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Chapter 6Crafting Business Strategy

for Dynamic Contexts



2

OBJECTIVES

Identify the challenges to sustainable competitiveadvantage in dynamic contexts

1

Understand the fundamental dynamics of competition

2

Evaluate the advantages and disadvantages of choosing a first-mover strategy3

Analyze and develop strategies for managingindustry evolution

4

Analyze and develop strategies for technologicaldiscontinuities

5

Analyze and develop strategies for high-speedenvironmental change

6

Explain the implications of a dynamic strategy for the strategy diamond and strategy implementation

7



3

THE TALE OF NAPSTER

S o l d

t o

S o

f t w a r e

B u

s i n e s s

s o l d

Business model options

RoxioSoftware

and musicSoftware Music

SoftwareSonicsolutions

Napster MusicBank-rupt

SubscriptionUnlimited downloadsfor $9.99/month

Streaming

Real-network's Rhap-sody lets music loverslisten as much as theywant for one monthlyfee

A la carteRoxio and iTunessell single songs



4

THREE CAUSES OF DYNAMIC CONTEXTS

Examples

Competitive

Interaction

When incumbents and,especially, new entrants use anew business model they drivedynamism in market

Mini-mills entered with a newbusiness model and incumbentsteel companies did not respond

As industries evolve andcompetition shifts fromdifferentiation to price/low-cost,advantages shift between rivals

Arm and Hammer almost lost itslead position when baking sodabecame commoditized

Industry

evolution

When technological change isdiscontinuous, it does notsustain existing leadersadvantages

The shift to digital photographyfavors the strengths of Sony notphotography incumbent likeKodak

Technological

change



5

PHASES OF COMPETITIVE INTERACTION

Phase 1

Discoveryandcompetitive

new action

Phase 2

Customer reaction

Phase 3

Competitor reaction

Phase 4

Evaluation of action andreaction

effectiveness

Source: Adapted from K.G. Smith, W.J. Ferrier, and C.M. Grimm, ³King of the Hill: Dethroning the Industry Leader,´ Academy of Management Executive 15:2 (2001), 59-70



6

Competitive Response Strategies

Containment

Neutralization

Shaping

Absorption

Annulment



7

CONTAINMENT

Containment

Neutralization

Shaping

Absorption

Annulment

Limit the extent to which the new entrant¶sinnovation impacts your business

For example: American Airlines can partiallycontain Southwest by using its bargainingpower to secure more exclusive airport gates



8

NEUTRALIZATION

Containment

Neutralization

Shaping

Absorption

Annulment

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 afierce legal attack on Napster that itforced even smaller Napster-like firms tostay out of the fray



9

SHAPING

Containment

Neutralization

Shaping

Absorption

Annulment

Shape the innovation so it becomessomething the incumbent can live with or

even benefit from

For example: For years the AmericanMedical Association used regulators toattack chiropractors; now they shapechiropractic medicine to become acomplement to traditional medicine



10

ABSORPTION

Containment

Neutralization

Shaping

Absorption

Annulment

Minimize the risks entailed by beingeither a first mover or an imitator

For example: In the late 1980s Microsoftpurchased Intuit, the maker of Quickenand QuickBooks; because it identifiedmoney-management software as a high-growth opportunity.



11

ANNULMENT

Containment

Neutralization

Shaping

Absorption

Annulment

Improve incumbent products andservices to annul an innovation or new

entrant¶s offering

For example: Kodak has improved thequality of its film-based prints so that theyare superior to many digital-basedalternatives



12

PROS AND CONS OF FIRST MOVERS

Rapid technology advances allow afast-follower to leapfrog the first mover

It achieves absolute cost advantage

The first mover¶s offering strikes achord but is flawed

Its reputation and image advantagesare hard to copy

The first mover lacks a keycomplement (e.g., channel access) thatthe follower possesses

Its customers are locked in (i.e.,switching costs exist)

First-mover costs outweigh theadvantages of being the first-move

Scale of the first move makes imitationunlikely

A fast-follower is often better off than a

first mover when:

