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Crafting Business Strategy for Dynamic C t t Contexts

OBJECTIVES

1 Identify the challenges to sustainable competitive advantage in dynamic contexts 2 Understand the fundamental dynamics of competition Evaluate l t th the advantages d t and d di disadvantages d t of f 3 E choosing a first-mover strategy 4 Analyze and develop strategies for managing industry evolution 5 Analyze and develop strategies for technological discontinuities high-speed speed 6 Analyze and develop strategies for high environmental change 7 Explain the implications of a dynamic strategy for the strategy diamond and strategy implementation

THE TALE OF NAPSTER


Business model options Napster p Music Bankrupt Sold to Roxio and iTunes sell single songs

A la carte

Roxio

Software

Software Music and music Bu usiness so old So oftware

Subscription

Unlimited downloads for $9.99/month

Streaming

Sonic solutions

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

Software
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THREE CAUSES OF DYNAMIC CONTEXTS


E Examples l 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 l ti

As industries evolve and competition shifts from diff differentiation i i to price/low-cost, i /l advantages shift between rivals

Arm and Hammer almost lost its lead position when baking soda b became commoditized di i d

Technological change

When technological change is discontinuous, it does not s stain existing sustain e isting leaders advantages

The shift to digital photography favors the strengths of Sony not photograph incumbent photography inc mbent like Kodak
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PHASES OF COMPETITIVE INTERACTION

Phase 1 Discovery and competitive new action ti

Phase 2 Customer reaction

Phase 3 Competitor reaction

Phase 4 Evaluation of action and reaction effectiveness ff ti

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

THE SPECTRUM OF COMPETITIVE RESPONSES STRATEGIES

Ease with thre eat can be e controll led Great t Limited Scope of response
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Difficult D

Extensive

CONTAINMENT

Containment

Neutralization

Limit the extent to which the new entrants innovation impacts p y your business For example: American Airlines can partially contain Southwest by using its bargaining power to secure more exclusive airport gates

Shaping

Absorption

Annulment
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NEUTRALIZATION

Containment

Neutralization

Try to short-circuit the moves of innovators or new entrants before they y 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

Shaping

Absorption

Annulment
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SHAPING

Containment

Neutralization

Shape the innovation so it becomes something g 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

Shaping

Absorption

Annulment
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ABSORPTION

Containment

Neutralization

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 highgrowth opportunity.

Shaping

Absorption

Annulment
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ANNULMENT

Containment

Neutralization

Improve incumbent products and services to annul an innovation or new entrants offering For example: Kodak has improved the quality of its film-based prints so that they are superior to many digital-based alternatives

Shaping

Absorption

Annulment
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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 Its reputation and image advantages


are hard to copy

Rapid technology advances allow a


fast-follower to leapfrog the first mover

The first movers offering strikes a


chord but is flawed

Its customers are locked in (i.e.,


switching costs exist)

The first mover lacks a key


complement (e.g., channel access) that the follower possesses

Scale of the first move makes imitation


unlikely

First-mover costs outweigh the


advantages of being the first-move

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A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS


Product Automated teller machines (ATMs) Pioneer(s) DeLaRue (1967) Docutel ( (1969) ) Imitators/fast followers Diebold (1971) IBM ( (1973) ) NCR (1974) 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 i th in the l late t 1940 1940s. P Parker k entered t d 8 years l later. t Bi 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, McDonnell-Douglas) safer larger, 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 travelers 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
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Ballpoint pens

Reynolds (1945) Eversharp (1946) DeHaviland (1952)

Parker (1954) Bic (1960) Boeing (1958) Douglas (1958)

Commercial jets

Credit cards

Diners club (1950)

Visa/MasterCard (1966) A American i Express (1968) Pepsis Patio Cola (1963) C k T Cokes Tab b (1964) Diet Pepsi (1964) Diet Coke (1982)

Diet soda

Kirschs No-Cal (1952) R Royal lC Crowns Di Diet t Rite Cola (1962)

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


Product Light beer Pioneer(s) Rheingolds and Gablingers (1968) Meister Brau Lite (1967) Imitators/fast followers Miller Lite (1975) Natural light g (1977) Coors light (1978) Bud light (1982) Microsoft DOS (1981) Microsoft Windows (1985) 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 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 standard. heavily from predecessors (and competitor Apple), then emerged as the leading interface 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
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PC operating systems

CP/M (1974)

Video games

Magnavoxs Odyssey (1972) Atans Pong (1972)

Nintendo (1985) Sega (1989) Microsoft (1998)

