Download - Bus496 Cs Lect6
-
8/11/2019 Bus496 Cs Lect6
1/30
Chapter 6Crafting Business Strategy
for Dynamic Contexts
-
8/11/2019 Bus496 Cs Lect6
2/30
1
OBJECTIVES
Identify the challenges to sustainable competitiveadvantage in dynamic contexts
1
Understand the fundamental dynamics ofcompetition
2
Evaluate the advantages and disadvantages ofchoosing a first-mover strategy
3
Analyze and develop strategies for managingindustry evolution
4
Analyze and develop strategies for technologicaldiscontinuities
5
Analyze and develop strategies for high-speed
environmental change
6
Explain the implications of a dynamic strategy forthe strategy diamond and strategy implementation
7
-
8/11/2019 Bus496 Cs Lect6
3/30
2
THE TALE OF NAPSTER
So
ldto
So
ftware
Bus
iness
so
ld
Business model options
RoxioSoftware
and musicSoftware Music
SoftwareSonicsolutions
Napster Music Bank-rupt
SubscriptionUnlimited downloadsfor $9.99/month
Streaming
Real-network's Rhap-sody lets music loverslisten as much as they
want for one monthlyfee
A la carteRoxio and iTunessell single songs
-
8/11/2019 Bus496 Cs Lect6
4/30
3
THREE CAUSES OF DYNAMIC CONTEXTS
Examples
CompetitiveInteraction
When incumbents and,
especially, new entrants use anew business model they drivedynamism in market
Mini-mills entered with a new
business 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
-
8/11/2019 Bus496 Cs Lect6
5/304
PHASES OF COMPETITIVE INTERACTION
Phase 1
Discoveryandcompetitivenew action
Phase 2
Customerreaction
Phase 3
Competitorreaction
Phase 4
Evaluation ofaction andreactioneffectiveness
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
-
8/11/2019 Bus496 Cs Lect6
6/305
THE SPECTRUM OF COMPETITIVE RESPONSES STRATEGIES
Easewith
threatcan
becontrolled
Grea
t
Diff
icu
lt
Scope of response
Limited ExtensiveAny firm that invests in
resources and capabilities that
support retaliation to the
exclusion of innovation and
change may only be prolonging
its inevitable demise
-
8/11/2019 Bus496 Cs Lect6
7/30
6
CONTAINMENT
Containment
Neutralization
Shaping
Absorption
Annulment
Limit the extent to which the new entrants
innovation impacts your business
For example:American Airlines can partially
contain Southwest by using its bargainingpower to secure more exclusive airport gates
-
8/11/2019 Bus496 Cs Lect6
8/30
7
NEUTRALIZATION
Containment
Neutralization
Shaping
Absorption
Annulment
Try to short-circuit the moves ofinnovators or new entrants beforetheymake them
For example:The Recording IndustryAssociation of America launched such afierce legal attack on Napster that itforced even smaller Napster-like firms tostay out of the fray
-
8/11/2019 Bus496 Cs Lect6
9/30
8
SHAPING
Containment
Neutralization
Shaping
Absorption
Annulment
Shape the innovation so it becomessomething the incumbent can live with oreven benefit from
For example:For years the AmericanMedical Association used regulators toattack chiropractors; now they shapechiropractic medicine to become acomplement to traditional medicine
-
8/11/2019 Bus496 Cs Lect6
10/30
9
ABSORPTION
Containment
Neutralization
Shaping
Absorption
Annulment
Minimize the risks entailed by beingeither a first mover or an imitator
For example:In the late 1980s Microsoft
purchased Intuit, the maker of Quickenand QuickBooks; because it identifiedmoney-management software as a high-growth opportunity.
