Strategy and Management of Change

1. Strategy and Management of Change Hypercompetition and the impact of the internet on strategy Ian Knox and Julian Lowe School of Business

2. Focus questions • What is extreme or hypercompetition? • Is strategy under conditions of extreme or hypercompetition different? • How does the internet influence value creation? • Can the internet deliver sustainable competitive advantage? • What is the impact of the internet in different industries? • Has it created new Business Models? • What are the latest emerging trends • How can we manage it?

3. What is hypercompetition? • Term developed by Richard D’aveni (Hypercompetion) and extended by Eisenhardt and Brown (Competing on the Edge) • Situation in which competitive advantage is not sustainable without regular reinvention, new entry, and exit • Shift from slow to fast cycle markets • Commoditization – all products having similar price – quality characteristics • Process of creative destruction – innovation continually breaking established firm’s hold on markets • Low industry returns

4. Hypercompetition and conventional models of strategy Five Forces Core Game Hypercompetion Competences Theory Assumptions Goal Performance Driver Strategy Success Source: S.L. Brown & K.M Eisenhardt (1998) ‘Competing on the Edge’ Boston: Harvard Business School Press p8

5. Move Back to HypercompetitionFigure 1-13 The cycle of price-quality competition moving up an escalation ladder Need toMove to a New Arena of Competition Return to Price Wars Commodity-like Market Where Price & Quality & Product Offerings Cease to Be an Advantage Attempt to Redefine Quality Move toward Ultimate Value Niching & Outflanking Full-Line Producers Price-Quality Manoeuvres Price War “Bottom of the Ladder”

6. E-readiness May 5th 2005 From The Economist print edition Denmark is still the best place in the world to do e-business, reports the Economist Intelligence Unit, a sister firm of The Economist. It has ranked the “e-readiness” of the world's 65 largest economies to find the countries most amenable to internet-based business. The factors considered include broadband and mobile-phone penetration, as well as government regulation. America rose from sixth to second place in the ranking since last year. Britain fell from second to fifth place. India, despite being an IT superpower, is ranked only 49th. Sources of hyper-competition • Disruptive technologies • Global competition • Internet • Better sources of information and ‘savvy’ customers

7. Disruptive technologies • New technologies with different price : performance ratios • New attributes • Effective in markets where dominant firms have focused on existing technologies and served markets and try to grow by improving the technology around old customer base • Examples: Sailing ships/Disk drives/Angioplasty and heart surgery

8. Globalisation • Increasingly homogeneous markets • Competition from anywhere • Anonymity of source of products and services • New entrants at low cost • Rapid diffusion of innovation • ……

9. Internet enabled business • Wherever there are transactions or information flows, there is scope for internet enabled commerce • The internet is still in a developing state. At present it is just beginning to restructure transactions and business models – see next slide • The impact of the internet has been more in some areas than others – typically because of their information content • You can understand the impact of the internet partly by • using the 5 forces – how does it change competitive relationships • Using the value chain – where can it reconfigure or create new value • Understanding the nature of the network externalities – that is the effect of adding more users – with the internet this increases the value of the whole system • Creating new sources of value – social network sites

10. Stages of technology change Change in industry: • Substitution • Scale • Structural change And a stage approach • Introduction – no standards, many competitors, product innovation • Growth – diffusion of ideas, development of a standard, reduction of competition • Maturity – dominant design, move to process innovation

11. Impact of internet on social and economic business models ?? ?? Economic and social impact time Start-up/novelty substitution Scale-up restructure

12. Internet enabled business – reduces the trade-off between richness (of relationships with customers) and reach (how many customers you can reach with internet with good connectivity ? Richness -customisation, knowing your customer(bandwidth) with internet in early years without internet Reach – how large or broad your market is (connectivity) ….and relationships?

13. Internet created value novelty Transaction structures, content Search costs, information, speed, scale Trust, switching costs, network externalities value Efficiency Lock - in Between products and services, on line and off line complementarities

14. Conventional drivers of Value • Innovation (schumpeter) • Reconfigure the value chain • Improve use of resources/create new competences • Change the nature and scope of networks • Change transaction costs • ….