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

EVALUATING A FIRMS FIRST-MOVER DEPENDENCIES ON INDUSTRY COMPLEMENTS


Status of complementary assets Freely available or unimportant i t t W Weak protec ction fro om imitatio on Ba ases of fir rst mover r advantag ges It is difficult for anyone to y Industry y make money: incumbent may simply give new product or service away as part of its larger bundle of offerings Tightly held and i important t t Value-creation pp favor the opportunities holder of complementary assets, who will probably pursue a fast-follower strategy

Stro ong protect tion from m imitation

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

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STRATEGIES FOR MANAGING COMMODITIZATION


E Examples l Value-in-use approach Anticipating Process innovation approach Managing commoditization diti ti Market focus Responding Service innovation Hotels may y charge g extra for cable TV and computer hookups
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Timken bundles commodity product with key components

Dell D ll sells ll di directly tl t to consumers

K-mart and KB Toys both reduced number of customers when they restructured

EFFECT OF TECHNOLOGICAL DISRUPTION


Performance Maturity Maturity Growth

Disruption Growth

Embryonic

Embryonic y Time
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FOUR ACTIONS FRAMEWORK: KEY TO THE VALUE CURVE


Reduce What factors should be reduced well belo the industry below ind str standard?

The key to discovering a new value curve lies in answering four basic questions

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 th i the industry d t standard? t d d?
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

High-end

Strategy that appears at the low end of industry offerings, targeting the least desirable of incumbents customers

Low-end

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VALUE CURVE for U.S. WINE INDUSTRY YELLOW TAIL


Expensive wines Yellow tail Cheap wines

High

Low Price Above-the-line g marketing Aging quality Vineyard prestige p g Wine complexity Wine range g Ease of selection Fun and adventure
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Use of technical wine terminology

Easy drinkability

CONVENTIONAL VS. NEW MARKET-CREATION STRATEGIC MINDSETS


Dimensions Di i of competition Industry Emphasizes competitive position Strategic group and within group and segments industry segments Emphasizes better buyer service Buyers Product and service offerings Business model Emphasizes product or service value and offerings within industry definition Emphasizes efficient operation of the model Emphasizes adaptation and capa capabilities that support competitive retaliation Head-to-Head competition Emphasizes rivalry New-market creation Emphasizes substitutes across industries Looks across groups and segments Emphasizes redefinition of the buyer and buyers preferences Emphasizes complementary products and services within and across industries and segments Emphasizes rethinking of the industry business model Emphasizes strategic intent intentseeking to shape the external environment over time
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Time

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 years,

Compaq grew from zero revenues to $ 1billion in 5 years

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CREATING OPTIONS FOR FUTURE COMPETITIVE ADVANTAGE AND PROFITABILITY


Profit

Tactical probing

Horizon H i 3 Seed options for future growth business

Horizon 2 Drives growth in emerging new business Horizon 1 Defend and extend current business Time
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IMPROVISATION AND SIMPLE RULES

Just as Jazz musicians can improvise p when they play together because they follow a set of simple rules ...

... corporations p 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

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TACTICAL PROBING OPERATIONAL TACTICS CAN BECOME STRATEGICALLY IMPORTANT


Merrill lyn nch discount initiative

Tactical initiatives

Futures trading Simplified Si lifi d mutual-fund t l f d offerings ff i

Charles Schwab

Internet p products services Credit cards

Though some initiatives failed, several enabled Charles S h bt Schwab to f further th differentiate itself from its bare-bones competition p

E* Trade E

Outline mortgage

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STAGING AND PACING IN THE REAL WORLD


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 In 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 rate and, overall, have targeted increasing new products to (equal) 35% of total sales The inventor of Moores 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 them, and before we know the industry is going to grow grow 40% of Gillettes 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 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

British Airways

Emerson Electric

Intel

Gillette

3M

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 til b better tt market k ti information f ti comes along l may exceed d th the value l 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 p j in response p 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

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THE VALUE OF REAL OPTIONS

DCF value Current business value

Value of real options + Realoptions value =

Total business 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.

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SUMMARY

1 Identify the challenges to sustainable competitive advantage in dynamic contexts 2 Understand the fundamental dynamics of competition Evaluate l t th the advantages d t and d di disadvantages d t of f 3 E choosing a first-mover strategy 4 Analyze and develop strategies for managing industry evolution 5 Analyze and develop strategies for technological discontinuities high-speed speed 6 Analyze and develop strategies for high environmental change 7 Explain the implications of a dynamic strategy for the strategy diamond and strategy implementation

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