementing those standards through the case study of the family console game industry. The results of analysis demonstrate that Nintendo has a traditional self-reliance strategy, whereas new entrant Sony has a collaborative one.


Introduction
As is well known, securing the industry standard is critical in corporate strategy, particularly for products affected by network externality. Companies have fiercely competed over formats for music records and VTRs in the past and, more recently, for third-generation mobile phones. In these lines of business, the system that is set as the industry standard greatly influences a company's subsequent competitive edge.
Where network externality is involved, supply-demand behavior and anticipation thereof (e.g., knowing the supplier and consumers behavior) become more important for a product to be the industry standard than the extent of the product's functional superiority. To influence prediction and establish a favorable industry standard, a company may delay the launch of a product and move in step with or disclose its technology to other companies and actively encourage imitation. Such practices are frequently observed in these types of industry (Asaba, 1995).
Once established, an industry standard tends to steer the industry over a long period. However, control based on a specific industry standard does not persist indefinitely. Setting standards for a given product entails reducing the freedom to choose technology. When very detailed and rigorous technical specifications are adopted, the range of technological choice will be greatly reduced, and the scope for product differentiation and product improvement will possibly disappear in extreme cases. Consequently, when facing newly developed technologies that could not be anticipated when the existing standards were set and cannot be integrated into existing standards, companies must change the current industry standard to utilize the new technologies. 1 1 For research on the relationship between standardization and corporate Users can maximize their benefit from the effects of network externality by preserving the existing industry standard. However, by doing so, they will face a dilemma as the products and services with even better functionality that incorporate new technologies cannot be used indefinitely. Moreover, companies that have been defeated in the standardization race are likely to promptly advocate a new standard on the basis of new technology and endeavor to make it the new industry standard. This paper analyzes the main factors that hamper the generational switch of industry standards and illustrates competitive strategies necessary for this switch. Strategies designed to develop next-generation industry standards can be called intergenerational competitive strategies whereas strategies to establish industry standards are defined as intragenerational competitive strategies.
Generational switch is a phenomenon observed in nearly all industries, but it is particularly prominent in industries that face rapid technological progress, such as the ICT industry. This paper discusses the family console game industry, which exemplifies this phenomenon. 2

Obstacles for Changing to New Standards
During the generational switch of an industry standard, if companies suffer defeat in the standardization race, they obtain the opportunity to reverse their fortunes if leading companies are unable to maintain compatibility with existing standards. However, it does not necessarily follow that a new product incompatible with the industry standard will fulfill the expectations of the company strategy in Japan, see Asaba (1995), Shintaku and Eto (2008), Shintaku, Konomi, and Shibata (2000), and Yamada (1993Yamada ( , 1997. 2 Shintaku, Tanaka, and Yanagawa (2003) provide a detailed analysis of hardware and software in relation to the console game industry.
launching it and that the generational switch from the industry standard will progress smoothly. Excess inertia comes into play when users continue to opt for an older product, although they all welcome the new product. Conversely, the effects of excess momentum can result in a complete switch to a new product, notwithstanding the social desirability of preserving the older product (Farrell & Saloner, 1987).
The reason for such situations arising is the uncertain success of a new product. As a result, a user's options change depending on his or her predictions of other users' purchasing behavior. A new product will not gain popularity if the majority of users are pessimistic about its prospects. This self-fulfilling prophecy results in excess inertia.
Conversely, excess momentum arises if the majority of users are optimistic and the product gains widespread acceptance.
The typewriter keyboard is a frequently cited example that illustrates adherence to an older product due to pessimism about the prospects for a new product (David, 1985 The first two relate to the specificities of the existing industry standard, while the remaining two concern the capabilities of individual companies.
The first is the number of users of products based on the existing industry standard, that is, the installed base. The larger the installed base, the higher the value of the existing industry standard, which makes it difficult to promote the widespread adoption of an

Strategies for New Generation
The previous section identified four obstacles. The first was the installed base-an obstacle that is inextricably linked to industry standards. This section examines strategies for migrating to a new industry norm, focusing on the magnitude of the installed base. (1) Companies can expand the performance differential between the new standard and the existing norm. They can achieve a 5 Rofles (1974) demonstrates in relation to a specific standard that there are multiple equilibrium points in models that take user anticipation into consideration and that one of these equilibrium points becomes unstable. This unstable equilibrium point shares commonalities with the critical mass noted here. its appearance in 1982 not only produced better sound quality than the analogue LP record player, but was also a standard that added a new functionality known as random access. Furthermore, two years later the "Discman" was commercialized-a portable device that was inconceivable for using LPs. As a result, the number of CD player deliveries matched that of LP record players within just five years of its launch (Shibata, 1996).

