Standards ... an Essential Component of Corporate Business Strategy

George T. Willingmyre, P.E.

December 1998

"The road to the City of Emeralds is paved with yellow brick," said the Witch, "so you cannot miss it." If only the correct route in the standards maze was marked as well as Dorothy's path to the magical kingdom of Oz, the arcane world of standards would not be so alien to US business strategists. However, executives who fail to recognize that standards impact their business do so at their own peril. Standards are important competitive tools that can define, limit and even create markets. The shift from national to global markets has made global standards strategy an essential component of overall business strategy. Standards particularly impact the innovative and "high proprietary content" products or services that have traditionally showcased US technology and have been the hallmark of the success of US industry over the years.

Perhaps the dilemma is that there are so many alternatives. "During the years ahead, when you come to a fork in the road, take it" Yogi  Berra. The standards challenge quickly becomes choosing which fork in the road is best: de facto or de jure; international or national; consensus or consortia? The truth is that standards strategy evolves from business strategy and no single approach works best for all situations. The maturity of a market and its traditional standards culture; a company's vision of its competitive edge; and proprietary intellectual property rights (IPRs) all contribute to a company's standards strategy.

Most businesses want the marketplace to select their proprietary technology as the "De facto Standard." One has only to look in the local software store for Windows95 (R) to confirm that "de facto" marketplace standards are alive and well. There is no lack of other success stories. Recall the battle over video tape formats pitting Matsushita's "VHS" against Sony's "Beta." Matsushita's subsidiary, JVC adopted a strategy of freely licensing the VHS technology, while Sony tried to keep its technology proprietary. The rest is history, even though many considered Beta a technically superior product. In the early 60s, there was similar competition between two-track and four-track audio cassette tapes. Philips' tactic of asking only nominal fees for licensing its two-track technology defeated the four track alternative in the marketplace. Early in this century, Bell expanded its customer base through standards strategy. Bell reversed its practice of allowing only Bell affiliates to access its long distance network and opted instead for the business multiplier effect of permitting any equipment that met Bell system standards to interconnect. According to economist W. Brian Arthur, "The utility of a given technology increases as more people select that technology…Over time, as increasing returns tend to create positive feedback…the process of adopting technology will converge on a standard." This phenomenon, often described as the "network effect," occurs when the value of a product or a service to a buyer increases with the cumulative number of other buyers. The network effect leads directly to the marketplace selection of "de facto" standards. Not many companies, however, have the combination of intellectual property rights (IPRs), wherewithal, and good fortune to become the object of "de facto standards." Enter the world of "De Jure" standards.

De Jure standards…standards promulgated by international organizations, national consensus bodies, industry consortia, or governments through a formal process…enjoy a presumption of market acceptance. So businesses work hard in standards committees to create standards that are compatible with or utilize their technology. But in contemplating de jure standards, a company must weigh the benefits of a standard's reference to the company's proprietary technology against possible downsides. Most standards organizations require the owner of any proprietary technology that is essential in order to meet a standard to agree to freely license the proprietary technology on non discriminatory terms. Recently the Federal Trade Commission (FTC) required a significant US computer company to forego its intellectual property rights (IPR) in a technology that was required to comply with a standard. The FTC took this action because the company participated in the development of the standard but failed to disclose that its IPR was essential to comply. Further, the company must maintain procedures to assure that it will not fail to disclose such IPRs in future standards development activities or it will lose the rights to those IPRs as well. This decision has implications for all companies that depend upon IPRs and who participate in standards development activities. Oliver Smoot, Executive Vice President of the Information Technology Industry Association notes in the June 1995 edition of Standard View, "Four types of intellectual property rights are recognized…Patents, Copyrights, Trademarks, Trade secrets…each of these rights needs to be considered in designing a successful standards program."

Many corporate chieftains who employ standards strategy in corporate strategic planning operate in global markets. Working to establish a single international standard helps companies obtain economies of scale in manufacturing a globally-accepted product line. "American companies must understand that standardization is a strategic business issue that has a direct impact on new product development. There is a direct relationship between leadership in standards and leadership in technology. American standards bodies must lead the way in international activities," according to George Fisher, CEO of Eastman Kodak in the October 16, 1995 Business Week. Gerald Ritterbusch of Caterpillar Corporation testified this Spring at a Congressional Hearing on The Increasing Importance of International Standards to the U.S. Industrial Community. Mr. Ritterbusch concluded that harmonized standards at the international level are vital to Caterpillar's competitiveness and that it is imperative therefore, that the company take a leadership position in developing such standards. In Caterpillar's industrial sector, international standards help supplier/customer communication and allow the company to compete on a level playing field. According to Mr. Ritterbusch, "If I were to tell a customer that a certain earth moving machine had an engine power of 300 kilowatts, the customer would have to ask a host of questions to be able to understand just how much power the engine would deliver. But, if I told the customer that the engine delivered 300 kilowatts of power according to ISO 9249, the customer would know exactly what I mean." Helping establish the standard can also provide a competitive edge over the company that does not participate. William J. Hudson, President and CEO of Amp, Incorporated concluded during his 1995 World Standards Day address, "We must all clearly understand the fundamental law of standards development which is that standards are never neutral. They reflect the strengths and innovations of those who offer them to the committees. Not participating in standards abdicates the decision-making to the competition whether it be by company or nation."

