Chapter 6Crafting Business Strategy for Dynamic Contexts

2

OBJECTIVES

Distinguish the ways in which firms’ strategies are related to dynamic contexts

1

Identify, compare, and contrast the various routes to revolutionary strategies

2

Evaluate the advantages and disadvantages of choosing a first-mover strategy

3

Recognize when an incumbent is caught off guard by revolutionary strategy and identify defensive tactics to reduce the effects of this competition

4

Explain the difficulties and solutions to implementing revolutionary strategies

5

3

THE TALE OF NAPSTER

Sol

d to

Sof

twar

e

Bus

ines

s so

ld

Business model options

RoxioSoftware and music

Software Music

SoftwareSonic solutions

Napster Music Bank-rupt

Subscription Unlimited downloadsfor $9.99/month

Streaming

Real-network's Rhap-sody lets music lovers listen as much as they want for one monthly fee

A la carteRoxio and iTunes sell single songs

4

THREE CAUSES OF DYNAMIC CONTEXTS

Examples

CompetitiveInteraction

When incumbents and, especially, new entrants use a new business model they drive dynamism in market

Mini-mills entered with a new business model and incumbent steel companies did not respond

As industries evolve and competition shifts from differentiation to price/low-cost, advantages shift between rivals

Arm and Hammer almost lost its lead position when baking soda became commoditized

Industryevolution

When technological change is discontinuous, it does not sustain existing leaders advantages

The shift to digital photography favors the strengths of Sony not photography incumbent like Kodak

Technologicalchange

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PHASES OF COMPETITIVE INTERACTION

Phase 1Discoveryand competitive new action

Phase 2Customer reaction

Phase 3 Competitor reaction

Phase 4 Evaluation of action and reaction effectiveness

Source: Adapted from K.G. Smith, W.J. Ferrier, and C.M. Grimm, “King of the Hill: Dethroning the Industry Leader,” Academy of Management Executive 15:2 (2001), 59-70

Competitive actions generate reactions – what is the best course of action given your competitor’s likely reaction?

6

COMMODITIZATION

Based on priceBased on price?Making a choice for a gas station

Differentiation strategies are vulnerable to commoditization as companies are forced to compete more on price

7

THE IMPORTANCE OF SPEED

“What counts most in expeditionary marketing is not hitting a bull’s eye the first time, but how quickly one can improve one’s aim and get another arrow on the way to the target.”

– Hamel and Prahalad

8

HIGH AND LOW-END DISRUPTION

Strategy that may result in huge new markets in which new players redefine industry rules to unseat the largest incumbents

Strategy that appears at the low end of industry offerings, targeting the least desirable of incumbents’ customers

High-end

Low-end

Cirque du Soleil disrupts the circus

industry by incorporating “Broadway”

Southwest eliminates services, satisfies basic

travel needs

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FOUR ACTIONS FRAMEWORK: KEY TO THE VALUE CURVE

ReduceWhat factors should be reduced well below the industry standard?

Raise

What factors should be raised well above the industry standard?

The key to discovering a new value curve lies in answering four basic

questions

Source: Adapted from W.C. Kim and R. Mauborgne, “Blue Ocean Strategy,” California Management Review 47:3 (2005), 105-121

Creating new markets:

A new value curve

Creating new markets:

A new value curve

Eliminate

What factors that theindustry has taken forgranted should be eliminated?

Create/Add

What factors that the industry has never offered should be created or added?

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COMPETITOR OR COMPLEMENTOR?

Competitor if customers value your product less when they have the other firm’s product than when they have your product alone OR it is less attractive for a supplier to provide resources to you when it is also supplying the other firm than when it is supplying you alone.

Complementor if customers value your product more when they have the other player’s product than when they have your product alone OR if it is more attractive for a supplier to provide resources to you when it is also supplying the other firm than when it is supplying you alone.

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CONVENTIONAL VS. NEW MARKET-CREATION STRATEGIC MINDSETS

Strategic group andindustry segments

Industry

Buyers

Business model

Time

Product and service offerings

Emphasizes competitive position within group and segments

Emphasizes rivalry

Emphasizes better buyer service

Emphasizes efficient operation of the model

Emphasizes adaptation and capa-bilities that support competitive retaliation

Emphasizes product or service value and offerings within industry definition

Dimensions of competition Head-to-Head competition New-market creation

Looks across groups and segments

Emphasizes substitutes across industries

Emphasizes redefinition of the buyer and buyer’s preferences

Emphasizes rethinking of the industry business model

Emphasizes strategic intent-seeking to shape the external environment over time

Emphasizes complementary products and services within and across industries and segments

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PROS AND CONS OF FIRST MOVERS

• Rapid technology advances allow a fast-follower to leapfrog the first mover

• It achieves absolute cost advantage

• The first mover’s offering strikes a chord but is flawed

• Its reputation and image advantages are hard to copy

• The first mover lacks a key complement (e.g., channel access) that the follower possesses

• Its customers are locked in (i.e., switching costs exist)

• First-mover costs outweigh the advantages of being the first-mover

• Scale of the first move makes imitation unlikely

A fast-follower is often better off than a first mover when:

A first-mover is often better off than a fast follower when:

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A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS

Product Pioneer(s)Imitators/fast followers Comments

Automated teller machines (ATMs)

DeLaRue (1967)

Docutel (1969)

Diebold (1971)

IBM (1973)

NCR (1974)

