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Chapter 6Crafting Business Strategy

for Dynamic Contexts

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OBJECTIVES

Identify the challenges to sustainable competitiveadvantage in dynamic contexts

1

Understand the fundamental dynamics ofcompetition

2

Evaluate the advantages and disadvantages ofchoosing a first-mover strategy

3

Analyze and develop strategies for managingindustry evolution

4

Analyze and develop strategies for technologicaldiscontinuities

5

Analyze and develop strategies for high-speed

environmental change

6

Explain the implications of a dynamic strategy forthe strategy diamond and strategy implementation

7

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THE TALE OF NAPSTER

So

ldto

So

ftware

Bus

iness

so

ld

Business model options

RoxioSoftware

and musicSoftware Music

SoftwareSonicsolutions

Napster Music Bank-rupt

SubscriptionUnlimited downloadsfor $9.99/month

Streaming

Real-network's Rhap-sody lets music loverslisten as much as they

want for one monthlyfee

A la carteRoxio and iTunessell single songs

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THREE CAUSES OF DYNAMIC CONTEXTS

Examples

CompetitiveInteraction

When incumbents and,

especially, new entrants use anew business model they drivedynamism in market

Mini-mills entered with a new

business model and incumbentsteel companies did not respond

As industries evolve andcompetition shifts fromdifferentiation to price/low-cost,advantages shift between rivals

Arm and Hammer almost lost itslead position when baking sodabecame commoditized

Industry

evolution

When technological change isdiscontinuous, it does notsustain existing leadersadvantages

The shift to digital photographyfavors the strengths of Sony notphotography incumbent likeKodak

Technological

change

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PHASES OF COMPETITIVE INTERACTION

Phase 1

Discoveryandcompetitivenew action

Phase 2

Customerreaction

Phase 3

Competitorreaction

Phase 4

Evaluation ofaction andreactioneffectiveness

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

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THE SPECTRUM OF COMPETITIVE RESPONSES STRATEGIES

Easewith

threatcan

becontrolled

Grea

t

Diff

icu

lt

Scope of response

Limited ExtensiveAny firm that invests in

resources and capabilities that

support retaliation to the

exclusion of innovation and

change may only be prolonging

its inevitable demise

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CONTAINMENT

Containment

Neutralization

Shaping

Absorption

Annulment

Limit the extent to which the new entrants

innovation impacts your business

For example:American Airlines can partially

contain Southwest by using its bargainingpower to secure more exclusive airport gates

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NEUTRALIZATION

Containment

Neutralization

Shaping

Absorption

Annulment

Try to short-circuit the moves ofinnovators or new entrants beforetheymake them

For example:The Recording IndustryAssociation of America launched such afierce legal attack on Napster that itforced even smaller Napster-like firms tostay out of the fray

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SHAPING

Containment

Neutralization

Shaping

Absorption

Annulment

Shape the innovation so it becomessomething the incumbent can live with oreven benefit from

For example:For years the AmericanMedical Association used regulators toattack chiropractors; now they shapechiropractic medicine to become acomplement to traditional medicine

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ABSORPTION

Containment

Neutralization

Shaping

Absorption

Annulment

Minimize the risks entailed by beingeither a first mover or an imitator

For example:In the late 1980s Microsoft

purchased Intuit, the maker of Quickenand QuickBooks; because it identifiedmoney-management software as a high-growth opportunity.

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ANNULMENT

Containment

Neutralization

Shaping

Absorption

Annulment

Improve incumbent products andservices to annul an innovation or newentrants offering

For example:Kodak has improved thequality of its film-based prints so that theyare superior to many digital-basedalternatives

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PROS AND CONS OF FIRST MOVERS

Rapid technology advances allow afast-follower to leapfrog the first mover

It achieves absolute cost advantage

The first movers offering strikes a

chord but is flawed

Its reputation and image advantages

are hard to copy

The first mover lacks a keycomplement (e.g., channel access) thatthe follower possesses

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

First-mover costs outweigh theadvantages of being the first-move

Scale of the first move makes imitationunlikely

A first-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 notsurvive

Ballpoint pens Reynolds (1945)

Eversharp (1946)

Parker (1954)

Bic (1960)

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

Commercialjets

DeHaviland (1952) Boeing (1958)Douglas (1958)

The pioneers rushed to market with a jet that crashedfrequently. Boeing and Douglas (later known asMcDonnell-Douglas) followed with safer, larger, andmore powerful jets unsullied by tragic crashes

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

AmericanExpress (1968)

The first mover was undercapitalized in a businessin which money is the key resource. AmericanExpress entered last with funds and namerecognition from its travelers check business

Diet soda Kirschs No-Cal(1952)

Royal Crowns Diet

Rite Cola (1962)

Pepsis Patio Cola

(1963)

Cokes Tab (1964)

Diet Pepsi (1964)

Diet Coke (1982)

The first mover could not match the distributionadvantages of Coke and Pepsi. Nor did it have themoney or marketing expertise needed for massivepromotional campaigns

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A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS (CONT.)