Leaders in Government and Technology Policy agree that international standards are important factors in national competitiveness. Arati Prabakar, Director of the National Institute of Standards and Technology notes, "The strategic value of standards to the economy is beyond doubt and the pace of development of international standards is accelerating. What isn't clear is whether we, or someone else, will get the economic advantage. Active participation by American business in the standards process in a strategic sense in critical to ensuring that we secure that advantage." In 1995, the National Research Council (NRC) completed a Congressionally-mandated study entitled, Standards, Conformity Assessment, and Trade into the 21st Century, According to the study, "The growing complexity of standards and conformity assessment systems in many nations however threatens to undermine future trade expansion." Nowhere is the urgency of creating international standards greater than for the Global Information Highway. "A second critical area in which we must have global solutions is standards. The Internet has been successful because it is based on open interpretable standards. In addition to technical standards for the transmission of data across the Network, frameworks are needed in areas such as electronic payment, intellectual property, commercial codes governing contractual agreements, security and privacy," stated FCC Chairman Reed Hundt this June at the INET Conference.

The International Organization for Standardization (ISO), the International Electrotechnical (IEC), and the International Telecommunications Union (ITU) provide the venue for the development of the majority of standards commonly considered "international standards." These are international organizations whose members are many "national" bodies, one per country. For "non-treaty" organizations such as ISO and IEC, most of the developed countries participate through "national standards organizations." For example, ISO members include the British Standards Institution (BSI) in the United Kingdom, the Deustches Institut fur Normung (DIN) in Germany, the Japanese Industrial Standards Committee (JISC) in Japan, and the American National Standards Institute (ANSI) in the United States. Technical Advisory Groups (TAGs) composed of the interested parties in each country typically prepare unified national positions on standards developed by the international organizations. Organizations working on national standards in the same field often sponsor the TAGs under the auspices of the national member body.

The standards of international organizations are often important to global markets because the Agreement on Technical Barriers to Trade (TBT) and the Agreement on Government Procurement (AGP) make them so. The underlying goal of the TBT and the AGP is to promote trade through international agreements for how the marketplace should and should not work. Standards can erect "technical barriers to trade." Bureaucrats can devise laws or regulations more easily met by local producers than by foreign firms. Markets can depend upon standards controlled by the local industries. Governments can issue procurement specifications that favor individual suppliers. The TBT and the AGP are international attempts to remove "unfairly discriminatory" standards as a factor in free trade.

Both the TBT and AGP encourage, pressure and sometimes require governments and private organizations to utilize international standards as the basis for technical rules, marketplace standards and government procurement. See Figures 1 and 2. The TBT applies to governments as well as regional standards groups (such as those in Europe, the Middle East, the Pacific Rim and North and South America); local governments (such as individual states in the US); and private organizations (such as ANSI and other standards developers). A "Code of Good Practice" (See Figure 3) for standards developers describes rules for openness, notification of work in progress, utilization of international standards and consideration of comments received. Exceptions from relevant international standards are subject to challenge and differences from any agreed-upon international standard must be justifiable. Governments report new technical regulations that differ from an international standard and agree to consider comments from other countries. In its 1996 recommendations to the US Government on these matters, the Advisory Committee for Trade Policy and Negotiation (ACTPN) counseled, "The US should…monitor closely the standards-related activities of other World Trade Organization (WTO) members and use WTO dispute settlement procedures against any countries that are not fully implementing their obligations." The ACTPN also reaffirmed its 1994 advice, "The U.S. Government should (1) ensure no downward harmonization of U.S. standards as a result of the TBT Agreement and (2) avoid unwarranted intrusion into US private sector standards activities."

 

Figure One

Excerpts from the Agreement on Technical Barriers to Trade

2.4 Where technical regulations are required and relevant international standards exist or their completion is imminent, Members shall use them, or the relevant parts of them, as a basis for their technical regulations except when such international standards or relevant parts would be an ineffective or inappropriate means for the fulfillment of the legitimate objectives pursued, for instance because of fundamental climatic or geographical factors or fundamental technological problems.