-
8/11/2019 Bus496 Cs Lect6
11/30
10
ANNULMENT
Containment
Neutralization
Shaping
Absorption
Annulment
Improve incumbent products andservices to annul an innovation or newentrants offering
For example:Kodak has improved thequality of its film-based prints so that theyare superior to many digital-basedalternatives
-
8/11/2019 Bus496 Cs Lect6
12/30
11
PROS AND CONS OF FIRST MOVERS
Rapid technology advances allow afast-follower to leapfrog the first mover
It achieves absolute cost advantage
The first movers offering strikes a
chord but is flawed
Its reputation and image advantages
are 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 first-follower is often better off than
a first mover when:
A first-mover is often better off than a
fast follower when:
-
8/11/2019 Bus496 Cs Lect6
13/30
12
A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS
Product Pioneer(s)
Imitators/fast
followers 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 notsurvive
Ballpoint pens Reynolds (1945)
Eversharp (1946)
Parker (1954)
Bic (1960)
The pioneers disappeared when the fad first endedin the late 1940s. Parker entered 8 years later. Bicentered last and sold pens as cheap disposables
Commercialjets
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. AmericanExpress entered last with funds and namerecognition from its travelers check business
Diet soda Kirschs No-Cal(1952)
Royal Crowns Diet
Rite Cola (1962)
Pepsis Patio Cola
(1963)
Cokes 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
-
8/11/2019 Bus496 Cs Lect6
14/30
13
A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS (CONT.)
Product Pioneer(s)
Imitators/fast
followers Comments
Light beer Rheingolds and
Gablingers (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 problemsdrove both out of business. Marketing anddistribution determined the outcome. Costly legalbattles, again requiring access to capital, werecommonplace
PC operating
systems
CP/M (1974) Microsoft DOS
(1981)MicrosoftWindows (1985)
The first mover set the early industry standard but
did 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 MagnavoxsOdyssey (1972)
Atans Pong (1972)
Nintendo (1985)
Sega (1989)
Microsoft (1998)
The market went from boom to bust to boom. Thebust occurred when home computers seemed likely
to 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
EVALUATING A FIRMS FIRST MOVER DEPENDENCIES
-
8/11/2019 Bus496 Cs Lect6
15/30
14
Status of complementary assets
EVALUATING A FIRM S FIRST-MOVER DEPENDENCIES
ON INDUSTRY COMPLEMENTS
Freely availableor unimportant
Tightly held andimportant
Basesoffirstmoveradv
antages
Strongpro
tec
tion
from
imitation
Weak
pro
tec
tion
fromim
ita
tion
It is difficult for anyone tomake money: Industryincumbent may simplygive new product orservice away as part of itslarger bundle of offerings
Value-creationopportunities favor theholder of complementaryassets, who will probablypursue a fast-followerstrategy
First mover can do well
depending on theexecution of its strategy
Value will go either to first
mover or to party with themost bargaining power
-
8/11/2019 Bus496 Cs Lect6
16/30
15
STRATEGIES FOR MANAGING COMMODITIZATION
Managing
commoditization
Anticipating
Responding
Value-in-useapproach
Process
innovation
approach
Market
focus
Service
innovation
Timken bundles commodityproduct with key components
Dell sells directly toconsumers
K-mart and KB Toys bothreduced number of customerswhen they restructured
Hotels may charge extra forcable TV and computer hookups
Examples
-
8/11/2019 Bus496 Cs Lect6
17/30
16
EFFECT OF TECHNOLOGICAL DISRUPTION
Maturity
Maturity Growth
Disruption
Embryonic
Embryonic
Growth
Performance
Time
-
8/11/2019 Bus496 Cs Lect6
18/30
17
FOUR ACTIONS FRAMEWORK: KEY TO THE VALUE CURVE
Reduce
What factors should
be reduced wellbelow the industrystandard?
Raise
What factors shouldbe raised well abovethe industry standard?
The key to discovering a
new value curve lies inanswering four basic
questions
Source:Adapted from W.C. Kim and R. Mauborgne, Blue Ocean Strategy, California Management Review 47:3 (2005), 105-121
Creating
new markets:A new value
curve
Eliminate
What factors that theindustry has taken forgranted should beeliminated?
Create/Add
What factors that theindustry has neveroffered should becreated or added?
