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Crafting Business Crafting Business Strategy for Dynamic C t t Contexts

Bussiness Strategy

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Page 1: Bussiness Strategy

Crafting BusinessCrafting Business Strategy for Dynamic C t tContexts

Page 2: Bussiness Strategy

OBJECTIVES

Identify the challenges to sustainable competitive advantage in dynamic contexts

1advantage in dynamic contexts Understand the fundamental dynamics of competition

2

E l t th d t d di d t f3 Evaluate the advantages and disadvantages of choosing a first-mover strategy

3

Analyze and develop strategies for managing industry evolution

4industry evolutionAnalyze and develop strategies for technological discontinuities

5

Analyze and develop strategies for high speed6 Analyze and develop strategies for high-speed environmental change

6

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

7

1

the strategy diamond and strategy implementation

Page 3: Bussiness Strategy

THE TALE OF NAPSTER

Business model options

Napster Music Bank-rupt Roxio and iTunes

Sol

d to

p rupt A la carte Roxio and iTunes sell single songs

RoxioSoftware and music Software Music Subscription Unlimited downloads

for $9.99/month

oftw

are

usin

ess

old

Streaming

Real-network's Rhap-sody lets music lovers

So

Bu

so

SoftwareSonic

Streaming listen as much as they want for one monthly fee

2

Softwaresolutions

Page 4: Bussiness Strategy

THREE CAUSES OF DYNAMIC CONTEXTS

E lExamples

CompetitiveWhen incumbents and, especially, new entrants use a

Mini-mills entered with a new business model and incumbent

Interaction new business model they drive dynamism in market

steel companies did not respond

As industries evolve and competition shifts from diff i i i /l

Arm and Hammer almost lost its lead position when baking soda b di i d

Industryl ti differentiation to price/low-cost,

advantages shift between rivals became commoditized evolution

When technological change is discontinuous, it does not s stain e isting leaders

The shift to digital photography favors the strengths of Sony not photograph inc mbent like

Technologicalchange

3

sustain existing leaders advantages

photography incumbent like Kodak

change

Page 5: Bussiness Strategy

PHASES OF COMPETITIVE INTERACTION

Phase 1 Phase 2 Phase 3 Phase 4Phase 1Discoveryand competitive

ti

Phase 2Customer reaction

Phase 3 Competitor reaction

Phase 4 Evaluation of action and reaction

ff tinew action effectiveness

4Source: 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

Page 6: Bussiness Strategy

THE SPECTRUM OF COMPETITIVE RESPONSES STRATEGIES

Diff

icul

t

eat c

an

led

D

with

thre

e co

ntro

llEa

se be

tG

reat

Limited Extensive

5

Scope of response

Limited Extensive

Page 7: Bussiness Strategy

CONTAINMENT

Containment

Neutralization Limit the extent to which the new entrant’s innovation impacts your business

Shaping

p y

For example: American Airlines can partially contain Southwest by using its bargaining power to secure more exclusive airport gates

AbsorptionAbsorption

6

Annulment

Page 8: Bussiness Strategy

NEUTRALIZATION

Containment

Neutralization Try to short-circuit the moves of innovators or new entrants before they

Shaping

ymake them

For example: The Recording Industry Association of America launched such a

Absorption

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

Absorption

7

Annulment

Page 9: Bussiness Strategy

SHAPING

Containment

Neutralization Shape the innovation so it becomes something the incumbent can live with or

Shaping

geven benefit from

For example: For years the American Medical Association used regulators to

Absorption

attack chiropractors; now they shape chiropractic medicine to become a complement to traditional medicine

Absorption

8

Annulment

Page 10: Bussiness Strategy

ABSORPTION

Containment

Neutralization Minimize the risks entailed by being either a first mover or an imitator

Shaping

For example: In the late 1980s Microsoft purchased Intuit, the maker of Quicken and QuickBooks; because it identified

Absorption

money-management software as a high-growth opportunity.