2.5 A Member preparing, adopting or applying a technical regulation which may have a significant effect on trade of other Members shall, upon the request of another Member, explain the justification for that technical regulation… Whenever a technical regulation is prepared, adopted… and is in accordance with relevant international standards, it shall be rebuttably presumed not to create an unnecessary obstacle to international trade.

2.6 With a view to harmonizing technical regulations on as wide a basis as possible, Members shall play a full part, within the limits of their resources, in the preparation by appropriate international standardizing bodies of international standards for products for which they either have adopted, or expect to adopt, technical regulations.

4.1 Members shall ensure that their central government standardizing bodies accept and comply with the Code of Good Practice for the Preparation, Adoption and Application of Standards… They shall take such reasonable measures as may be available to them to ensure that local government and non-governmental standardizing bodies within their territories, as well as regional standardizing bodies of which they or one or more bodies within their territories are members, accept and comply with this Code of Good Practice… The obligations of Members with respect to compliance of standardizing bodies with the provisions of the Code of Good Practice shall apply irrespective of whether or not a standardizing body has accepted the Code of Good Practice.

 

 

Figure Three

EXCERPTS FROM THE

CODE OF GOOD PRACTICE FOR THE PREPARATION, ADOPTION AND

APPLICATION OF STANDARDS

F. Where international standards exist or their completion is imminent, the standardizing body shall use them, or the relevant parts of them, as a basis for the standards it develops, except where such international standards or relevant parts would be ineffective or inappropriate, for instance, because of an insufficient level of protection or fundamental climatic or geographical factors or fundamental technological problems.

G. With a view to harmonizing standards on as wide a basis as possible, the standardizing body shall, in an appropriate way, play a full part, within the limits of its resources, in the preparation by relevant international standardizing bodies of international standards regarding subject matter for which it either has adopted, or expects to adopt, standards. For standardizing bodies within the territory of a Member, participation in a particular international standardization activity shall, whenever possible, take place through one delegation representing all standardizing bodies in the territory that have adopted, or expect to adopt, standards for the subject matter to which the international standardization activity

J. At least once every six months, the standardizing body shall publish a work programme containing its name and address, the standards it is currently preparing and the standards which it has adopted in the preceding period. A standard is under preparation from the moment a decision has been taken to develop a standard until that standard has been adopted. The titles of specific draft standards shall, upon request, be provided in English, French or Spanish. A notice of the existence of the work programme shall be published in a national or, as the case may be, regional publication of standardization activities…The work programme shall for each standard indicate, in accordance with any ISONET rules, the classification relevant to the subject matter, the stage attained in the standard's development, and the references of any international standards taken as a basis.

L. Before adopting a standard, the standardizing body shall allow a period of at least 60 days for the submission of comments on the draft standard by interested parties within the territory of a Member of the WTO. This period may, however, be shortened in cases where urgent problems of safety, health or environment arise or threaten to arise. No later than at the start of the comment period, the standardizing body shall publish a notice announcing the period for commenting in the publication referred to in paragraph J. Such notification shall include, as far as practicable, whether the draft standard deviates from relevant international standards.

N. The standardizing body shall take into account, in the further processing of the standard, the comments received during the period for commenting. Comments received through standardizing bodies that have accepted this Code of Good Practice shall, if so requested, be replied to as promptly as possible. The reply shall include an explanation why a deviation from relevant international standards is necessary.

 

Figure Two

Excerpts from the Plurilateral Agreement on Government Procurement

Article VI Technical specifications

  1. Technical specifications laying down the characteristics of the products or services to be procured …shall not be prepared, adopted or applied with a view to, or with the effect of, creating unnecessary obstacles to international trade.
  1. Technical specifications prescribed by procuring entities shall, where appropriate: (a) be in terms of performance rather than design or descriptive characteristics; and (b) be based on international standards, where such exist; otherwise on national technical regulations, recognized standards or building codes.

standards developers describes rules for openness, notification of work in progress, utilization of international standards and consideration of comments received. Exceptions from relevant international standards are subject to challenge and differences from any agreed-upon international standard must be justifiable. Governments report new technical regulations that differ from an international standard and agree to consider comments from other countries. In its 1996 recommendations to the US Government on these matters, the Advisory Committee for Trade Policy and Negotiation (ACTPN) counseled, "The US should…monitor closely the standards-related activities of other World Trade Organization (WTO) members and use WTO dispute settlement procedures against any countries that are not fully implementing their obligations." The ACTPN also reaffirmed its 1994 advice, "The U.S. Government should (1) ensure no downward harmonization of U.S. standards as a result of the TBT Agreement and (2) avoid unwarranted intrusion into US private sector standards activities."

