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Crafting BusinessCrafting Business Strategy for Dynamic C t tContexts
OBJECTIVES
Identify the challenges to sustainable competitive advantage in dynamic contexts
1advantage in dynamic contexts Understand the fundamental dynamics of competition
2
E l t th d t d di d t f3 Evaluate the advantages and disadvantages of choosing a first-mover strategy
3
Analyze and develop strategies for managing industry evolution
4industry evolutionAnalyze and develop strategies for technological discontinuities
5
Analyze and develop strategies for high speed6 Analyze and develop strategies for high-speed environmental change
6
Explain the implications of a dynamic strategy for the strategy diamond and strategy implementation
7
1
the strategy diamond and strategy implementation
THE TALE OF NAPSTER
Business model options
Napster Music Bank-rupt Roxio and iTunes
Sol
d to
p rupt A la carte Roxio and iTunes sell single songs
RoxioSoftware and music Software Music Subscription Unlimited downloads
for $9.99/month
oftw
are
usin
ess
old
Streaming
Real-network's Rhap-sody lets music lovers
So
Bu
so
SoftwareSonic
Streaming listen as much as they want for one monthly fee
2
Softwaresolutions
THREE CAUSES OF DYNAMIC CONTEXTS
E lExamples
CompetitiveWhen incumbents and, especially, new entrants use a
Mini-mills entered with a new business model and incumbent
Interaction new business model they drive dynamism in market
steel companies did not respond
As industries evolve and competition shifts from diff i i i /l
Arm and Hammer almost lost its lead position when baking soda b di i d
Industryl ti differentiation to price/low-cost,
advantages shift between rivals became commoditized evolution
When technological change is discontinuous, it does not s stain e isting leaders
The shift to digital photography favors the strengths of Sony not photograph inc mbent like
Technologicalchange
3
sustain existing leaders advantages
photography incumbent like Kodak
change
PHASES OF COMPETITIVE INTERACTION
Phase 1 Phase 2 Phase 3 Phase 4Phase 1Discoveryand competitive
ti
Phase 2Customer reaction
Phase 3 Competitor reaction
Phase 4 Evaluation of action and reaction
ff tinew action effectiveness
4Source: 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
Diff
icul
t
eat c
an
led
D
with
thre
e co
ntro
llEa
se be
tG
reat
Limited Extensive
5
Scope of response
Limited Extensive
CONTAINMENT
Containment
Neutralization Limit the extent to which the new entrant’s innovation impacts your business
Shaping
p y
For example: American Airlines can partially contain Southwest by using its bargaining power to secure more exclusive airport gates
AbsorptionAbsorption
6
Annulment
NEUTRALIZATION
Containment
Neutralization Try to short-circuit the moves of innovators or new entrants before they
Shaping
ymake them
For example: The Recording Industry Association of America launched such a
Absorption
fierce legal attack on Napster that it forced even smaller Napster-like firms to stay out of the fray
Absorption
7
Annulment
SHAPING
Containment
Neutralization Shape the innovation so it becomes something the incumbent can live with or
Shaping
geven benefit from
For example: For years the American Medical Association used regulators to
Absorption
attack chiropractors; now they shape chiropractic medicine to become a complement to traditional medicine
Absorption
8
Annulment
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
Absorption
money-management software as a high-growth opportunity.
