Chapter 6

1. Chapter 6 Crafting Business Strategy for Dynamic Contexts

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

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

4. SOUTHWEST AIRLINES “Think and act big and we’ll get smaller. Think and act small and we’ll get bigger.” – Herb Kelleher

5. 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 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 THREE CAUSES OF DYNAMIC CONTEXTS Examples CompetitiveInteraction Industryevolution Technologicalchange

6. Phase 1Discoveryand competitive new action Phase 2Customer reaction Phase 3 Competitor reaction Phase 4 Evaluation of action and reaction effectiveness PHASES OF COMPETITIVE INTERACTION 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

7. COMMODITIZATION Based on price ? Making a choice for a gas station

8. 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

9. High-end Low-end 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

10. Re-conceiving a Product • Reconfiguring the Value Chain • Redefining arenas • Rescaling the industry • Reconsidering the competitivemindset 5 Types of Revolutionary Strategies 9

11. FOUR ACTIONS FRAMEWORK: KEY TO THE VALUE CURVE Eliminate Create/Add What factors that theindustry has taken forgranted should be eliminated? What factors that the industry has never offered should be created or added? Reduce The key to discovering a new value curve lies in answering four basic questions What factors should be reduced well below the industry standard? Creating new markets: A new value curve Raise What factors should be raised well above the industry standard? Source: Adapted from W.C. Kim and R. Mauborgne, “Blue Ocean Strategy,” California Management Review 47:3 (2005), 105-121 10

12. 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.

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

14. PROS AND CONS OF FIRST MOVERS A first-mover is often better off than a fast follower when: A first-follower is often better off than a first mover when: • It achieves absolute cost advantage • Rapid technology advances allow a fast-follower to leapfrog the first mover • Its reputation and image advantages are hard to copy • The first mover’s offering strikes a chord but is flawed • Its customers are locked in (i.e., switching costs exist) • The first mover lacks a key complement (e.g., channel access) that the follower possesses • Scale of the first move makes imitation unlikely • First-mover costs outweigh the advantages of being the first-move

15. 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 pens Reynolds (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 cards Diners 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 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 distribution advantages of Coke and Pepsi. Nor did it have the money or marketing expertise needed for massive promotional campaigns A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS Imitators/fast followers Product Pioneer(s) Comments

16. Light beer Rheingold’s and Gablinger’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 and 16 years before Budweiser, but financial problems 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 borrowed heavily 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 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. Microsoft entered with its Xbox when perceived gaming to be a possible component of its wired world A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS (CONT.) Imitators/fast followers Product Pioneer(s) Comments Source: Adapted from S. Schnaars, Managing Imitation Strategies (New York Free Press, 1994), 37-43

17. 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 EVALUATING A FIRM’S FIRST-MOVER DEPENDENCIESON INDUSTRY COMPLEMENTS Status of complementary assets Tightly held and important Freely available or unimportant Weak protection from imitation Bases of first mover advantages Strong protection from imitation

18. THE SPECTRUM OF COMPETITIVE RESPONSES STRATEGIES Difficult Ease with threat can be controlled Containment/Neutralization/Shaping/Absorption/Annulment Great Limited Extensive Scope of response

19. CONTAINMENT Containment 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 Neutralization Shaping Absorption Annulment

20. NEUTRALIZATION Containment 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 Neutralization Shaping Absorption Annulment

21. SHAPING Containment 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 Neutralization Shaping Absorption Annulment

22. ABSORPTION Containment 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. Neutralization Shaping Absorption Annulment

23. ANNULMENT Containment 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 Neutralization Shaping Absorption Annulment

24. 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 • Growth options. An entry investment may create opportunities to pursue valuable follow-up projects • 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 • Exit (or abandonment) options. The option to walk away from a project in response to new information increases its value • 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 REAL OPTIONS – FIVE CATEGORIES

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

26. STAGING AND PACING IN THE REAL WORLD “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” British Airways “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” Emerson Electric 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” Intel 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. Gillette 30% of sales must come from products that are fewer than 4 years old 3M Source: S. Brown and K. Eisenhardt, Competing on the Edge: Strategy as Structure Chaos (Boston: Harvard Business School Press, 1998)