Strategic standardization.

Can effective standards management boost the bottom line? Compare the commercial success of Microsoft's Windows software with that of Sony's Betamax videocassette recorder.

Tolstoy may have crystallized the nature of standardization when he wrote in "War and Peace": "There is nothing for which we have no standard. And there is no greatness where there is not simplicity, goodness, and truth."

In business terms, standards are critical, because products made by various companies must be compatible--meet form, fit, and function specifications--to be of any practical use. Because of standards, trains zigzag across most national borders on uniform tracks; faxes, phones, and personal computers can be linked to the growing information superhighway; and 35mm film can be bought in the U.S., popped into a Japanese camera, and developed almost anywhere in the world.

In the corporate arena--particularly in the computer and electronic products industries--how companies address standards can be the difference between substantial profit and crippling loss. Consider Sony's trouncing in the 1980s by another Japanese electronic giant, Matsushita, when the latter's VHS video recording format snuffed Betamax to become the standard of choice. Or the royalties Microsoft reaped when its MS-DOS product carved out a near-monopoly in the multimillion dollar market for operating systems.

Given the stakes, many CEOs need to think more strategically about standards, particularly about how they dovetail with research and development, manufacturing, and marketing. Companies must be able to evaluate effectively the costs of implementing or developing certain standards. To do so, they should participate in--or at least follow--the activities of U.S. and global standards committees, such as those under the umbrella of the American National Standards Institute.

Of course, such participation comes at a price. At AMP, a sizable department of more than a dozen full-time professionals coordinates our standards-setting agenda and ensures broad participation by about 500 AMP representatives at some 1,600 U.S. committee meetings each year. But there's a tangible payoff: Companies taking an aggressive approach to standards can derive a critical competitive advantage in shorter time-to-market and a higher "hit" ratio, while those that adopt the more defensive posture of simply creating products that conform to existing standards risk falling behind on the learning curve.

WORLDWIDE STANDARDIZATION

Standards are foremost a market-driven phenomenon. A company no longer can maintain complete control of a new product area or technology. Indeed, in today's global markets, adherence to national standards may not even be enough, as they are ceding ground to global standards. Today, it is the global user community that demands freedom of choice in selecting new systems, equipment, and components. This ensures multicompany industries, opens markets, and promotes global competition. Industry standards level the playing field and assure fair competition, because they require all suppliers to meet a common set of requirements. Thus, they break down trade barriers, provide industry stability, and legitimize new technologies. Standards also reflect the state-of-the-art developments in technology. Because of growing complexity and cost, users increasingly are insisting on standards to assure product interconnectability before they purchase. This endows today's new standards with a so-called "anticipatory nature." This means product standards frequently are set before the technology hits the market.

Even in the most high-technology fields, the marketplace already is demanding standards. However, the industries involved must participate in defining the standards that will hasten the implementation of new technology.

It's important for CEOs to understand the ramifications of worldwide standards issues and to participate in the standards-setting process. In fact, a CEO roundtable on this subject recently took place with participants including Motorola's Gary Tooker, Bellcore's George Heilmeier, and Storage Technology's Ryal R. Poppa.

ADVANCING TECHNOLOGY

Companies with large patent portfolios--those that invest heavily in technology and the intellectual property resulting from it--frequently have viewed standards as a threat they must avoid. Today's market dynamics, however, no longer will support such "lone ranger" attempts, as Sony found out with its Betamax product. Standards today create markets for new products, because they focus on the interfaces between hardware and software elements, rather than dwell on the elements themselves. They indicate what must be done, not how it must be done, which hastens the implementation of new technology.

This allows suppliers to decide how to implement a particular standard and how to improve a product on either side of the interface. These innovations are proprietary and, through competition, advance everyone's standard of living. Until recently, for example, laptop computer manufacturers generated their own standards for adding such options as larger memory chips or faster modems. But when hundreds of makers of computer-related gear--including IBM, Apple, Intel, and Microsoft--decided to support an interface, or "bus," known as PCMCIA (after the industry group backing it--the Personal Computer Memory Card International Association), a multibillion dollar industry for portable computer add-ons emerged.

Suppliers to a standard can still differentiate themselves on the basis of superior implementation of new technology. When standards become rigorous prescriptions of what must be done, they indeed will "commoditize" products and reduce incentives to innovate. Take, for example, the common electrical wall outlet. However, when technology developers allow the marketplace to "legitimize" new products, they are free to proceed with market implementation of that technology and, more important, to direct resources toward even newer technologies and more anticipatory standards.

AMERICANS ABROAD

Another recent global phenomenon is the horizontal standards movement, which refers to standards that cross all industry segments. Already, it is significantly affecting how companies compete internationally. Most organizations are in the process of incorporating ISO 9000--the "quality" system standard--in their facilities and benefiting from it. At AMP, all major production systems are now certified. But some questions about ISO 9000 on scope, cost, and relevance still linger.

Many believe the U.S. was "asleep at the switch" during the development and implementation of this vital standard. Unfortunately, few American companies voiced their concerns at the global implementation meetings. We could have spoken louder and more forcefully on what the form and function of a truly global quality system standard should be. However, the ISO quality certification process is currently under review, and active participation by interested companies and organizations should result in streamlined procedures that improve quality while reducing time and costs.