Absorption
9
Annulment
ANNULMENT
Containment
Neutralization Improve incumbent products and services to annul an innovation or new
Shaping
entrant’s offering
For example: Kodak has improved the quality of its film-based prints so that they
Absorption
are superior to many digital-based alternatives
Absorption
10
Annulment
PROS AND CONS OF FIRST MOVERS
A first-follower is often better off than a first mover when:
A first-mover is often better off than a fast follower when:
• Rapid technology advances allow a fast-follower to leapfrog the first mover
• It achieves absolute cost advantage
a first mover when:fast follower when:
• The first mover’s offering strikes a chord but is flawed
• Its reputation and image advantages are hard to copy
• The first mover lacks a key complement (e.g., channel access) that the follower possesses
• Its customers are locked in (i.e., switching costs exist)
• First-mover costs outweigh the advantages of being the first-move
• Scale of the first move makes imitation unlikely
11
A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS
Product Pioneer(s)Imitators/fast followers Comments
Automated teller machines
DeLaRue (1967)Docutel (1969)
Diebold (1971)IBM (1973)
The first movers were small entrepreneurial upstarts that faced two types of competitors: (1)
(ATMs)( ) ( )
NCR (1974) larger firms with experience selling to banks and (2) the computer giants. The first movers did not survive
Ballpoint pens Reynolds (1945) Parker (1954) The pioneers disappeared when the fad first ended i th l t 1940 P k t d 8 l t BiEversharp (1946) Bic (1960) 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 andMcDonnell-Douglas) followed with safer, larger, and more powerful jets unsullied by tragic crashes
Credit cards Diners club (1950) Visa/Master-Card (1966)A i
The first mover was undercapitalized in a business in which money is the key resource. American Express entered last with funds and nameAmerican
Express (1968)Express entered last with funds and name recognition from its traveler’s check business
Diet soda Kirsch’s No-Cal(1952)R l C ’ Di t
Pepsi’s Patio Cola (1963)C k ’ T b (1964)
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
12
Royal Crown’s DietRite Cola (1962)
Coke’s Tab (1964)Diet Pepsi (1964)Diet Coke (1982)
money or marketing expertise needed for massive promotional campaigns
A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS (CONT.)
Product Pioneer(s)Imitators/fast followers Comments
Light beer Rheingold’s and Gablinger’s (1968)
Miller Lite (1975)Natural light
The first movers entered 9 years before Miller and 16 years before Budweiser, but financial problems
Meister Brau Lite(1967)
g(1977)Coors light (1978)Bud light (1982)
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 borrowedWindows (1985) standard. Windows entered later and borrowed heavily from predecessors (and competitor Apple), then emerged as the leading interface
Video games Magnavox’s Nintendo (1985) The market went from boom to bust to boom. The Odyssey (1972)Atan’s Pong (1972)
Sega (1989)Microsoft (1998)
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.
13
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
EVALUATING A FIRM’S FIRST-MOVER DEPENDENCIESON INDUSTRY COMPLEMENTS
Status of complementary assets
Freely available i t t
Tightly held and i t tor unimportant important
ges
ctio
n on
It is difficult for anyone to make money: Industry
Value-creation opportunities favor the
r adv
anta
g
Wea
k pr
otec
om im
itatio
y yincumbent may simply give new product or service away as part of its larger bundle of offerings
ppholder of complementary assets, who will probably pursue a fast-follower strategy
rst m
over
tion
W fro larger bundle of offerings strategy
ases
of f
ir
ong
prot
ect
m im
itatio
n 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
Ba
Stro
from
STRATEGIES FOR MANAGING COMMODITIZATION
E l
Value-in-useapproach
Timken bundles commodity product with key components
Examples
Anticipating
approach
Process
product with key components
D ll ll di tl t
Managingditi ti
Processinnovationapproach
Dell sells directly toconsumers
commoditization
Marketfocus
K-mart and KB Toys both reduced number of customers when they restructured
Responding
Service
when they restructured
Hotels may charge extra for
15
innovationy g
cable TV and computer hookups
EFFECT OF TECHNOLOGICAL DISRUPTION
MaturityPerformance
Maturity Growth
Disruption
Growth
Embryonic
Growth
Embryonic
Embryonic
16
yTime
FOUR ACTIONS FRAMEWORK: KEY TO THE VALUE CURVE
ReduceWhat factors should be reduced well belo the ind str
The key to discovering a new value curve lies in answering four basic below the industry
standard?answering four basic
questions
Creatingnew markets:A new value
EliminateWhat factors that theindustry has taken for
Create/AddWhat factors that the industry has never A new value
curvegranted should be eliminated?
offered should be created or added?
RaiseWhat factors should be raised well above th i d t t d d?
17
the industry standard?