A first-mover is often better off than a

fast follower when:



13

A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS

Product Pioneer(s)

Imitators/fast

followers Comments

Automatedteller machines(ATMs)

DeLaRue (1967)

Docutel (1969)

Diebold (1971)

IBM (1973)

NCR (1974)

The first movers were small entrepreneurialupstarts that faced two types of competitors: (1)larger firms with experience selling to banks and (2)the computer giants. The first movers did notsurvive

Ballpoint pens Reynolds (1945)

Eversharp (1946)

Parker (1954)

Bic (1960)

The pioneers disappeared when the fad first ended

in the late 1940s. Parker entered8

years later. Bicentered last and sold pens as cheap disposables

Commercial jets

DeHaviland (1952) Boeing (1958)

Douglas (1958)

The pioneers rushed to market with a jet that crashedfrequently. Boeing and Douglas (later known asMcDonnell-Douglas) followed with safer, larger, andmore powerful jets unsullied by tragic crashes

Credit cards Diners club (1950) Visa/Master-Card (1966)

AmericanExpress (1968)

The first mover was undercapitalized in a businessin which money is the key resource. American

Express entered last with funds and namerecognition 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 distributionadvantages of Coke and Pepsi. Nor did it have themoney or marketing expertise needed for massivepromotional campaigns



14

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

Product Pioneer(s)

Imitators/fast

followers Comments

Light beer Rheingold¶s andGablinger¶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 and16 years before Budweiser, but financial problemsdrove both out of business. Marketing anddistribution determined the outcome. Costly legalbattles, again requiring access to capital, werecommonplace

PC operatingsystems

CP/M (1974) Microsoft DOS(1981)

MicrosoftWindows (1985)

The first mover set the early industry standard butdid not upgrade for the IBM PC. Microsoft boughtan imitative upgrade and became the newstandard. Windows entered later and borrowedheavily 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 likelyto make video games obsolete. Kids lost interestwhen games lacked challenge. Price competitionruled. Nintendo rekindled interest with better gamesand restored market order with managed competition.Microsoft entered with its Xbox when perceivedgaming 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

Status of complementary assets

EVALUATING A FIRM¶S FIRST-MOVER DEPENDENCIES

ON INDUSTRY COMPLEMENTS

Freely availableor unimportant

Tightly held andimportant

B a s e s o f f i r

s t m o v e r a d v a n t a

g e s

S t r o n g p r o t e c t i o n

f r o m i m i t a t i o n

W e a k p r o t e c t i o n

f r o m i m i t a t i o n

It is difficult for anyone tomake money: Industry

incumbent may simplygive new product or service away as part of itslarger bundle of offerings

Value-creationopportunities favor the

holder of complementaryassets, who will probablypursue a fast-follower strategy

First mover can do welldepending on theexecution of its strategy

Value will go either to firstmover or to party with themost bargaining power



16

STRATEGIES FOR MANAGING COMMODITIZATION

Managing

commoditization

Anticipating

Responding

Value-in-use

approach

Process

innovationapproach

Market

focus

Service

innovation

Timken bundles commodityproduct with key components

Dell sells directly toconsumers

K-mart and KB Toys bothreduced number of customers

when they restructured

Hotels may charge extra for cable TV and computer hookups

Examples



17

FOUR ACTIONS FRAMEWORK: KEY TO THE VALUE CURVE

ReduceWhat factors shouldbe reduced well

below the industrystandard?

Raise

What factors shouldbe raised well above

the industry standard?

The key to discovering a

new value curve lies in

answering four basic

questions

Source: Adapted from W.C. Kim and R. Mauborgne, ³Blue Ocean Strategy,´ California Management Review 47:3 (2005), 105-121

Creating

new markets:

A new valuecurve

Eliminate

What factors that theindustry has taken for granted should beeliminated?

Create/Add

What factors that theindustry has never offered should becreated or added?