Cirque du Soleil example
-
8/11/2019 Bus496 Cs Lect6
19/30
18
HIGH AND LOW-END DISRUPTION
Strategy that may result in hugenew markets in which newplayers redefine industry rules tounseat the largest incumbents
Strategy that appears at the low
end of industry offerings,targeting the least desirable ofincumbents customers
High-end
Low-end
-
8/11/2019 Bus496 Cs Lect6
20/30
19
VALUE CURVE for U.S. WINE INDUSTRYYELLOW TAIL
Expensive wines
Yellow tail
Cheap wines
Price
Use of technicalwine terminology
Above-the-linemarketing
Agingquality
Vineyardprestige
Winecomplexity
Winerange
Easydrinkability
Ease ofselection
Fun andadventure
Low
High
-
8/11/2019 Bus496 Cs Lect6
21/30
20
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 operation
of 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 across
industries
Emphasizes redefinition of the
buyer and buyers preferences
Emphasizes rethinking of the
industry business model
Emphasizes strategic intent-seeking to shape the externalenvironment over time
Emphasizes complementaryproducts and services within andacross industries and segments
-
8/11/2019 Bus496 Cs Lect6
22/30
CREATING OPTIONS FOR FUTURE COMPETITIVE ADVANTAGE AND
-
8/11/2019 Bus496 Cs Lect6
23/30
22
PROFITABILITY
Horizon 3
Seed options for future
growth business
Horizon 2
Drives growth inemerging new business
Horizon 1Defend and extendcurrent business
Profit
Time
Tactical
probing
-
8/11/2019 Bus496 Cs Lect6
24/30
23
IMPROVISATION AND SIMPLE RULES
Just as Jazz musicians can improvisewhen they play together because they
follow a set of simple rules ...
... corporations can become moreflexible by allowing improvisation
under a set of simple rules
Simple rules
Customer is always right
Always run highest profitabilityproducts
Never
TACTICAL PROBING OPERATIONAL TACTICS CAN BECOME STRATEGICALLY
http://www.sxc.hu/browse.phtml?f=download&id=370613 -
8/11/2019 Bus496 Cs Lect6
25/30
24
IMPORTANT
Though some initia-tives failed, severalenabled CharlesSchwab to furtherdifferentiate itselffrom its bare-bonescompetition
Merr
illl
ync
h
discoun
tin
itiative
E*Tra
de
Charles
Schwab
Tactical initiatives
Futurestrading
Simplified mutual-fund offerings
Internet products services
Credit cards
Outline mortgage
-
8/11/2019 Bus496 Cs Lect6
26/30
25
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 AirwaysFive 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 ElectricIn 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 rateand, overall, have targeted increasing new products to (equal) 35% of total sales
IntelThe inventor of Moores Law stated that the power of the computer chip would
double every 18 months. IBM builds a new manufacturing facility every ninemonths. We 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 Gillettes sales every five years must come from entirely new products (priorto its acquisition by P&G). Gillette raises prices at a pace set to match priceincreases 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.
3M30% of sales must come from products that are fewer than 4 years old
O O S C GO S
-
8/11/2019 Bus496 Cs Lect6
27/30
26
REAL OPTIONSFIVE 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 topursue valuable follow-up projects
3. Flexibility options. Serving markets on two continents by buildingtwo 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 furtherinformation about a market opportunity and may help to determinewhether the firm should add more capacity
THE VALUE OF REAL OPTIONS
-
8/11/2019 Bus496 Cs Lect6
28/30
27
THE VALUE OF REAL OPTIONS
Total busi-ness value
DCF value Value ofreal 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-options
value
Totalbusiness
value
SUMMARY
http://www.lek.com/ideas/publications/svahttp://www.lek.com/ideas/publications/sva -
8/11/2019 Bus496 Cs Lect6
29/30
28
SUMMARY
Identify the challenges to sustainable competitiveadvantage in dynamic contexts
1
Understand the fundamental dynamics ofcompetition
2
Evaluate the advantages and disadvantages ofchoosing a first-mover strategy
3
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 forthe strategy diamond and strategy implementation
7
EXERCISES
-
8/11/2019 Bus496 Cs Lect6
30/30
29
EXERCISES
1. If you were the CEO of Napster, what material from this chapter would be most relevant to you? Howmight 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?2. 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 andfast follower if it wanted to be?
3. Choose an industry you believe is very dynamic and identify the drivers of that dynamism. Now pick afirm in that industry and formulate a strategy and basic implementation scheme to exploit its dynamiccontext