There is ongoing debate whether the international organization model resting on an infrastructure of national member bodies is responsive to some industrial sectors in the United States. Some sectors have problems securing international acceptance of US positions. In Congressional testimony, ASTM President James Thomas said, "Many US industries have a tough time working in such an "international system" for a number of reasons: If these industries are small, their products are innovative, their designs are different and their technology is at variance with European Technology, their perception is that they do not have much of a chance to prevail in ISO. Their US viewpoint (with one vote) is sometimes overborne by the European viewpoint (with 15 votes) and they end up with international standards with which they do not agree and which they cannot meet…We believe that the blanket commitment to ISO made by the US government before it knew whether the ISO process would work for all US industries was an error in judgment." Chairwoman Morella of the House Subcommittee on Technology stated recently in Congressional debate, "And it's my understanding that IOS (sic) is not a consensus organization It's not obligated to resolve negative balance and use as a majority by country rule, even when a major producing country has voted negative… If IOS is given legal blessing as a consensus organization…it would undermine the consensus standards that the American Society for Testing and Materials (sic), the Society of Automotive Engineers and the American Standards, National Standards Institute and similar bodies by employing equal recognition of standards adopted by an organization that does not operate by consensus." Chairwoman Morella was concerned about harming the hundreds of committees, professional and engineering societies, and trade organizations that have successfully developed voluntary consensus standards for the US market over the years. But other industrial sectors have successfully coordinated and channeled the work of US voluntary consensus standards organizations to the international fora. According to Mr. Ritterbusch in his Congressional testimony, "By effectively using the SAE in a national standards developer role, we are able to bring together the USA expertise in the sector. The TAG then becomes the marketing group to convince the other participants in the ISO process to accept the USA input…The USA industry can ensure that it will not be disadvantaged in the ISO standards development process when it aggressively participates in the ISO Technical Committees." Some US-based organizations are reaching out for international members. The Institute of Electrical and Electronic Engineers (IEEE), for example, has adopted a strategy of actively seeking international participation in IEEE standards committees and working closely with the IEC. Figure 4 elaborates this IEEE Guide on IEC.

 

Figure Four

Excerpts from Institute of Electrical and Electronic Engineers (IEEE), Inc. Guide on IEC

One of the long-range goals of the IEEE is to transform the Institute into a truly global organization. To this end, it is intended that the IEEE become a major contributor to the development and dissemination of standards and related information serving the needs of the global electrotechnology community. A strategy to support this objective is to increase the development of standards that have global implications and the participation in and cooperation with international organizations such as IEC, ISO, etc. This document outlines a mechanism for cooperation with the standards development program of the IEC…Each IEEE committee, subcommittee or working group should take steps to expand participation in their work by IEEE members from many countries. This participation will help to increase the acceptability of IEEE standards throughout the world, thereby leading to expanded adoption of IEEE standards.

 


That some US standards differ from international counterparts has been noticed by our trade partners. In its 1996 report on US trade barriers the European Commission notes, "A particular problem in the US is the relatively low level of use, or even awareness, of standards set by international standardizing bodies. All parties to the WTO Agreement on Technical Barriers to Trade are committed to the wider use of these standards; but although a significant number of US standards are claimed to be "technically equivalent" to international ones, very few indeed are directly adopted. Some are in direct contradiction." There is growing international pressure for US standards bodies to voluntarily subscribe to the TBT Code of Good Practice mentioned above. To date, thirty-seven Standardizing bodies from around the world had declared their conformance with the Code.

It has long been US Government policy codified in the Office of Management and Budget (OMB) Administrative Circular A.119 to use "voluntary" standards whenever possible. See Figure 5, Federal Participation in the Development and Use of Voluntary Standards. Congress elevated the policy to the status of US law in The National Technology Transfer and Advancement Act of 1995. Public Law 104-113, Section 12 encourages government agencies to use consensus standards rather than developing their own. See Figure 6. According to Congresswoman Morella, "The effect of this section… would be a reduction in Federal Procurement and operating costs. For example instead of mandating products built only to special government-created standards, the Federal Government can cut costs by purchasing off the shelf products meeting a voluntary consensus standard that, in the judgment of an agency, meets its procurement requirements." Section 12 (d) requires federal agencies and departments to use standards that are developed or adopted by voluntary consensus bodies except when that would be inconsistent with applicable law or otherwise impractical. The law refers several times to the concept, "voluntary consensus standard." Standards of "consensus" organizations embody elements of due process, balanced committee membership, rights of appeal, response to negative ballots, etc. in their standards development procedures. Congresswoman Morella explains, "The private sector consensus standards bodies covered by the Act are engineering societies and trade associations as well as organizations whose primary purpose is development or promotion of standards…We meant to cover only those standards which are developed through an open process in which all parties and experts have ample opportunity to participate in develop the consensus embodied in that standard."

