Conflicting technical standards are seemingly everywhere: CDs and DVDs, telephony systems, computer operating systems, electronic file formats. As the rate of technological innovation continues to accelerate, and as electronic systems become more complex and involve growing numbers of complementary components, technical standards take on increasing strategic importance and need to be managed accordingly.

Conflicting standards can have terrible effects on industry attractiveness. Customers and builders of complementary products postpone or avoid purchases and investments in systems that might end up on the losing side of the standards conflict on in overly narrowly circumscribed markets. Writable DVD players have not taken off in large part because of the number of incompatible types. The problem has been exacerbated by the "laser wars" (blue lasers, red lasers), creating further incompatibility issues. These deferments and under-investments by customers and complementors create their own vicious cycle, magnifying the original effect of the standards war on market size and growth — complementors wait for greater customer uptake, and customers delay or forgo purchase of a product lacking sufficient complements. Consequently, the market is smaller than it could be, has a lower growth rate, and is highly fragmented. While revenues and profits drop as a result, costs can go up as firms design, test, and produce to multiple standards.

Conflicting technical standards often arise unintentionally as a narrow coalition of players optimizing locally, leading to sub-optimal outcomes at the global level, as in cases such as electrical socket plugs and electrical voltage. Conflicting standards can also arise from standards wars — intentional battles for preeminence of one technical standard over another as a means of gaining a dominant market position — can be even more devastating in their consequences. As technological innovation accelerates, standards wars become increasingly common.

In addition to the negative impacts outlined above that result from all cases of conflicting standards — smaller and more fragmented markets with lower growth rates and higher costs for producers — standards wars have additional downsides. First, they increase risk and uncertainty for the firms engaging in the standards war. A priori, a firm often is uncertain of which standard will eventually prevail and if a firm’s standard loses the war, it can be hugely expensive given the winner-take-all nature of standards wars. The browser wars are a good example. In the end Internet Explorer won the browser, leaving all but nothing for the rival, Netscape. This risk is exacerbated by regulatory risk; If regulatory agencies get involved in setting a standard different from that pursued by a given firm, the firm can incur substantial market share loss and costs for re-designing and re-tooling to the new regulated standard.

Second, as a consequence of the costs of being on the wrong side of a standards war, firms engaging in standards wars tend to “fight to the death”. For example, manufacturers of industrial process control equipment had been used to captive markets and failed to perceive the need for interconnectability in the communication protocols, once users decided to mix suppliers. The result was a standards war which lasted several years, the publication of a "non-standard" and no benefit to either manufacturers or end-users. The greater the sunk investments into the standard and the standards war, the greater is the creeping commitment to keep up the fight in the hopes of justifying the unrecoverable past expenditures. The costs associated with attempting to win the standards war can escalate to the point where even the victor gains only a Phyrric victory, with the profits failing to offset the costs of the war.

Some have argued that standards wars are socially beneficial in that they allow for the stronger standard to emerge. Yet a cursory look at some recent standards wars suggests this is often wishful thinking. Which standards emerge as triumphant from standard wars is often as much a function of the strength of the firms or coalitions behind the standards and the happenstance of timing and critical mass as it is of which standard is actually technically superior. The classic example is the VCR. There were originally three formats: VHS, Beta and V2000. While no one remembers V2000, even though many believe it was technically superior.

None of this is to say that engaging in a standards war is always poor strategy. There are times when a firm or coalition of firms can come to dominate an entire market through a strong proprietary standard. However, given the increasing speed with which competitors can design competitive products with comparable functionality, the opportunities for extended quasi-monopoly rents through standards dominance are receding. Markets with two competing but functionally converging standards are unstable and/or sub-optimal, with tendencies toward either reduction to a single standard or with two competing market segments continuing with reduced incentives for entry for complementors and consumers.

