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					Bjarne Berg - INFO 8203. Information Systems Strategy Economics and Policy

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Article review Author(s): Chen, Pei-Yu and Forman, C. Citation: Can Vendors Influence Switching Costs and Compatibility in an Environment with Open Standards? MIS Quarterly, Vol. 30, August 2006.

Overview: In This paper the authors examine the 22,000 samples collected by Harte Hanks from 1996 to 1998 to see if vendors are able to maintain high switching costs from their equipment despite open standards. The area being examined is the relatively standardized routers and switches such as those sold by Linksys, Cisco and others. In the paper the authors find that vendors can employ a variety of methods to either create real switching obstacles or create perceived obstacles. The author starts with an overview of the market ($116 billion in 2000), and a short literature review. This is followed by a background of the IT component and the history of routers and switches. Since the standards of routers and switches are well adopted by vendors and customers, the authors hypothesis that “positive switching costs does not exists in the market for routers and switches”, seems reasonable. Overall the authors examine 6 hypothesis and 2 sub hypotheses related to the switching costs and strategies. Findings: The authors find that overall there are seven strategies that an organization can leverage offensively or defensively to create actual or perceived switching costs. These strategies are linked to either a product type or a marketing type strategy. It is important to note that most perceived switching costs were created by marketing, while actual switching costs were usually related to the product type. The first strategy was to create horizontal compatibility with other products within the vendor‟s offerings. This entails adding features that makes your product more suited as integrated with your other product and thereby increase the risk that those added features will not be available to the customer if they switch one part of your products. The second strategy is to create „perceptual compatibility”, this is used in marketing to create uncertainty, or increase the perceived risk of a switch by playing on the fears of customers that the next solution may be incompatibility with others. The third strategy is to employ “vertical compatibility”. This is to modify the compatibility of other related products so that other products that you sell are better suited to the existing standard. This is a products strategy and requires actual changes in products associated with the core standardized product. The fourth strategy is to bundle the products into products suites that is sold as a whole including the standardized components and the customized items as well.. The fifth strategy is to offer UNCC – Ph. D. Information Technology Dr. Ram Kumar - http://www.belkcollege.uncc.edu/rlkumar/

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Bjarne Berg - INFO 8203. Information Systems Strategy Economics and Policy

Article review

lower price to customers and thereby increase their shopping costs since a switch will not only reduce the price of the item from a competitor, but also increase the price for existing products that is not bought from the competitor. The sixth strategy is to actively work on getting the customers to delay the adaptation of the new features, or standards by using marketing to create uncertainty. The last strategy is to target a specific market segment (going niche) and thereby provide specialized service, know-how and avoid to directly competing with the major players in the field. By looking at the inherent switching costs relative to those by various vendors, the researchers were able to classify the different strategies employed. The first step was to look at the variances between the vendors and thereby finding the base (all technology have some switching costs, and it is only when those are abnormally high that we can see what defensive strategy is being employed (if any)). They used a one year lag in investments and looked at 3 possible choices (routers, switches, or both). The analysis was looked at initial/existing buying patters vs. changes in buying patterns over a 3 years period (6,596 observations in 1996, 6,923 in 97; and 9,249 in 98). The research established abnormal differences between the vendors in terms of switching, indicating that vendors were successful in impacting the outcomes. I.e. for buying routers and switches together for 3Com or Bay were more statistical significant that for Cisco (2.3899, 1.9863 and 0.402 respectively). This indicated that the value of buying both routers and switches from the same smaller vendors was statistically more significant that from the larger. This implies that the smaller vendors may be using this as a defensive strategy to protect their market by increasing the shopping costs. One interesting finding was that there were no statistical significant differences in buying patters of companies of various sizes. Implications: This research shows that the idea that standards will remove all capabilities to build in pricing into the products is not correct. Companies will employ a variety of defensive strategies to maintain profitability and lock-in customers to their products, even if the general product is „generic‟ in-terms of standardized capabilities. Another interesting finding was that the customer characteristics were different across the 3 core vendors (3Com, Cisco, Bay). This indicates that the vendors had segmented the customer base and catered to different segments and thereby maintained some pricing power. The authors state that the segmentation achieves this by reducing the intensity of competition. They also noted that the strategies to increase switching costs in some cases (i.e. Cisco‟s customer switch from routers to switches), were actually a contributing forced in delaying adaptation of new information technology. UNCC – Ph. D. Information Technology Dr. Ram Kumar - http://www.belkcollege.uncc.edu/rlkumar/

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Bjarne Berg - INFO 8203. Information Systems Strategy Economics and Policy

Article review

Finally, the authors examine why a significantly higher switching cost was observed for 3Com, Vs. Cisco and Bay networks. They found that as market share declined this vendor became more aggressive in increasing switching costs than the companies that experienced market share gains. Again, this indicates that the 8 introduced strategies are primarily defensive in nature. Summary and Opinion: Very interesting article that demonstrates empirically what one would expect, but elevates the discussion for opinions to actual knowledge. The reasoning for the use of formulas could have been shortened, but overall a very good article..

UNCC – Ph. D. Information Technology Dr. Ram Kumar - http://www.belkcollege.uncc.edu/rlkumar/

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