 
Figure Five
 
Excerpts from OMB Circular A-119
Federal Participation in the Development and Use of Voluntary Standards
 
  1. Policy Guidelines
 
  1. Reliance on voluntary standards
 
  1. Voluntary standards that will serve agency's purposes and are consistent with applicable law and regulations should be adopted and used by Federal Agencies in the interests of greater economy and efficiency unless they are specifically prohibited by law from doing so.
  1. (2) International standards should be considered in procurement and regulatory applications in the interests of promoting trade and implementing the provisions of the Agreement on Technical Barriers to Trade and the Agreement on government Procurement.

 
Figure Six
Excerpts from the
National Technology Transfer and Advancement Act of 1995
 
 
SECTION 12 (d) UTILIZATION OF CONSENSUS TECHNICAL STANDARDS BY FEDERAL AGENCIES; REPORTS
 
 
  1. INGENERAL-Except as provided inparagraph(3) of this subsection, all Federal agencies and departments shall use technical standards that are developed or adopted by voluntary consensus standards bodies, using such technical standards as a means to carry out policy objectives or activities determined by the agencies and departments.
 
  1. CONSULTATION; PARTICIPATION- In carrying out paragraph (1) of this subsection, Federal agencies and departments shall consult with voluntary, private sector, consensus standards bodies and shall, when such participation is in the public interest and is compatible with agency and departmental missions, authorities, priorities, and budget resources, participate with such bodies in the development of technical standards,
 
  1. EXCEPTION- If compliance with paragraph (1) of this subsection is inconsistent with applicable law or otherwise impractical, a Federal agency or department may elect to use technical standards that are not developed or adopted by voluntary consensus standards bodies if the head of each such agency or department transmits to the Office of Management and Budget an explanation of the reasons for using such standards. Each year, beginning with fiscal year 1997, the Office of Management and Budget shall transmit to Congress and its committees a report summarizing all explanations received in the preceding year under this paragraph.

Standards from consortia are not "consensus standards" but such standards play a significant role in the Information Technology (IT) marketplace. Largely because of the short life cycles of IT products, major companies in this field found that the time essential to establish consensus according to historical standards processes was too long. Like-minded companies organized themselves in consortia to produce "Publicly Available Specifications (PAS)" in the time frames consistent with their product development needs. In its 1996 Survey of Telecommunications-Related Forum's Activities, Japan's Telecommunication Technology Committee identified 63 such forums around the world. Attesting to the marketplace relevance of PAS are experiments within the ISO and IEC to transpose PAS into international standards under a "Fast Track" process. The ISO/IEC JTC1 Committee on Information Technology will accept PASs from approved "PAS Submitters" and directly ballot the standards for international acceptance. Similarly there are moves within ITU to coordinate and cooperate with the standards work underway within the Internet Engineering Task Force. Thus the best features of both standards processes may be utilized…the quickness of the consortia process combined with the consensus of the traditional process. This Fall, the OMB will revise its Circular A-119 to implement the standards provisions of The National Technology Transfer and Advancement Act of 1995. It will be interesting to watch the extent to which standards of consortia will acquire the status of standards from consensus organizations. Congresswoman Morella alluded to the importance of flexibility when she said, "We would expect government procurement of off-the-shelf commercial products to be exempted by regulation from any review under the act. We also do not intend through this section to limit the right of the Government to write specifications for what the government needs to purchase" The use of standards as tools of economic policy is probably no where more refined than in the European Union. In a July 1996 communication the Council and Parliament even the European commission stated, "The European standards organizations are invited to promote the possibilities of the adoption of specifications that originate outside their formal structures. They should examine the possibility of adopting PAS." Clearly consortia standards must be factored in to corporate standards strategy.

This introduction to the world of standards will achieve the author's goal if the reader has gained some new perspective of the complexities of standards and of the importance of standards strategy to industrial competitiveness in today's global market. The standards path is not marked with yellow bricks and the routes are many, but as Hans Kluge, past Chairman of Automatic Switch Company once observed, "If you are not involved in standards or standard-setting, you will be left outside and the competition will run away with your business."

 

 

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