These trends are amplified in the electronics sector where there are network externalities where the value of one consumer’s product is increased as a function of the number of other consumers using the same product (e.g., in telephone networks, email). The effects have been dramatic in the difference in uptake of mobile phone networks in the US, which had multiple incompatible standards and low and slow initial uptake, versus in the EU, which had a single standard accompanied by much higher and quicker uptake. These network effects are multiplied in contexts where makers of complementary products (e.g., handset makers for mobile telephone networks) must also measure their returns and risks in terms of uptake by the market. In such contexts, managers need to think less about creating a standard as a basis for competition within the industry, and more about building strong standards which improve industry size and growth and making one’s own industry a substitute threat to other industries, rather than vice versa.

Given these considerations, often a better strategic approach is cooptition. That is, first cooperate across with stakeholders across the value net to develop optimal international standards that quickly gain legitimacy and de facto market dominance. This helps to create an attractive industry while reducing costs and uncertainty for individual firms. Then compete along other dimensions in this more attractive industry context. The benefits of this approach are the flipside of the drawbacks to standards wars: larger market, faster market growth, more and faster developed complementary products, less uncertainty and lower attendant hedging costs, and lower costs designing, testing, and building to multiple standards. The larger and more quickly growing market has the knock-on benefit for industry structure of providing less pressure to compete purely on price.

This virtuous cycle has been exemplified with the compact disc. The two main developers, Philips and Sony, determined that agreeing on a technology and sharing it, would generate a market for the product way above anything that would have existed, had they worked separately on their own. How right they were! There was plenty of money for everyone and the product, although probably no longer at its peak, is still going strong, 20 years after it was introduced. There are not many hi-tech products that remain stable and still produce profit over that length of time.

Mangers interested in creating and capturing the value of a single international standard must ensure that their firm actively participates in technical standards workgroups that are well recognized by regulatory agencies, have broad legitimacy, and are international. Standard setting organizations such as the International Electrotechnical Commission (IEC), the International Organization for Standardization (ISO), and the International Telecommunication Union (ITU) are preeminent international standard-setting organizations whose standards are frequently referenced by many governments and transnational organizations such as the WTO.

Actively participating in IEC and ISO technical groups, as opposed to merely using their standards, has the benefit of shaping standards that align with the firm’s technical and strategic goals, ensuring that forthcoming standards are state-of-the-art, and technical knowledge-sharing with industry leaders. Firms that are active, for example, in IEC Working Groups and Technical Committees gain information on technological and market developments in their field of activity, and adjacent fields that are likely to impact their own industries. Firms that merely adopt standard specifications, as opposed to actively participating in their creation, lack the benefits mentioned above and are less up-to-date on the direction in which specifications are evolving. In quickly moving industries, being a step behind competitors can have major competitive and performance implications.

International standards organizations such as the IEC, ISO, and ITU have adapted to the quickening pace of technological innovation and now have multiple methods for quickly establishing proto-standards. For example, Industry Technical Agreements are an IEC imprimatur of recognition for industry groupdeveloped specifications. According to Dr. Leonardo Chiariglione, a key figure in the establishment of the MPEG audio/video compression standard and who helped launch the ITA, "With the ITA, we can do the work wonderfully without the complex infrastructure of a consortium and, potentially reduce the cost of technical development." This imprimatur adds legitimacy to specifications and is a step toward the eventual creation of a full-fledged IEC standard, which itself gains legitimacy through inclusion of all relevant stakeholders — of industry, government, test laboratories, academia — in all IEC national committees’ management.

In summary, standard-creation raises important strategic implications for managers. While there are exceptions, in many cases, multiple standards weaken industry structure and reduce firm profitability. Betting on the wrong horse in a case of conflicting standards can be devastating; hedging bets by producing to multiple standards is costly. Through active participation in standard-creation in the context of recognized international standards bodies, managers can help to ensure that their industry structure is better, that emerging standards align with the firm’s technical and strategic goals, that forthcoming standards are state-of-the-art, and that the firm is plugged into technical developments in their own and adjacent industries.

In politics they say, "Those who don’t do politics get done by politics." The same logic applies in the context of standards. Standards are going to be imposed on your firm in the future: Do you want to actively participate in their creation or leave this to your competitors and others?