15. A view from a guru • The dot com crash showed that there is no value in internet companies unless they already have the fundamentals of competitive advantage in place • Porter suggests it changes nothing but merely leverages existing strengths • But not all agree

16. Complements existing advantages Impact on industry structure Conventional cost curves Embeds switching Competition at firm level Redefines strategy and more customer focused Changes and creates new industries Network externalities Speeds up switching Competition at network level Porter and Anti-Porter

17. Categories

19. Bricks or Clicks? • A fundamental question is should existing firms compete in the electronic and physical world at the same time or should they run these businesses separately?

20. Some Examples: Book Retailing Traditional value nets Broad Narrow concentrated Narrow fragmented Size and dispersion of market Innovative value nets Segmented Sequential Precise Interactive total partial Methods of access of information

21. The Strategic Challenge of E-commerce • Connectivity • Intra-org • Inter-org • The value chain • Incumbents v new entrants • New forms of competition • Bricks / Clicks • Protection and capture • Complementary with other forces • Globalisation • Technology • Communications • New industry boundaries … … But why did .coms fail?

22. Issues for Individual Firms • How and where in the current value chain is information a component of value? • Where are the current trade offs being made between connectivity and customisation? How will eCommerce change these? • Which critical activities – especially informational activities can be spun off? • Could the underlying businesses be made more efficient if the informational activities were stripped away? • What new activities – especially facilitating agent roles – might be required? • How are risks distributed in the chain break up? • What happens to value capture? • What happens to control? • Which strategic assets become liabilities? • What are the new capabilities required in the emerging businesses?

23. New Opportunities • Release Trapped Value • Efficient markets • Efficient value systems • Case of access • Disrupt incumbent power • New ! Value • Customised offerings • Radically extended reach • Building a community and brand value • New functionality

24. Recent developments • Increased speed of broadband and wireless means the internet is increasing in impact – Korea – 100mb/s download • Symmetric download and up load • Development of Web 2.0 • Rapid growth of Social network sites • TV advertising, traditional newsmedia are all in decline

25. EMERGING-MARKET INDICATORSE-readiness May 5th 2005 From The Economist print edition Denmark is still the best place in the world to do e-business, reports the Economist Intelligence Unit, a sister firm of The Economist. It has ranked the “e-readiness” of the world's 65 largest economies to find the countries most amenable to internet-based business. The factors considered include broadband and mobile-phone penetration, as well as government regulation. America rose from sixth to second place in the ranking since last year. Britain fell from second to fifth place. India, despite being an IT superpower, is ranked only 49th. EMERGING-MARKET INDICATORSE-readiness May 5th 2005 From The Economist print edition Denmark is still the best place in the world to do e-business, reports the Economist Intelligence Unit, a sister firm of The Economist. It has ranked the “e-readiness” of the world's 65 largest economies to find the countries most amenable to internet-based business. The factors considered include broadband and mobile-phone penetration, as well as government regulation. America rose from sixth to second place in the ranking since last year. Britain fell from second to fifth place. India, despite being an IT superpower, is ranked only 49th.

26. 2005

27. Technology and the internet • What is the impact of the internet on your organisation? • Will the internet change the nature of competition? • Will it generate new sources of value? • Operational or strategic changes? • Will it create or change industry boundaries?

28. Hypercompetion - Building Blocks • Setting the pace • Time pacing • Transition • Rhythm • Gaining advantages of the past • Regeneration • Natural selection • Genetic algorithms • Modularity • Winning tomorrow today • Experimentation • Options • Learning • Playing the improvisational Edge • Improvisation • Real-time communication • Semi-structures • Capturing cross-business synergies • Co-adaptation • Focus • Nexus of strategy and tactics • Unique roles Source: S.L. Brown & K.M Eisenhardt (1998) ‘Competing on the Edge’ Boston: Harvard Business School Press p.23

