Sunday Jul 15, 2007

Markets and Standards

 

Much has been written about the role of dominant standards in growing markets in complementary products. In their Competing for the Future, Gary Hamel and C. K. Prahalad summarize the main points:

In the absence of one or two dominant standards, vendors of complementary products can't capture economies of scale because they must design different products for different standards.  The result is diminished potential for economies of scale, higher prices for consumers, and a market much slower to take off. Competing standards confuse customers and make them less apt to buy; many will prefer to wait until a clear winner emerges. When an industry finally coalesces around one or two primary standards, market growth spurts ahead.

For the most part, therefore, companies competing for the future are keen for standards to emerge as early as possible. Not only does this accelerate market development, it also reduces the risk of committing resources to technology or approach that ultimately fails to become the dominant standard.

This view of standards has proved valid in business history. One area where dominant standards play a very definite role involves industries that depend on very large "networks" such as the Internet, telecommunications or various other social and peer-to-peer networks.

The classical view regarding markets and standards needs to be complemented. First, we should be able to observe and try to explain the diversity of standards and markets. There are various niche markets and communities of exchange that require their own particular ways (or standards) for doing and building things. Here, we have a diversity of products that are available in each market community.

Second, standard dominance can be very "thin." Consider the (non-medical) shoe market. When it comes to the design of shoes, there are no "dominant" standards, other than the natural ones such as the bounds dictated by the physiology of feet and the demands of leather or other materials used.

Third, a particular standard can be rooted in a simple response to an inherent need, in a rather informal way. Later, it may become the "dominant standard" where the need has produced a community.

For example, we can investigate the case of giveh. In some rural communities, giveh became the standard shoe. These shoes are still manufactured by hand on a mass scale for everyday use. Givehs have surprisingly standard shapes, and one may encounter highly specialized markets in standard sole pieces, top pieces, thread, lace, etc. Here, we have a prime example of how rural communities give rise to their own standards for purposes of reducing transaction and manufacturing costs without ever holding a standards conference. The "tolerance" of these standards is good enough to serve their community and the relevant markets.

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