Chapter 6
Crafting Business Strategy
for Dynamic Contexts
OBJECTIVES
1
Distinguish the ways in which firms’ strategies are
related to dynamic contexts
2
Identify, compare, and contrast the various routes
to revolutionary strategies
3
Evaluate the advantages and disadvantages of
choosing a first-mover strategy
4
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
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
SOUTHWEST AIRLINES
“Think and act big and we’ll get
smaller. Think and act small and
we’ll get bigger.”
– Herb Kelleher
3
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
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
Based
?
on price
6
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
7
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
8
5 Types of Revolutionary Strategies
1.Re-conceiving a Product
2.Reconfiguring the Value Chain
3.Redefining arenas
4.Rescaling the industry
5.Reconsidering the competitive mindset
9
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
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.
11
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
12
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
13
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
14
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
15
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
16
Great
Ease with threat can
be controlled
Difficult
THE SPECTRUM OF COMPETITIVE RESPONSES STRATEGIES
Limited
Extensive
Scope of response
17
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
18
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
19
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
20
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
21
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
22
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
23
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
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