18

VALUE CURVE for U.S. WINE INDUSTRY ± YELLOW TAIL

Expensive wines

Yellow tailCheap wines

Price

Use of technicalwine terminology

Above-the-linemarketing

Agingquality

Vineyardprestige

Winecomplexity

Winerange

Easydrinkability

Ease of selection

Fun andadventure

Low

High



19

CONVENTIONAL VS. NEW MARKET-CREATION STRATEGIC MINDSETS

Strategic group andindustry segments

Industry

Buyers

Business model

Time

Product andservice offerings

Emphasizes competitive positionwithin group and segments

Emphasizes rivalry

Emphasizes better buyer service

Emphasizes efficient operationof the model

Emphasizes adaptation and capa-bilities that support competitiveretaliation

Emphasizes product or servicevalue and offerings within industrydefinition

Dimensions

of competition Head-to-Head competition New-market creation

Looks across groups andsegments

Emphasizes substitutes acrossindustries

Emphasizes redefinition of thebuyer and buyer¶s preferences

Emphasizes rethinking of theindustry business model

Emphasizes strategic intent-seeking to shape the externalenvironment over time

Emphasizes complementaryproducts and services within andacross industries and segments



20

SOMEWELL-KNOWN DISRUPTIONS

Compaq grew from zero revenues to $ 1billionin 5 years

Microsoft took 15 years to grow from boutiquesoftware firm to Goliath

Atari grew from $50 million to $1.6billion over 5years, doubling every year



21

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 profitabilityproducts

Never



22

TACTICAL PROBING OPERATIONAL TACTICS CAN BECOME STRATEGICALLY

IMPORTANT

Though some initia-tives failed, severalenabled CharlesSchwab to further differentiate itself from its bare-bones

competition

M e r r i l l l y n c h

d i s c o u n t i n i t i a t i v e

E * T r a d e

Charles

Schwab

Tactical initiatives

Futures ± trading

Simplified mutual-fund offerings

Internet products services

Credit cards

Outline mortgage



23

STAGING AND PACING IN THE REAL WORLD

Source: S. Brown and K. Eisenhardt, Competing on the Edge: Strategy as Structure Chaos (Boston: Harvard Business School Press, 1998)

British Airways ³Five 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 wecould continue to win customers´

Emerson Electric³In 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 rateand, overall, have targeted increasing new products to (equal) 35% of total sales´

IntelThe inventor of Moore¶s Law stated that the power of the computer chip woulddouble every 18 months. IBM builds a new manufacturing facility every ninemonths. ³We build factories two years in advance of needing them, before we havethe products to run in them, and before we know the industry is going to grow´

Gillette40% 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 theprice of the market basket.

3M30% of sales must come from products that are fewer than 4 years old



24

REAL OPTIONS ± FIVE CATEGORIES

1. Waiting-to-invest options. The value of waiting to build a factoryuntil better market information comes along may exceed the valueof immediate expansion

2. Growth options. An entry investment may create opportunities to

pursue valuable follow-up projects3. Flexibility options. Serving markets on two continents by building

two plants instead of one gives a firm the option of switchingproduction from one plant to the other as conditions dictate

4. Exit (or abandonment) options. The option to walk away from aproject 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 determinewhether the firm should add more capacity



25

THE VALUE OF REAL OPTIONS

Total busi-

ness value

DCF value Value of

real options

Source: L.E.K. Consulting LLC, Shareholder Value Added: Making Real Decisions with Real Options (Accessed September 12, 2005),www.lek.com/ideas/publications/sva16.pdf.

+ =Currentbusiness

value

Real-optionsvalue

Totalbusiness

value



26

SUMMARY

Identify the challenges to sustainable competitiveadvantage in dynamic contexts

1

Understand the fundamental dynamics of competition

2

Evaluate the advantages and disadvantages of choosing a first-mover strategy3

Analyze and develop strategies for managingindustry evolution

4

Analyze and develop strategies for technologicaldiscontinuities

5

Analyze and develop strategies for high-speedenvironmental change

6

Explain the implications of a dynamic strategy for the strategy diamond and strategy implementation

7

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