Product Pioneer(s)

Imitators/fast

followers Comments

Light beer Rheingolds and

Gablingers (1968)Meister Brau Lite(1967)

Miller Lite (1975)

Natural light(1977)

Coors light(1978)

Bud light (1982)

The first movers entered 9 years before Miller and

16 years before Budweiser, but financial problemsdrove both out of business. Marketing anddistribution determined the outcome. Costly legalbattles, again requiring access to capital, werecommonplace

PC operating

systems

CP/M (1974) Microsoft DOS

(1981)MicrosoftWindows (1985)

The first mover set the early industry standard but

did not upgrade for the IBM PC. Microsoft boughtan imitative upgrade and became the newstandard. Windows entered later and borrowedheavily from predecessors (and competitor Apple),then emerged as the leading interface

Video games MagnavoxsOdyssey (1972)

Atans Pong (1972)

Nintendo (1985)

Sega (1989)

Microsoft (1998)

The market went from boom to bust to boom. Thebust occurred when home computers seemed likely

to make video games obsolete. Kids lost interestwhen games lacked challenge. Price competitionruled. Nintendo rekindled interest with better gamesand restored market order with managed competition.Microsoft entered with its Xbox when perceivedgaming to be a possible component of its wired world

Source: Adapted from S. Schnaars, Managing Imitation Strategies (New York Free Press, 1994), 37-43

EVALUATING A FIRMS FIRST MOVER DEPENDENCIES

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Status of complementary assets

EVALUATING A FIRM S FIRST-MOVER DEPENDENCIES

ON INDUSTRY COMPLEMENTS

Freely availableor unimportant

Tightly held andimportant

Basesoffirstmoveradv

antages

Strongpro

tec

tion

from

imitation

Weak

pro

tec

tion

fromim

ita

tion

It is difficult for anyone tomake money: Industryincumbent may simplygive new product orservice away as part of itslarger bundle of offerings

Value-creationopportunities favor theholder of complementaryassets, who will probablypursue a fast-followerstrategy

First mover can do well

depending on theexecution of its strategy

Value will go either to first

mover or to party with themost bargaining power

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STRATEGIES FOR MANAGING COMMODITIZATION

Managing

commoditization

Anticipating

Responding

Value-in-useapproach

Process

innovation

approach

Market

focus

Service

innovation

Timken bundles commodityproduct with key components

Dell sells directly toconsumers

K-mart and KB Toys bothreduced number of customerswhen they restructured

Hotels may charge extra forcable TV and computer hookups

Examples

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EFFECT OF TECHNOLOGICAL DISRUPTION

Maturity

Maturity Growth

Disruption

Embryonic

Embryonic

Growth

Performance

Time

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FOUR ACTIONS FRAMEWORK: KEY TO THE VALUE CURVE

Reduce

What factors should

be reduced wellbelow the industrystandard?

Raise

What factors shouldbe raised well abovethe industry standard?

The key to discovering a

new value curve lies inanswering 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

Eliminate

What factors that theindustry has taken forgranted should beeliminated?

Create/Add

What factors that theindustry has neveroffered should becreated or added?

Cirque du Soleil example

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HIGH AND LOW-END DISRUPTION

Strategy that may result in hugenew markets in which newplayers redefine industry rules tounseat the largest incumbents

Strategy that appears at the low

end of industry offerings,targeting the least desirable ofincumbents customers

High-end

Low-end

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VALUE CURVE for U.S. WINE INDUSTRYYELLOW TAIL

