382 • Chapter 11 • Sustaining Competitive Advantage

the network and attracting even more customers. Competition to grow the installed base can be very costly, however, as firms invest heavily in advertising, pay steep fees to encourage production by complementary product manufacturers, and offer deep discounts to lure early adopters. When the prospects for a costly standards battle loom large, the firms might be better off agreeing to a common standard.

•To win a standards war, it is critical to attract early adopters. Sellers need to tailor their products to the tastes of early adopters while hoping that mainstream consumers will be sufficiently attracted by these products to jump into the market themselves.

•When complementary products are extremely important, a standards war may deter manufacturers of the complements from entering the market until a standard has emerged. This can destroy the value of all the competing standards and stifle the growth of the entire industry.

•By the same token, the manufacturers of the complementary products will favor the standard that provides them with the greatest share of the value added. Thus, to win a standards battle, a firm must take care of the other firms in its value net.

Many of these factors came into play in the battle between Sony and Toshiba for dominance of the high-definition home theater market. Both invested heavily in their proprietary formats, hoping to secure monopoly position. Sony enjoyed a huge advantage in installed base by incorporating Blu-ray technology into its Playstation gaming consoles. The two technologies coexisted for several years in the mid-2000s; during this time there was only a trickle of software available for either platform. Eventually, Toshiba realized that it could not outlast Sony and announced that it would stop producing new HD-DVD hardware. Almost immediately, movie studios ramped up production of Blu-ray movies.

Knocking off a Dominant Standard

It is not easy to knock off a dominant standard. The installed base of the incumbent gives it a decided advantage in any battle. The rival standard can succeed, however, especially in markets with virtual networks. There are two keys to success. First, the rival must offer superior quality, or new options for using the product, that would appeal to a large segment of current users. Second, the rival must be able to tap into complementary goods markets.

Both keys to success were available to Sony and Toshiba as they attempted to replace the dominant DVD standard. Growing sales of big-screen plasma and LCD televisions meant that there were millions of homeowners able to exploit the superior resolution of high-definition discs. And the movie studios were anxious to jump-start software sales, much as DVD did for them a decade earlier. Sony may have won the format battle yet lost the war; during the time it took for Blu-ray to emerge victorious, consumers had already started experimenting with and enjoying direct streaming over the Internet.

Early-Mover Disadvantages

Some firms pioneer a new technology or product but fail to become the market leader. Royal Crown in diet cola and EMI with computerized axial tomography (the CT scanner) are notable examples. This suggests that it is not inevitable that early movers will achieve sustainable competitive advantage in their industries.

Early movers may fail to achieve a competitive advantage because they lack the complementary assets needed to commercialize the product. This happened to EMI Ltd., a British music and electronics company perhaps best known for signing the