Absorption

9

Annulment

Page 11: Bussiness Strategy

ANNULMENT

Containment

Neutralization Improve incumbent products and services to annul an innovation or new

Shaping

entrant’s offering

For example: Kodak has improved the quality of its film-based prints so that they

Absorption

are superior to many digital-based alternatives

Absorption

10

Annulment

Page 12: Bussiness Strategy

PROS AND CONS OF FIRST MOVERS

A first-follower is often better off than a first mover when:

A first-mover is often better off than a fast follower when:

• Rapid technology advances allow a fast-follower to leapfrog the first mover

• It achieves absolute cost advantage

a first mover when:fast follower when:

• 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-move

• Scale of the first move makes imitation unlikely

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Page 13: Bussiness Strategy

A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS

Product Pioneer(s)Imitators/fast followers Comments

Automated teller machines

DeLaRue (1967)Docutel (1969)

Diebold (1971)IBM (1973)

The first movers were small entrepreneurial upstarts that faced two types of competitors: (1)

(ATMs)( ) ( )

NCR (1974) larger firms with experience selling to banks and (2) the computer giants. The first movers did not survive

Ballpoint pens Reynolds (1945) Parker (1954) The pioneers disappeared when the fad first ended i th l t 1940 P k t d 8 l t BiEversharp (1946) Bic (1960) 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 andMcDonnell-Douglas) followed with safer, larger, and more powerful jets unsullied by tragic crashes

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

The first mover was undercapitalized in a business in which money is the key resource. American Express entered last with funds and nameAmerican

Express (1968)Express entered last with funds and name recognition from its traveler’s check business

Diet soda Kirsch’s No-Cal(1952)R l C ’ Di t

Pepsi’s Patio Cola (1963)C k ’ T b (1964)

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

12

Royal Crown’s DietRite Cola (1962)

Coke’s Tab (1964)Diet Pepsi (1964)Diet Coke (1982)

money or marketing expertise needed for massive promotional campaigns

Page 14: Bussiness Strategy

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

Product Pioneer(s)Imitators/fast followers Comments

Light beer Rheingold’s and Gablinger’s (1968)

Miller Lite (1975)Natural light

The first movers entered 9 years before Miller and 16 years before Budweiser, but financial problems

Meister Brau Lite(1967)

g(1977)Coors light (1978)Bud light (1982)

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 borrowedWindows (1985) standard. Windows entered later and borrowed heavily from predecessors (and competitor Apple), then emerged as the leading interface

Video games Magnavox’s Nintendo (1985) The market went from boom to bust to boom. The Odyssey (1972)Atan’s Pong (1972)

Sega (1989)Microsoft (1998)

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.

13

and restored market order with managed competition. Microsoft entered with its Xbox when perceived gaming to be a possible component of its wired world

Source: Adapted from S. Schnaars, Managing Imitation Strategies (New York Free Press, 1994), 37-43

Page 15: Bussiness Strategy

EVALUATING A FIRM’S FIRST-MOVER DEPENDENCIESON INDUSTRY COMPLEMENTS

Status of complementary assets

Freely available i t t

Tightly held and i t tor unimportant important

ges

ctio

n on

It is difficult for anyone to make money: Industry

Value-creation opportunities favor the

r adv

anta

g

Wea

k pr

otec

om im

itatio

y yincumbent may simply give new product or service away as part of its larger bundle of offerings

ppholder of complementary assets, who will probably pursue a fast-follower strategy

rst m

over

tion

W fro larger bundle of offerings strategy

ases

of f

ir

ong

prot

ect

m im

itatio

n 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

Ba

Stro

from

Page 16: Bussiness Strategy

STRATEGIES FOR MANAGING COMMODITIZATION

E l

Value-in-useapproach

Timken bundles commodity product with key components

Examples

Anticipating

approach

Process

product with key components

D ll ll di tl t

Managingditi ti

Processinnovationapproach

Dell sells directly toconsumers

commoditization

Marketfocus

K-mart and KB Toys both reduced number of customers when they restructured

Responding

Service

when they restructured

Hotels may charge extra for

15

innovationy g

cable TV and computer hookups

Page 17: Bussiness Strategy

EFFECT OF TECHNOLOGICAL DISRUPTION

MaturityPerformance

Maturity Growth

Disruption

Growth

Embryonic

Growth

Embryonic

Embryonic

16

yTime

Page 18: Bussiness Strategy

FOUR ACTIONS FRAMEWORK: KEY TO THE VALUE CURVE

ReduceWhat factors should be reduced well belo the ind str

The key to discovering a new value curve lies in answering four basic below the industry

standard?answering four basic

questions

Creatingnew markets:A new value

EliminateWhat factors that theindustry has taken for

Create/AddWhat factors that the industry has never A new value

curvegranted should be eliminated?

offered should be created or added?

RaiseWhat factors should be raised well above th i d t t d d?

17

the industry standard?