Self-reliance Strategy of Nintendo and Collaborative Strategy of Sony
When companies simultaneously advance heterogeneous new standards, users may refrain from purchasing them until it becomes clear which standard will prevail. As a result, no standard gains ground. This phenomenon can arise in the initial standardization race of a particular product, such as in the case of VHS and Betamax systems for home video recorders. When such a phenomenon arises in a generational switch, however, the refrain from purchasing can be even more common as many users already own a product based on Although there is no conclusive evidence whether Nintendo's delayed launch was intentional from the outset, companies that plan a late launch are known to try to obstruct software companies from switching and discourage users from making purchases by providing advance notice of new hardware (Brandenburger & Nalebuff, 1995 A generational switch, however, can create an opportunity to break this virtuous circle. When deciding on the next-generation standard, the best technology to adopt differs between hardware and software producers, and even among software producers, depending on which software is the main product for the software company. Such differences may break the dominance of Nintendo that has been established. For example, in third-generation game consoles, other companies adopted the CD-ROM as a medium of software storage, whereas Nintendo was the sole manufacturer opting for a conventional ROM cartridge. Nintendo deemed the ROM cartridge better suited to fast moving games, given its far shorter access time compared to the CD-ROM. In fact, the software that Nintendo released exploited this advantage.
Nevertheless, the CD-ROM with its larger capacity was more attractive than the ROM cartridge with high-speed access for Square, which developed role-playing games that did not require rapid movement. Square had been developing software for Nintendo hardware for many years, but opted for Sony's PlayStation as the hardware for Final Fantasy VII. It did so because it decided to orient itself toward realistic image projection through the heavy use of computer graphics to enhance the expressive power of the images. 8 The fact that the choice of technology when deciding on a new standard can give rise to the departure of such a third party is a very serious issue for companies such as Nintendo that advance new 8 Square's internet site, http://www.square.co.jp standards.
Sony was a newcomer to the game console market. It did not have a strong software division, so it deliberately chose a strategy of enhancing incentives for third party software producers to develop software for Sony. First, Sony reduced the contract commission that third parties pay to the hardware producer. The contract commission to Nintendo, including the factory cost and royalty, was 2,500 yen per unit of software sold. By comparison, Sony's contract commission was the higher of 900 yen and 10% of the retail price, that is, 900 yen in most cases, based on retail prices. Second, Sony set the minimum order quantity to 1,000 units, compared to Nintendo's 5,000 units.
Third, it reduced the lead time from order to delivery to approximately one week. Software producers for Nintendo were exposed to opportunity losses and inventory risks because the lead time was two months for ROM cartridge, not to mention the minimum order quantity that was much larger. Fourth, development tools for software development apparently cost over 10 million yen per set for Nintendo. Sony offered this at 2-3 million yen, which enabled low-cost development.
Although Sony was a newcomer, it successfully offered incentives for third parties to develop many software products with the help of these strategies, which contributed to the adoption of the hardware.
The widespread ownership of the hardware has generated a further increase in software. Enix, which produces the popular Dragon Quest series, announced in January 1997 that the next release of Dragon Quest would be from PlayStation. One of the reasons why the company switched from Nintendo to Sony was that PlayStation had the largest user base of the next-generation video game consoles.  However, there is no guarantee that NINTENDO64 will continue to gain further ground with a limited variety of software because Nintendo has narrowed down the third parties, as has hitherto been the case. The adoption of NINTENDO64 depends also on how other types of consoles are being adopted. The PlayStation and the Sega Saturn differ from the Mega Drive in that they rise along their lines more rapidly, that is, gaining ground more quickly than in the past.
Therefore, it cannot be concluded from this figure that neither of the two consoles will become the new industry standard.
However, there seems to be two options for a company that advances industry standards and attempts to increase the supply of complementary products. The first option is to build a cooperative relationship with suppliers of complementary products in advance, increase the variety of complementary products, and thus make the hardware more appealing. By contrast, the other strategy is to adopt a strategy to reinforce its own complementary product division, prioritize the adoption of its hardware, and then attract third parties with a large installed base.

Conclusion
In this paper, we have discussed competition and cooperation among companies regarding industry standards. Network externality comes into play in markets for products in which industry standards play a key role, so business practices that are not observable in ordinary markets become apparent. The fundamental reason why such business practices occur lies in the significance of expectations.
Product manufacturers, those of complementary products, distributors, and users all form expectations: which company will introduce which product, how many consumers will purchase a particular product, the diversity of complementary products, pricing, and technological trends and speed. Companies attempt to influence expectations because these expectations can at times be more important than the pricing or performance of a product in determining the outcome of the competition between the companies. This is what generates behavior characteristic of these markets.
There are two noteworthy points in relation to influencing expectations. The first is the importance of commitment.
Commitment toward product development and production, the complementary product business, and the levels of distribution fosters trust in a company's product. It also adds momentum to product adoption and dispels the market apprehension that exists during the market launch and generational switch of standards.
The other point is building a cooperative relationship with other companies. Strategic theories to date have discussed how to eliminate competitors and ease competitive pressure. Porter's (1980) theory on competitive strategy is a typical example of this. In contrast, a vital issue in the competition for an industry standard is how best to draw competitors into the ring.
The importance of industry standards in relation to competition between companies has come to be recognized in recent years, and actual business practices have developed in a manner that reflects this awareness. Competition and cooperation among companies have become intertwined in the wake of such increasing awareness, and underlying strategic aims appear to have become more complex.