Expensive wines

Yellow tail

Cheap wines

Price

Use of technicalwine terminology

Above-the-linemarketing

Agingquality

Vineyardprestige

Winecomplexity

Winerange

Easydrinkability

Ease ofselection

Fun andadventure

Low

High

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CONVENTIONAL VS. NEW MARKET-CREATION STRATEGIC MINDSETS

Strategic group andindustry segments

Industry

Buyers

Business model

Time

Product andservice offerings

Emphasizes competitive positionwithin group and segments

Emphasizes rivalry

Emphasizes better buyer service

Emphasizes efficient operation

of the model

Emphasizes adaptation and capa-bilities that support competitiveretaliation

Emphasizes product or servicevalue and offerings within industrydefinition

Dimensions

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

Looks across groups andsegments

Emphasizes substitutes across

industries

Emphasizes redefinition of the

buyer and buyers preferences

Emphasizes rethinking of the

industry business model

Emphasizes strategic intent-seeking to shape the externalenvironment over time

Emphasizes complementaryproducts and services within andacross industries and segments

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CREATING OPTIONS FOR FUTURE COMPETITIVE ADVANTAGE AND

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PROFITABILITY

Horizon 3

Seed options for future

growth business

Horizon 2

Drives growth inemerging new business

Horizon 1Defend and extendcurrent business

Profit

Time

Tactical

probing

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IMPROVISATION AND SIMPLE RULES

Just as Jazz musicians can improvisewhen they play together because they

follow a set of simple rules ...

... corporations can become moreflexible by allowing improvisation

under a set of simple rules

Simple rules

Customer is always right

Always run highest profitabilityproducts

Never

TACTICAL PROBING OPERATIONAL TACTICS CAN BECOME STRATEGICALLY

http://www.sxc.hu/browse.phtml?f=download&id=370613

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IMPORTANT

Though some initia-tives failed, severalenabled CharlesSchwab to furtherdifferentiate itselffrom its bare-bonescompetition

Merr

illl

ync

h

discoun

tin

itiative

E*Tra

de

Charles

Schwab

Tactical initiatives

Futurestrading

Simplified mutual-fund offerings

Internet products services

Credit cards

Outline mortgage

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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 AirwaysFive 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 wecould continue to win customers

Emerson ElectricIn each of the last three years weve introduced more than 100 major new products,which is about 70% above our pace of the early 1990s. We plan to maintain this rateand, overall, have targeted increasing new products to (equal) 35% of total sales

IntelThe inventor of Moores Law stated that the power of the computer chip would

double every 18 months. IBM builds a new manufacturing facility every ninemonths. We build factories two years in advance of needing them, before we havethe products to run in them, and before we know the industry is going to grow

Gillette40% of Gillettes sales every five years must come from entirely new products (priorto its acquisition by P&G). Gillette raises prices at a pace set to match priceincreases 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.

3M30% of sales must come from products that are fewer than 4 years old

O O S C GO S

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REAL OPTIONSFIVE CATEGORIES

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

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

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

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

5. Learning options. An initial investment may generate furtherinformation about a market opportunity and may help to determinewhether the firm should add more capacity

THE VALUE OF REAL OPTIONS

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THE VALUE OF REAL OPTIONS

Total busi-ness value

DCF value Value ofreal options

Source: L.E.K. Consulting LLC, Shareholder Value Added: Making Real Decisions with Real Options (Accessed September 12, 2005),www.lek.com/ideas/publications/sva16.pdf.

+ =Currentbusiness

value

Real-options

value

Totalbusiness

value

SUMMARY

http://www.lek.com/ideas/publications/svahttp://www.lek.com/ideas/publications/sva

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SUMMARY

Identify the challenges to sustainable competitiveadvantage in dynamic contexts

1

Understand the fundamental dynamics ofcompetition

2

Evaluate the advantages and disadvantages ofchoosing a first-mover strategy

3

Analyze and develop strategies for managingindustry evolution

4

Analyze and develop strategies for technologicaldiscontinuities

5

Analyze and develop strategies for high-speedenvironmental change

6

Explain the implications of a dynamic strategy forthe strategy diamond and strategy implementation

7

EXERCISES

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EXERCISES

1. If you were the CEO of Napster, what material from this chapter would be most relevant to you? Howmight it help you formulate strategy? What might the key components of the strategy be? How should

Microsoft use this chapter to formulate a strategic response to Napster?2. Consider first and second mover advantages. What specific resources and capabilities do you think

successful first and second movers must possess? Do you think a firm could be both a first mover andfast follower if it wanted to be?

3. Choose an industry you believe is very dynamic and identify the drivers of that dynamism. Now pick afirm in that industry and formulate a strategy and basic implementation scheme to exploit its dynamiccontext