Source: Adapted from W.C. Kim and R. Mauborgne, “Blue Ocean Strategy,” California Management Review 47:3 (2005), 105-121
HIGH AND LOW-END DISRUPTION
Strategy that may result in huge new markets in which new players redefine industry rules to High-endplayers 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
Low-end
18
incumbents’ customers
VALUE CURVE for U.S. WINE INDUSTRY – YELLOW TAIL Expensive winesExpensive winesYellow tailCheap wines
High
Low
Price Above-the-linemarketing
Vineyardprestige
Winerange
Ease ofselection
Low
19
Use of technicalwine terminology
g
Agingquality
p g
Winecomplexity
g
Easydrinkability
Fun andadventure
CONVENTIONAL VS. NEW MARKET-CREATION STRATEGIC MINDSETS
Di i
IndustryEmphasizes rivalry
Dimensions of competition Head-to-Head competition New-market creation
Emphasizes substitutes across industries
Strategic group andindustry segments
Industry
Emphasizes competitive position within group and segments
Looks across groups and segments
industry segments
BuyersEmphasizes 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 modelEmphasizes efficient operation of the model
Emphasizes adaptation and capa
Emphasizes rethinking of the industry business model
Emphasizes strategic intent
20
TimeEmphasizes adaptation and capa-bilities that support competitive retaliation
Emphasizes strategic intent-seeking to shape the external environment over time
SOME WELL-KNOWN DISRUPTIONS
Microsoft took 15 years to grow from boutiqueMicrosoft took 15 years to grow from boutique software firm to Goliath
Atari grew from $50 million to $1.6billion over 5 years doubling every yearyears, doubling every year
Compaq grew from zero revenues to $ 1billionin 5 years
21
CREATING OPTIONS FOR FUTURE COMPETITIVE ADVANTAGE AND PROFITABILITY
Profit
H i 3Horizon 3Seed options for future growth business
Tactical probing
Horizon 2Drives growth in emerging new business
Horizon 1Defend and extend current business
22
Time
IMPROVISATION AND SIMPLE RULES
Just as Jazz musicians can improvise ... corporations can become more pwhen they play together because they follow a set of simple rules ...
pflexible by allowing improvisation under a set of simple rules
Simple rulesSimple rules
• Customer is always right
• Always run highest profitability products
• Never
23
TACTICAL PROBING OPERATIONAL TACTICS CAN BECOME STRATEGICALLY IMPORTANT
nch
initi
ativ
e Tactical initiatives
Mer
rill l
yndi
scou
nt
• Futures – trading
Si lifi d t l f d ff iThough some initia-tives failed, several enabled Charles S h b t f th
Charles Schwab
• Simplified mutual-fund offerings
• Internet products services Schwab to further differentiate itself from its bare-bones competition
Schwab p
• Credit cards p
E* T
rade
• Outline mortgage
24
E
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 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”the products to run in them, and before we know the industry is going to grow
Gillette 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 newspaperincreases 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
25Source: S. Brown and K. Eisenhardt, Competing on the Edge: Strategy as Structure Chaos (Boston: Harvard Business School Press, 1998)
3M 30% of sales must come from products that are fewer than 4 years old
REAL OPTIONS – FIVE CATEGORIES
1. Waiting-to-invest options. The value of waiting to build a factory til b tt k t i f ti l d th luntil 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 valuep j p
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
whether the firm should add more capacity
THE VALUE OF REAL OPTIONS
Total busi-ness value
DCF value Value ofreal options ness valuereal options
+ =Current business
value
Real-options value
Total business
value
27Source: 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.
value value value
SUMMARY
Identify the challenges to sustainable competitive advantage in dynamic contexts
1advantage in dynamic contexts Understand the fundamental dynamics of competition
2
E l t th d t d di d t f3 Evaluate the advantages and disadvantages of choosing a first-mover strategy
3
Analyze and develop strategies for managing industry evolution
4industry evolutionAnalyze and develop strategies for technological discontinuities
5
Analyze and develop strategies for high speed6 Analyze and develop strategies for high-speed environmental change
6
Explain the implications of a dynamic strategy for the strategy diamond and strategy implementation
7
28
the strategy diamond and strategy implementation
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