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

Page 19: Bussiness Strategy

HIGH AND LOW-END DISRUPTION

Strategy that may result in huge new markets in which new players redefine industry rules to High-endplayers 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

Low-end

18

incumbents’ customers

Page 20: Bussiness Strategy

VALUE CURVE for U.S. WINE INDUSTRY – YELLOW TAIL Expensive winesExpensive winesYellow tailCheap wines

High

Low

Price Above-the-linemarketing

Vineyardprestige

Winerange

Ease ofselection

Low

19

Use of technicalwine terminology

g

Agingquality

p g

Winecomplexity

g

Easydrinkability

Fun andadventure

Page 21: Bussiness Strategy

CONVENTIONAL VS. NEW MARKET-CREATION STRATEGIC MINDSETS

Di i

IndustryEmphasizes rivalry

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

Emphasizes substitutes across industries

Strategic group andindustry segments

Industry

Emphasizes competitive position within group and segments

Looks across groups and segments

industry segments

BuyersEmphasizes better buyer service Emphasizes redefinition of the

buyer and buyer’s preferences

Product and service offerings

Emphasizes product or service value and offerings within industry definition

Emphasizes complementary products and services within and across industries and segments

Business modelEmphasizes efficient operation of the model

Emphasizes adaptation and capa

Emphasizes rethinking of the industry business model

Emphasizes strategic intent

20

TimeEmphasizes adaptation and capa-bilities that support competitive retaliation

Emphasizes strategic intent-seeking to shape the external environment over time

Page 22: Bussiness Strategy

SOME WELL-KNOWN DISRUPTIONS

Microsoft took 15 years to grow from boutiqueMicrosoft took 15 years to grow from boutique software firm to Goliath

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

Compaq grew from zero revenues to $ 1billionin 5 years

21

Page 23: Bussiness Strategy

CREATING OPTIONS FOR FUTURE COMPETITIVE ADVANTAGE AND PROFITABILITY

Profit

H i 3Horizon 3Seed options for future growth business

Tactical probing

Horizon 2Drives growth in emerging new business

Horizon 1Defend and extend current business

22

Time

Page 24: Bussiness Strategy

IMPROVISATION AND SIMPLE RULES

Just as Jazz musicians can improvise ... corporations can become more pwhen they play together because they follow a set of simple rules ...

pflexible by allowing improvisation under a set of simple rules

Simple rulesSimple rules

• Customer is always right

• Always run highest profitability products

• Never

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Page 25: Bussiness Strategy

TACTICAL PROBING OPERATIONAL TACTICS CAN BECOME STRATEGICALLY IMPORTANT

nch

initi

ativ

e Tactical initiatives

Mer

rill l

yndi

scou

nt

• Futures – trading

Si lifi d t l f d ff iThough some initia-tives failed, several enabled Charles S h b t f th

Charles Schwab

• Simplified mutual-fund offerings

• Internet products services Schwab to further differentiate itself from its bare-bones competition

Schwab p

• Credit cards p

E* T

rade

• Outline mortgage

24

E

Page 26: Bussiness Strategy

STAGING AND PACING IN THE REAL WORLD

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”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 newspaperincreases 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.

30% of sales must come from products that are fewer than 4 years old

25Source: S. Brown and K. Eisenhardt, Competing on the Edge: Strategy as Structure Chaos (Boston: Harvard Business School Press, 1998)

3M 30% of sales must come from products that are fewer than 4 years old

Page 27: Bussiness Strategy

REAL OPTIONS – FIVE CATEGORIES

1. Waiting-to-invest options. The value of waiting to build a factory til b tt k t i f ti l d th luntil 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 valuep j p

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

26

whether the firm should add more capacity

Page 28: Bussiness Strategy

THE VALUE OF REAL OPTIONS

Total busi-ness value

DCF value Value ofreal options ness valuereal options

+ =Current business

value

Real-options value

Total business

value

27Source: L.E.K. Consulting LLC, Shareholder Value Added: Making Real Decisions with Real Options (Accessed September 12, 2005),

www.lek.com/ideas/publications/sva 16.pdf.

value value value

Page 29: Bussiness Strategy

SUMMARY

Identify the challenges to sustainable competitive advantage in dynamic contexts

1advantage in dynamic contexts Understand the fundamental dynamics of competition

2

E l t th d t d di d t f3 Evaluate the advantages and disadvantages of choosing a first-mover strategy

3

Analyze and develop strategies for managing industry evolution

4industry evolutionAnalyze and develop strategies for technological discontinuities

5

Analyze and develop strategies for high speed6 Analyze and develop strategies for high-speed environmental change

6

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

7

28

the strategy diamond and strategy implementation