U.S. industry also must participate in developing environmental management requirements for product and process standards. Already underway, this work has a vast scope and global coverage. Companies must work together to assure that when environmental requirements are added to new product standards--such as the ease of disassembly, recyclability, and energy consumption--the requirements must be based on sound principles that benefit the environment. As it stands now, the implementation costs of such requirements could make those of ISO 9000 pale in comparison.

Meanwhile, there are other concerns American companies should have about their role in the development of global standards. Overall, the U.S. system of voluntary standards is sound. In fact, in large measure, it has been responsible for developing what is still the largest single market in the world. Standards, as they should, will continue to drive technology implementation in this country through market forces. So, although the system ought to remain voluntary, it can be further strengthened by a more formal partnership with the U.S. government.

The European Telecommunications Standards Institute currently is proposing a set of cumbersome and potentially onerous provisions for intellectual property, which many have called a "technology grab." For example, the ETSI policy contains compulsory, not voluntary, licensing. The ETSI policy also carries anti-competitive implications. As adopted, any company that refuses to sign the accord is excluded from ETSI membership, although membership is prerequisite to competing in a European Community market. Such an approach is particularly damaging to the U.S., where royalties for patents and copyrights represent one of the largest profit-generating exports.

U.S. government agencies, working with ANSI, could help solve this dilemma. And such a partnership would be instrumental in airing U.S. businesses' views in other forums that address global standards. These include the General Agreement on Tariffs and Trade, the Pacific Area Standards Congress, Pan American Standards Commission, European Committee for Standardization, the European Committee for Electrotechnical Standardization, and the North American Free Trade Agreement. Global standards must not be permitted to become non-tariff barriers to trade.

Advancements in technology are proceeding at such a rate that U.S. standards development processes are having difficulty keeping pace. This, in turn, creates more and more consortia, and their attendant costs (some consortia require participation fees of up to $25,000), and to more conflict among standards developers as the market validates some standards and rejects others. Using the burgeoning information highway will speed this process, as will relaxing anti-trust regulations that may stifle the development of industry standards.

AMP STANDARDS MANAGEMENT

To ignore standards development is to risk abdicating to the competition key decisions that will impact the bottom line of new product performance. AMP attempts to minimize this potential problem by involving our standards professionals in corporate strategic planning.

At AMP, those who deal with standards participate in the annual presentation of these plans to executive management. This process catalyzes the necessary interaction between standards professionals and the rest of the company, particularly the engineering community. It also helps identify the appropriate national and international committees and the opportunities they present. This is true whether the standards are for offensive purposes, such as to enhance the market position of a new product, or defensive ones to enhance the position of a product already in the marketplace.

Effective work in the standards development committees depends on continuous cooperation among AMP's standards professionals and its engineering communities, consisting of more than 2,000 people with technical degrees. AMP's standards staff identifies the committees and trains employees on how to participate effectively within legal boundaries.

These standards-making professionals are responsible for bringing together everyone at AMP who needs to be a part of the standards strategy sessions that are called to address particular committee requirements. To help ensure this, our standards professionals have prepared a unique, comprehensive, 8-hour training course and accompanying manual for committee members, covering such topics as the importance of standards to our business, preparing for meetings, and anti-trust aspects. After the training, engineers can better represent the technical merits of AMP's products during the intense committee deliberations that determine which product best meets marketplace needs. So far, AMP employees in five countries have been trained. The course now is being used to develop ANSI's national training program to improve the global competitiveness of the U.S. standards development process.

In recent years, AMP's most significant standards challenges have come from European and other international organizations, such as CEN, CENELEC, and ETSI. In fact, the U.S. Department of Commerce indicated in a recently published document that national standards are diminishing in importance to international standards. Our experience within and without the U.S. supports this. For these reasons, and to further our global objectives and those of our global customers, AMP formed its Global Working Group for Standards in 1991. The group seeks to set the direction and coordinate implementation of our global standards strategies. It consists of one key individual from each of our global companies located in countries where standards-making activities are especially critical. To date, this group includes representatives from the U.S., Japan, and six European countries.

Communicating developments in our standards work--to employees and other corporations--is an important part of our program. Accordingly, we distribute monthly reports on standards activities and issues. In addition, many data bases on standards can be computer accessed instantly by more than 8,000 of our employees around the world.

To be sure, standards-making can be costly. Out-of-pocket expenses incurred (largely travel-related) are a function of the number of committees in which a company participates. But the alternative is to implement a standard when it has been completed--or to go it alone.

If you're not Sony or another leviathan with seemingly bottomless pockets, a Betamax-type debacle may deliver a knockout punch. And while many companies continue to enjoy success with a follow-the-leader approach, few become market leaders. And there is always the risk of being left in the dust.

William J. Hudson is president and chief executive of AMP Inc., a $4 billion in sales worldwide producer of electrical and electronic connection, programming, and switching devices based in Harrisburg, PA. This article is based on a speech he presented at the American National Standards Institute's 1994 annual conference.