Technology adoption results in additional profits
Tyco Electronics/AMP is a big player in the field of electrical and electronic connectors and interconnection systems. Their main competitor dominated the existing US standard. But with a new international standard in preparation, the company has decided to participate in standardization work to have their new technology evaluated and internationally referenced. If they succeed , they will enjoy a global competitive advantage…
A cost-benefit ratio of 1:500
Tyco Electronics/AMP is a big player in the field of electrical and electronic connectors Fibre-optic products, switches and IC sockets. Application tooling is also part of the product family offered by Tyco Electronics. This company has managed to increase its market share of optical connectors by participating in standardization at the national, European and global levels in the following manner:
Locked-in in the home market
In the US market, the ANSI/EIA/TIA 568 standard, published in 1991, was the dominant standard for commercial building telecommunications wiring. Optical connectors are part of the technology and so the standard selected the so-called ST optical connector for this. At that time, AT&T (nowadays Lucent Technologies) was the main producer of this technology, consequently this standard was very beneficial to them.
A global opportunity
The Europeans needed a standard as well, but for commercial reasons, they did not wish to copy the American standard. The European standard should be developed by the European Committee for Electrotechnical Standardization (CENELEC). Since the world is more than just Europe and the United States, the development of an international standard was initiated simultaneously, in parallel to the European one.
How to get involved?
Tyco Electronics/AMP had developed another connector, the so-called SC-connector, with certain technical advantages over the ST connector. In this case the new standards would refer to their technology and this would give them a competitive advantage. Therefore, the company decided to join standardization committees in order to influence the process to their own benefit. This may seem easier than it actually was. One of the first problems was that the topic was dealt with by different standardization committees: three in CENELEC and, at the international level, two in the IEC and a third one in the ISO/IEC Joint Technical Committee 1 on Information Technology. In addition, telecommunications were dealt with by the International Telecommunication Union (ITU). ISO and IEC use the so-called country model which means that, in general, companies do not participate directly at the international level, but do so via the national member body, i.e., the National Standardization Organization (NSO).
An international strategy – a competitive advantage
Being a multinational, Tyco/AMP had the possibility of joining NSOs in several countries. In these countries, the company’s representatives succeeded in convincing the other organizations represented at the national level of the advantages of their technology and several individuals managed to become national delegates I on committees of CENELEC, IEC and ISO/IEC JTC 1. This effort has been successful in the sense that both the international standard and the – slightly deviating – European standard finally refer to the SC connector. This did not mean an exclusive right for Tyco/AMP to produce the technology the standard refers to since the rules and regulations of CENELEC, IEC and JTC 1 forbid that. In respect to property rights, other organizations were to be be allowed to acquire licences on reasonable terms. Nevertheless, Tyco/AMP had a competitive advantage in terms of knowledge time it took to reach markets and, subsequently, economies of scale. When the standards referred to the ST connector, Tyco/AMP would have also been allowed to produce that connector. In that case, however, they would have had to modify their production process and related supporting processes, and pay licence fees to Lucent Technologies. It should be noted that the SC-connector is more advanced and thus more expensive. This offered an additional possibility of a better profit margin.
In the period 1995-2004, the combination of a better market share and better profit margins provided Tyco/AMP with additional revenue estimated to be between US$ 50 and 100 million.. Without the investment in standardization this probably would not have been feasible. The cost of the company’s participation in standardization involved the time investment of the different delegates multiplied with their hourly wages, the travel and accommodation expenses. With the additional costs for testing the total cost was estimated to run between US$ 100 000 and US$ 200 000. ,In turn, this resulted in a cost-benefit ratio of approximately 1:500.
Study by Dr. ir. Henk J. de Vries
Rotterdam School of Management, Erasmus University, The Netherlands
Standards for business – How companies benefit from participating in international standards setting