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
“Any firm that invests in
resources and capabilities that Limited
support retaliation to the
exclusion of innovation and
change may only be prolonging
its inevitable demise”
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?
Cirque du Soleil example
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
EXERCISES
1. If you were the CEO of Napster, what material from this chapter would be most relevant to you? How
2.
3.
might 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?
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 and
fast follower if it wanted to be?
Choose an industry you believe is very dynamic and identify the drivers of that dynamism. Now pick a
firm in that industry and formulate a strategy and basic implementation scheme to exploit its dynamic
context
29