Chapter 6 Crafting Business Strategy for Dynamic Contexts

1 OBJECTIVES Distinguish the ways in which firms’ strategies are related to dynamic contexts 1 Identify, compare, and contrast the various routes to revolutionary strategies 2 Evaluate the advantages and disadvantages of choosing a first-mover strategy 3 Recognize when an incumbent is caught off guard by revolutionary strategy and identify defensive tactics to reduce the effects of this competition 4 Explain the difficulties and solutions to implementing revolutionary strategies 5

2 THE TALE OF NAPSTER Sold to Software Business sold Business model options Roxio Software and music SoftwareMusic Software Sonic solutions NapsterMusic Bank- rupt Subscription Unlimited downloads for $9.99/month Streaming Real-network's Rhap- sody lets music lovers listen as much as they want for one monthly fee A la carte Roxio and iTunes sell single songs

3 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 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 Industry evolution 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 Technological change

4 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), Competitive actions generate reactions – what is the best course of action given your competitor’s likely reaction?

5 COMMODITIZATION Based on price ? Making a choice for a gas station Differentiation strategies are vulnerable to commoditization as companies are forced to compete more on price

6 THE IMPORTANCE OF SPEED “What counts most in expeditionary marketing is not hitting a bull’s eye the first time, but how quickly one can improve one’s aim and get another arrow on the way to the target.” – Hamel and Prahalad

7 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 Cirque du Soleil disrupts the circus industry by incorporating “Broadway” Southwest eliminates services, satisfies basic travel needs

8 FOUR ACTIONS FRAMEWORK: KEY TO THE VALUE CURVE Reduce What factors should be reduced well below the industry standard? Raise What factors should be 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, “Blue Ocean Strategy,” California Management Review 47:3 (2005), Creating new markets: A new value curve Creating new markets: A new value curve Eliminate What factors that the industry has taken for granted should be eliminated? Create/Add What factors that the industry has never offered should be created or added?

9 COMPETITOR OR COMPLEMENTOR? Competitor if customers value your product less when they have the other firm’s product than when they have your product alone OR it is less attractive for a supplier to provide resources to you when it is also supplying the other firm than when it is supplying you alone. Complementor if customers value your product more when they have the other player’s product than when they have your product alone OR if it is more attractive for a supplier to provide resources to you when it is also supplying the other firm than when it is supplying you alone.

10 CONVENTIONAL VS. NEW MARKET-CREATION STRATEGIC MINDSETS Strategic group and industry segments Industry Buyers Business model Time Product and service offerings Emphasizes competitive position within group and segments Emphasizes rivalry Emphasizes better buyer service Emphasizes efficient operation of the model Emphasizes adaptation and capa- bilities that support competitive retaliation Emphasizes product or service value and offerings within industry definition Dimensions of competition Head-to-Head competitionNew-market creation Looks across groups and segments Emphasizes substitutes across industries Emphasizes redefinition of the buyer and buyer’s preferences Emphasizes rethinking of the industry business model Emphasizes strategic intent- seeking to shape the external environment over time Emphasizes complementary products and services within and across industries and segments

11 PROS AND CONS OF FIRST MOVERS Rapid technology advances allow a fast-follower to leapfrog the first mover It achieves absolute cost advantage 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-mover Scale of the first move makes imitation unlikely A fast-follower is often better off than a first mover when: A first-mover is often better off than a fast follower when:

12 A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS ProductPioneer(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 not survive Ballpoint pensReynolds (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 cardsDiners club (1950)Visa/Master- Card (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 sodaKirsch’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

13 Status of complementary assets EVALUATING A FIRM’S FIRST-MOVER DEPENDENCIES ON INDUSTRY COMPLEMENTS Freely available or unimportant Tightly held and important Bases of first mover advantages Strong protection from imitation Weak protection from imitation 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 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 THE SPECTRUM OF COMPETITIVE RESPONSES STRATEGIES Ease with threat can be controlled Great Difficult Containment/Neutralization/Shaping/Absorption/Annulment Scope of response Limited Extensive

15 CONTAINMENT – limit your competitor’s impact Containment Neutralization Shaping Absorption Annulment 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

16 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 a fierce legal attack on Napster that it forced even smaller Napster-like firms to stay out of the fray

17 SHAPING (repositioning) Containment Neutralization Shaping Absorption Annulment 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

18 ABSORPTION Containment Neutralization Shaping Absorption Annulment 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 high- growth opportunity.

19 ANNULMENT Containment Neutralization Shaping Absorption Annulment 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

20 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

21 CREATING OPTIONS FOR FUTURE COMPETITIVE ADVANTAGE AND PROFITABILITY Horizon 3 Seed options for future growth business Horizon 2 Drives growth in emerging new business Horizon 1 Defend and extend current business Profit Time Tactical probing

22 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 “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” 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 newspaper, a candy bar, and a can of soda). Gillette prices are never raised faster than the price of the market basket. 3M 30% of sales must come from products that are fewer than 4 years old