The first movers were small entrepreneurial upstarts that faced two types of competitors: (1) larger firms with experience selling to banks and (2) the computer giants. The first movers did not survive

Ballpoint pens Reynolds (1945)

Eversharp (1946)

Parker (1954)

Bic (1960)

The pioneers disappeared when the fad first ended in the late 1940s. Parker entered 8 years later. Bic entered last and sold pens as cheap disposables

Commercial jets

DeHaviland (1952) Boeing (1958)

Douglas (1958)

The pioneers rushed to market with a jet that crashed frequently. Boeing and Douglas (later known as McDonnell-Douglas) followed with safer, larger, and more powerful jets unsullied by tragic crashes

Credit cards Diners club (1950) Visa/Master-Card (1966)

American Express (1968)

The first mover was undercapitalized in a business in which money is the key resource. American Express entered last with funds and name recognition from its traveler’s check business

Diet soda Kirsch’s No-Cal(1952)

Royal Crown’s Diet

Rite Cola (1962)

Pepsi’s Patio Cola (1963)

Coke’s Tab (1964)

Diet Pepsi (1964)

Diet Coke (1982)

The first mover could not match the distribution advantages of Coke and Pepsi. Nor did it have the money or marketing expertise needed for massive promotional campaigns

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Status of complementary assets

EVALUATING A FIRM’S FIRST-MOVER DEPENDENCIESON INDUSTRY COMPLEMENTS

Freely available or unimportant

Tightly held and important

Bas

es o

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rst

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ver

adva

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Str

ong

prot

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n fr

om im

itatio

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eak

prot

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om im

itatio

nIt is difficult for anyone to make money: Industry incumbent may simply give new product or service away as part of its larger bundle of offerings

Value-creation opportunities favor the holder of complementary assets, who will probably pursue a fast-follower strategy

First mover can do well depending on the execution of its strategy

Value will go either to first mover or to party with the most bargaining power

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THE SPECTRUM OF COMPETITIVE RESPONSES STRATEGIES

Eas

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reat

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Containment/Neutra

lizatio

n/Shaping/Absorptio

n/Annulment

Scope of response

Limited Extensive

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CONTAINMENT – limit your competitor’s impact

Containment

Neutralization

Shaping

Absorption

Annulment

Limit the extent to which the new entrant’s innovation impacts your business

For example: American Airlines can partially contain Southwest by using its bargaining power to secure more exclusive airport gates

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NEUTRALIZATION

Containment

Neutralization

Shaping

Absorption

Annulment

Try to short-circuit the moves of innovators or new entrants before they make them

For example: The Recording Industry Association of America launched such a fierce legal attack on Napster that it forced even smaller Napster-like firms to stay out of the fray

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SHAPING (repositioning)

Containment

Neutralization

Shaping

Absorption

Annulment

Shape the innovation so it becomes something the incumbent can live with or even benefit from

For example: For years the American Medical Association used regulators to attack chiropractors; now they shape chiropractic medicine to become a complement to traditional medicine

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ABSORPTION

Containment

Neutralization

Shaping

Absorption

Annulment

Minimize the risks entailed by being either a first mover or an imitator

For example: In the late 1980s Microsoft purchased Intuit, the maker of Quicken and QuickBooks; because it identified money-management software as a high-growth opportunity.

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ANNULMENT

Containment

Neutralization

Shaping

Absorption

Annulment

Improve incumbent products and services to annul an innovation or new entrant’s offering

For example: Kodak has improved the quality of its film-based prints so that they are superior to many digital-based alternatives

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REAL OPTIONS – FIVE CATEGORIES

1. Waiting-to-invest options. The value of waiting to build a factory until better market information comes along may exceed the value of immediate expansion

2. Growth options. An entry investment may create opportunities to pursue valuable follow-up projects

3. Flexibility options. Serving markets on two continents by building two plants instead of one gives a firm the option of switching production from one plant to the other as conditions dictate

4. Exit (or abandonment) options. The option to walk away from a project in response to new information increases its value

5. Learning options. An initial investment may generate further information about a market opportunity and may help to determine whether the firm should add more capacity

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CREATING OPTIONS FOR FUTURE COMPETITIVE ADVANTAGE AND PROFITABILITY

Horizon 3Seed options for future growth business

Horizon 2Drives growth in emerging new business

Horizon 1Defend and extend current business

Profit

Time

Tactical

probing

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STAGING AND PACING IN THE REAL WORLD

Source: S. Brown and K. Eisenhardt, Competing on the Edge: Strategy as Structure Chaos (Boston: Harvard Business School Press, 1998)

British Airways“Five years is the maximum that you can go without refreshing the brand ... We did it (relaunched Club Europe Service) because we wanted to stay ahead so that we could continue to win customers”

Emerson Electric“In each of the last three years we’ve introduced more than 100 major new products, which is about 70% above our pace of the early 1990s. We plan to maintain this rate and, overall, have targeted increasing new products to (equal) 35% of total sales”

Intel The inventor of Moore’s Law stated that the power of the computer chip would double every 18 months. IBM builds a new manufacturing facility every nine months. “We build factories two years in advance of needing them, before we have the products to run in them, and before we know the industry is going to grow”

Gillette 40% of Gillette’s sales every five years must come from entirely new products (prior to its acquisition by P&G). Gillette raises prices at a pace set to match price increases in a basket of market goods (which includes items such as a newspaper, a candy bar, and a can of soda). Gillette prices are never raised faster than the price of the market basket.

3M 30% of sales must come from products that are fewer than 4 years old