Title

Transcript Title

Chapter 6

Crafting Business Strategy for Dynamic Contexts

OBJECTIVES

1 2 3 4 Distinguish the ways in which firms’ strategies are related to dynamic contexts Identify, compare, and contrast the various routes to revolutionary strategies Evaluate the advantages and disadvantages of choosing a first-mover strategy Recognize when an incumbent is caught off guard by revolutionary strategy and identify defensive tactics to reduce the effects of this competition 5 Explain the difficulties and solutions to implementing revolutionary strategies 1

THE TALE OF NAPSTER

Napster Roxio

Software Software and music Music

Sonic solutions

Music

Bank rupt

Software Business model options A la carte

Roxio and iTunes sell single songs

Subscription

Unlimited downloads for $9.99/month

Streaming

Real-network's Rhap sody lets music lovers listen as much as they want for one monthly fee 2

SOUTHWEST AIRLINES

“Think and act big and we’ll get smaller. Think and act small and we’ll get bigger.”

– Herb Kelleher

THREE CAUSES OF DYNAMIC CONTEXTS Competitive Interaction

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

Examples

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

Industry evolution

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

Technological change

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 4

PHASES OF COMPETITIVE INTERACTION Phase 1

Discovery and competitive new action

Phase 2

Customer 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 5

COMMODITIZATION Making a choice for a gas station

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

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 High-end Strategy that appears at the low end of industry offerings, targeting the least desirable of incumbents’ customers Low-end 8

5 Types of Revolutionary Strategies

Re-conceiving a Product

Reconfiguring the Value Chain

Redefining arenas

Rescaling the industry

Reconsidering the competitive mindset

FOUR ACTIONS FRAMEWORK: KEY TO THE VALUE CURVE The key to discovering a new value curve lies in answering four basic questions Reduce

What factors should be reduced

well below

the industry standard?

Eliminate

What factors that the industry has taken for granted should be eliminated?

Creating new markets:

A new value curve

Create/Add

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

Raise

What factors should be raised

well above

the industry standard?

Source: Adapted from W.C. Kim and R. Mauborgne, “Blue Ocean Strategy,” California Management Review 47:3 (2005), 105-121 10

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.

CONVENTIONAL VS. NEW MARKET-CREATION STRATEGIC MINDSETS Dimensions of competition

Industry

Head-to-Head competition

Emphasizes rivalry

New-market creation

Emphasizes substitutes across industries Strategic group and industry segments Emphasizes competitive position within group and segments Emphasizes better buyer service Buyers Looks across groups and segments Emphasizes redefinition of the buyer and buyer’s preferences Product and service offerings Business model Emphasizes product or service value and offerings within industry definition Emphasizes efficient operation of the model Emphasizes complementary products and services within and across industries and segments Emphasizes rethinking of the industry business model Time Emphasizes adaptation and capa bilities that support competitive retaliation Emphasizes strategic intent seeking to shape the external environment over time 12

PROS AND CONS OF FIRST MOVERS

• •

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

• It achieves absolute cost advantage Its reputation and image advantages are hard to copy Its customers are locked in (i.e., switching costs exist) • Scale of the first move makes imitation unlikely

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

• Rapid technology advances allow a fast-follower to leapfrog the first mover • The first mover’s offering strikes a chord but is flawed • The first mover lacks a key complement (e.g., channel access) that the follower possesses • First-mover costs outweigh the advantages of being the first-move 13

A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS Product

Automated teller machines (ATMs)

Pioneer(s)

DeLaRue (1967) Docutel (1969) Ballpoint pens Commercial jets Credit cards Diet soda Reynolds (1945) Eversharp (1946) DeHaviland (1952) Diners club (1950) Kirsch’s No-Cal (1952) Royal Crown’s Diet Rite Cola (1962)

Imitators/fast followers

Diebold (1971) IBM (1973) NCR (1974) Parker (1954) Bic (1960) Boeing (1958) Douglas (1958) Visa/Master Card (1966) American Express (1968) Pepsi’s Patio Cola (1963) Coke’s Tab (1964) Diet Pepsi (1964) Diet Coke (1982)

Comments

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 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 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 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 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 14

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

Light beer

Pioneer(s)

Rheingold’s and Gablinger’s (1968) Meister Brau Lite (1967)

Imitators/fast followers

Miller Lite (1975) Natural light (1977) Coors light (1978) Bud light (1982)

Comments

The first movers entered 9 years before Miller and 16 years before Budweiser, but financial problems drove both out of business. Marketing and distribution determined the outcome. Costly legal battles, again requiring access to capital, were commonplace PC operating systems CP/M (1974) Microsoft DOS (1981) Microsoft Windows (1985) The first mover set the early industry standard but did not upgrade for the IBM PC. Microsoft bought an imitative upgrade and became the new standard. Windows entered later and borrowed heavily from predecessors (and competitor Apple), then emerged as the leading interface Video games Magnavox’s Odyssey (1972) Atan’s Pong (1972) Nintendo (1985) Sega (1989) Microsoft (1998) The market went from boom to bust to boom. The bust occurred when home computers seemed likely to make video games obsolete. Kids lost interest when games lacked challenge. Price competition ruled. Nintendo rekindled interest with better games and restored market order with managed competition. Microsoft entered with its Xbox when perceived gaming to be a possible component of its wired world Source: Adapted from S. Schnaars, Managing Imitation Strategies (New York Free Press, 1994), 37-43 15

EVALUATING A FIRM’S FIRST-MOVER DEPENDENCIES ON INDUSTRY COMPLEMENTS Status of complementary assets

Freely available or unimportant Tightly held and important It 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 16

THE SPECTRUM OF COMPETITIVE RESPONSES STRATEGIES

Limited

Scope of response

Extensive 17

CONTAINMENT 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 18

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 19

SHAPING 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 20

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. 21

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 22

REAL OPTIONS – FIVE CATEGORIES

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 23

CREATING OPTIONS FOR FUTURE COMPETITIVE ADVANTAGE AND PROFITABILITY Profit Horizon 1

Defend and extend current business

Tactical probing Horizon 2

Drives growth in emerging new business

Horizon 3

Seed options for future growth business

Time

STAGING AND PACING IN THE REAL WORLD 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 Gillette

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” 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.

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