Hope this slide will help you Identify and analysis the challenges to sustainable competitive advantage in a dynamic context

1. Crafting Business
Strategy for Dynamic
Contexts
C t t

2. OBJECTIVES
1 Identify the challenges to sustainable competitive
advantage in dynamic contexts
2 Understand the fundamental dynamics of
competition
3 E l t th advantages and di d
Evaluate the d t d disadvantages of
t f
choosing a first-mover strategy
4 Analyze and develop strategies for managing
industry evolution
5 Analyze and develop strategies for technological
discontinuities
6 Analyze and develop strategies for high speed
high-speed
environmental change
7 Explain the implications of a dynamic strategy for
the strategy diamond and strategy implementation
1

3. THE TALE OF NAPSTER
Business model options
Bank-
Napster
p Music
rupt Roxio and iTunes
A la carte
sell single songs
Sold
to
Software Unlimited downloads
Roxio Software Music Subscription
and music for $9.99/month
usiness
oftware
Real-network's Rhap-
sody lets music lovers
old
Streaming
So
Bu
so
listen as much as they
want for one monthly
fee
Sonic
Software
solutions
2

4. THREE CAUSES OF DYNAMIC CONTEXTS
Examples
E l
When incumbents and, Mini-mills entered with a new
Competitive especially, new entrants use a business model and incumbent
Interaction new business model they drive steel companies did not respond
dynamism in market
As industries evolve and Arm and Hammer almost lost its
Industry competition shifts from lead position when baking soda
evolution
l ti diff i i
differentiation to price/low-cost,
i /l became commoditized
b di i d
advantages shift between rivals
When technological change is The shift to digital photography
Technological discontinuous, it does not favors the strengths of Sony not
change sustain e isting
s stain existing leaders photography inc mbent
photograph incumbent like
advantages Kodak
3

5. PHASES OF COMPETITIVE INTERACTION
Phase 1 Phase 2 Phase 3 Phase 4
Discovery Customer Competitor Evaluation of
and reaction reaction action and
competitive reaction
new action
ti effectiveness
ff ti
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 4

6. THE SPECTRUM OF COMPETITIVE RESPONSES STRATEGIES
Difficult
D
Ease with thre can
led
eat
be controll
e
t
Great
Limited Extensive
Scope of response
5

7. CONTAINMENT
Containment
Neutralization Limit the extent to which the new entrant’s
innovation impacts y
p your business
For example: American Airlines can partially
contain Southwest by using its bargaining
Shaping power to secure more exclusive airport gates
Absorption
Annulment
6

8. NEUTRALIZATION
Containment
Neutralization Try to short-circuit the moves of
innovators or new entrants before they
y
make them
For example: The Recording Industry
Shaping 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
Absorption
Annulment
7

9. SHAPING
Containment
Neutralization Shape the innovation so it becomes
something the incumbent can live with or
g
even benefit from
For example: For years the American
Shaping Medical Association used regulators to
attack chiropractors; now they shape
chiropractic medicine to become a
complement to traditional medicine
Absorption
Annulment
8

10. ABSORPTION
Containment
Neutralization 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
Shaping and QuickBooks; because it identified
money-management software as a high-
growth opportunity.
Absorption
Annulment
9

11. ANNULMENT
Containment
Neutralization Improve incumbent products and
services to annul an innovation or new
entrant’s offering
For example: Kodak has improved the
Shaping quality of its film-based prints so that they
are superior to many digital-based
alternatives
Absorption
Annulment
10

12. PROS AND CONS OF FIRST MOVERS
A first-mover is often better off than a A first-follower is often better off than
fast follower when: 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 • The first mover’s offering strikes a
are hard to copy chord but is flawed
• Its customers are locked in (i.e., • The first mover lacks a key
switching costs exist) complement (e.g., channel access) that
the follower possesses
• Scale of the first move makes imitation • First-mover costs outweigh the
unlikely advantages of being the first-move
11

