Chapter 6 Crafting Business Strategy for Dynamic Contexts OBJECTIVES 1 Identify the challenges to sustainable competitive advantage in dynamic contexts 2 Understand the fundamental dynamics of competition 3 Evaluate the advantages and disadvantages of choosing a first-mover strategy 4 Analyze and develop strategies for managing industry evolution 5 Analyze and develop strategies for technological discontinuities 6 Analyze and develop strategies for high-speed environmental change 7 Explain the implications of a dynamic strategy for the strategy diamond and strategy implementation 1 THE TALE OF NAPSTER Business model options Music Bankrupt A la carte Roxio and iTunes sell single songs Subscription Unlimited downloads for $9.99/month Sold to Napster Software Music and music Sonic solutions Business sold Software Software Roxio Streaming Real-network's Rhapsody lets music lovers listen as much as they want for one monthly fee Software 2 THREE CAUSES OF DYNAMIC CONTEXTS Examples Competitive Interaction 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 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 3 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 4 Great Ease with threat can be controlled Difficult THE SPECTRUM OF COMPETITIVE RESPONSES STRATEGIES Limited Extensive Scope of response 5 CONTAINMENT Containment Neutralization Shaping 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 Absorption Annulment 6 NEUTRALIZATION Containment Neutralization Shaping 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 Absorption Annulment 7 SHAPING Containment Neutralization Shaping 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 Absorption Annulment 8 ABSORPTION Containment Neutralization Minimize the risks entailed by being either a first mover or an imitator Shaping For example: In the late 1980s Microsoft purchased Intuit, the maker of Quicken and QuickBooks; because it identified money-management software as a highgrowth opportunity. Absorption Annulment 9 ANNULMENT Containment Neutralization Shaping 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 Absorption Annulment 10 PROS AND CONS OF FIRST MOVERS A first-mover is often better off than a fast follower when: A first-follower is often better off than a first mover when: • It achieves absolute cost advantage • Rapid technology advances allow a fast-follower to leapfrog the first mover • 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 • 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 11 A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS Imitators/fast followers Product Pioneer(s) 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/MasterCard (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 12 A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS (CONT.) Imitators/fast followers Product Pioneer(s) Comments Light beer Rheingold’s and Gablinger’s (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 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 13 EVALUATING A FIRM’S FIRST-MOVER DEPENDENCIES ON INDUSTRY COMPLEMENTS Status of complementary assets Weak protection from imitation 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 Strong protection from imitation Bases of first mover advantages Freely available or unimportant 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 14 STRATEGIES FOR MANAGING COMMODITIZATION Examples Value-in-use approach Timken bundles commodity product with key components Process innovation approach Dell sells directly to consumers Market focus K-mart and KB Toys both reduced number of customers when they restructured Service innovation Hotels may charge extra for cable TV and computer hookups Anticipating Managing commoditization Responding 15 EFFECT OF TECHNOLOGICAL DISRUPTION Performance Maturity Maturity Growth Disruption Growth Embryonic Embryonic Time 16 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? Create/Add Creating new markets: A new value curve 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 17 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 18 VALUE CURVE for U.S. WINE INDUSTRY – YELLOW TAIL Expensive wines Yellow tail Cheap wines High Low Price Above-the-line marketing Use of technical wine terminology Aging quality Vineyard prestige Wine complexity Wine range Ease of selection Easy drinkability Fun and adventure 19 CONVENTIONAL VS. NEW MARKET-CREATION STRATEGIC MINDSETS Dimensions of competition Head-to-Head competition Emphasizes rivalry Industry Emphasizes competitive position Strategic group and within group and segments industry segments New-market creation Emphasizes substitutes across industries Looks across groups and segments Emphasizes better buyer service Emphasizes redefinition of the buyer and buyer’s preferences Product and service offerings Emphasizes product or service value and offerings within industry definition Emphasizes complementary products and services within and across industries and segments Business model Emphasizes efficient operation of the model Emphasizes rethinking of the industry business model Emphasizes adaptation and capabilities that support competitive retaliation Emphasizes strategic intentseeking to shape the external environment over time Buyers Time 20 SOME WELL-KNOWN DISRUPTIONS Microsoft took 15 years to grow from boutique software firm to Goliath Atari grew from $50 million to $1.6billion over 5 years, doubling every year Compaq grew from zero revenues to $ 1billion in 5 years 21 CREATING OPTIONS FOR FUTURE COMPETITIVE ADVANTAGE AND PROFITABILITY Profit Tactical probing Horizon 3 Seed options for future growth business Horizon 2 Drives growth in emerging new business Horizon 1 Defend and extend current business Time 22 IMPROVISATION AND SIMPLE RULES Just as Jazz musicians can improvise when they play together because they follow a set of simple rules ... ... corporations can become more flexible by allowing improvisation under a set of simple rules Simple rules • Customer is always right • Always run highest profitability products • Never 23 Merrill lynch discount initiative TACTICAL PROBING OPERATIONAL TACTICS CAN BECOME STRATEGICALLY IMPORTANT Charles Schwab Tactical initiatives • Futures – trading • Simplified mutual-fund offerings • Internet products services E* Trade • Credit cards Though some initiatives failed, several enabled Charles Schwab to further differentiate itself from its bare-bones competition • Outline mortgage 24 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 3M 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 Source: S. Brown and K. Eisenhardt, Competing on the Edge: Strategy as Structure Chaos (Boston: Harvard Business School Press, 1998)25 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 26 THE VALUE OF REAL OPTIONS DCF value Current business value + Value of real options Total business value Realoptions value Total business value = Source: L.E.K. Consulting LLC, Shareholder Value Added: Making Real Decisions with Real Options (Accessed September 12, 2005), www.lek.com/ideas/publications/sva 16.pdf. 27 SUMMARY 1 Identify the challenges to sustainable competitive advantage in dynamic contexts 2 Understand the fundamental dynamics of competition 3 Evaluate the advantages and disadvantages of choosing a first-mover strategy 4 Analyze and develop strategies for managing industry evolution 5 Analyze and develop strategies for technological discontinuities 6 Analyze and develop strategies for high-speed environmental change 7 Explain the implications of a dynamic strategy for the strategy diamond and strategy implementation 28