29. The 10 Rules for Competing on the Edge If you want to play in the new strategy game, you’ve got to know the rules. Here are Shona Brown and Kathleen Eisenhardt’s guidelines for managers who want to abandontheir old-strategy mindset for today’s “on the edge” strategy… where the name of the game is change: Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

30. StrategyRule 1: Advantage Is Temporary On-the-edge managers understand that competitive advantage is fleeting. So, they focus on continuously generating new sources of advantage and never lose sight of the fact that today’s winning strategy will probably not work tomorrow. In their minds, change is an opportunity—not a threat. Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

31. StrategyRule 2: Strategy is Diverse, Emergent, and Complicated Strategy is a diverse collection of moves that are loosely linked together in a semi-coherent direction. Managers who compete on the edge let strategy emerge by making a variety of moves, seeing what happens, and following through on those that work. They end up playing a broader and more surprising set of strategic options than others. Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

32. StrategyRule 3: Reinvention is the Goal On-the-edge managers scan for opportunities to reinvent the business and then let profits follow. Creating value takes higher priority than improving efficiency when it’s accepted that profit juggernauts are rare finds and continual reinvention is the smarter path to long-term profitability. Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

33. OrganizationRule 4: Live in the Present The most important time frame is today. The key to effectively managing today is to maximize the minimum organizational structure. Firms that compete on the edge use just enough structure to prevent things from flying apart, keep businesses poised for change and managers aware of opportunities, but allow enough room for innovation, personalization, and experimentation. Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

34. OrganizationRule 5: Stretch Out the Past On-the-edge managers realize that the past is often the greatest competitive advantage when chasing new opportunities. Wise use of the past saves time, saves money, and mitigates risk. Most significant, the past lets managers jump-start new opportunities and focus on the truly new. Past experience also shows up in exploiting derivative products more effectively and extending out product and service platforms. These managers stretch out the past but don’t get stuck in it. Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

35. Organization Rule 6: Reach Into the Future On-the-edge managers compete across a longer time horizon than most. Driven by the paranoia that the market is constantly and unpredictably shifting, they frequently probe the future. They launch more experimental products and services, create more strategic alliances in nascent markets and technologies, and employ more futurists than other firms. But they strike a balance between the future and the present so as not to reach for future gains at the expense of present rewards. Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

36. OrganizationRule 7: “Time Pacing” On-the-edge strategy uses time (as distinct from speed) as a critical strategic weapon. On-the-edge companies set a metronome-like pace around the number of new products launched per year, the refreshment of brands, or the building of manufacturing capacity. Companies that set the pace of change in their industry hold a potent advantage; they understand the power of rhythm to get their businesses into a winning groove and keep them there. Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

37. LeadershipRule 8: Grow the Strategy Managers who compete on the edge grow their businesses like prairies, rather than assemble them like toasters. They don’t compile the pieces of strategy at once. They coax them by pruning back on overstructuring, while setting priorities, major responsibilities, and key operating measures where they don’t already exist. The strategy is grown, starting with the current businesses, then incorporating some of the past, and then linking to future opportunities. Then it’s time paced. Never start with the future when growing a strategy—begin with the basics of today’s businesses. Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

38. LeadershipRule 9: Drive Strategy From the Business Level Managers in on-the-edge companies realize that in high-velocity markets, strategy cannot be driven top-down. There’s too much change that comes too quickly and unpredictably to wait for strategy to trickle through hierarchy. Success comes from skilled, fast, and agile moves at the business level. Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

39. LeadershipRule 10: Repatch Businesses to Markets and Articulate the Whole It’s tough to find a once-for-all match of businesses with markets in a rapidly changing world—any that exist are fleeting. Continuously realigning businesses with emerging opportunities and articulating that emergent strategy are the principal responsibilities for on-the-edge senior managers. Pattern recognition, articulation of those patterns, and flexible thinking across time frames are the skills at the heart of the senior manager’s job in an on-the-edge company. Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

40. Verdict? • Cycles are getting faster in some sectors. (eg cameras) • Hypercompetition as defined by move to same price-quality ratios exist in many non-technology markets • Evidence across industries is mixed • Where it is evident, very difficult strategies and strategic processes are required. • The internet is now creating fundamental change