13. A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS
Imitators/fast
Product Pioneer(s) followers Comments
Automated DeLaRue (1967) Diebold (1971) The first movers were small entrepreneurial
teller machines Docutel (1969)
( ) IBM (1973)
( ) 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
Eversharp (1946) Bic (1960) in the late 1940s. Parker t d
i th l t 1940 P k entered 8 years l t later. Bi
Bic
entered last and sold pens as cheap disposables
Commercial DeHaviland (1952) Boeing (1958) The pioneers rushed to market with a jet that crashed
jets Douglas (1958) frequently. Boeing and Douglas (later known as
McDonnell-Douglas)
McDonnell Douglas) followed with safer, larger, and
safer larger
more powerful jets unsullied by tragic crashes
Credit cards Diners club (1950) Visa/Master- The first mover was undercapitalized in a business
Card (1966) in which money is the key resource. American
American
A i Express entered last with funds and name
Express (1968) recognition from its traveler’s check business
Diet soda Kirsch’s No-Cal Pepsi’s Patio Cola The first mover could not match the distribution
(1952) (1963) advantages of Coke and Pepsi. Nor did it have the
R
Royal C
l Crown’s Di t
’ Diet C k ’ T b (1964)
Coke’s Tab money or marketing expertise needed for massive
Rite Cola (1962) Diet Pepsi (1964) promotional campaigns
Diet Coke (1982)
12

14. A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS (CONT.)
Imitators/fast
Product Pioneer(s) followers Comments
Light beer Rheingold’s and Miller Lite (1975) The first movers entered 9 years before Miller and
Gablinger’s (1968) Natural light
g 16 years before Budweiser, but financial problems
Meister Brau Lite (1977) drove both out of business. Marketing and
(1967) Coors light distribution determined the outcome. Costly legal
(1978) battles, again requiring access to capital, were
commonplace
Bud light (1982)
PC operating CP/M (1974) Microsoft DOS The first mover set the early industry standard but
systems (1981) did not upgrade for the IBM PC. Microsoft bought
Microsoft an imitative upgrade and became the new
Windows (1985) standard.
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) Sega (1989) bust occurred when home computers seemed likely
Atan’s Pong (1972) Microsoft (1998) 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
Source: Adapted from S. Schnaars, Managing Imitation Strategies (New York Free Press, 1994), 37-43 13

15. EVALUATING A FIRM’S FIRST-MOVER DEPENDENCIES
ON INDUSTRY COMPLEMENTS
Status of complementary assets
Freely available Tightly held and
or unimportant
i t t important
i t t
ction
It is difficult for anyone to Value-creation
ges
on
make money: Industry
y y opportunities favor the
pp
Weak protec
ases of fir mover advantag
fro imitatio
incumbent may simply holder of complementary
give new product or assets, who will probably
service away as part of its pursue a fast-follower
om
larger bundle of offerings strategy
W
r
tion
rst
Stro protect
from imitation
First mover can do well Value will go either to first
depending on the mover or to party with the
execution of its strategy most bargaining power
ong
Ba
m
14

16. STRATEGIES FOR MANAGING COMMODITIZATION
Examples
E l
Value-in-use Timken bundles commodity
approach product with key components
Anticipating
Process
Dell ll directly to
D ll sells di tl t
innovation
consumers
approach
Managing
commoditization
diti ti
K-mart and KB Toys both
Market
reduced number of customers
focus
when they restructured
Responding
Service Hotels may charge extra for
y g
innovation cable TV and computer hookups
15

17. EFFECT OF TECHNOLOGICAL DISRUPTION
Performance
Maturity
Maturity Growth
Disruption
Growth
Embryonic
Embryonic
y
Time
16

18. FOUR ACTIONS FRAMEWORK: KEY TO THE VALUE CURVE
Reduce
The key to discovering a What factors should
new value curve lies in be reduced well
answering four basic belo the industry
below ind str
questions standard?
Eliminate Create/Add
Creating
What factors that the new markets: What factors that the
industry has taken for A new value industry has never
granted should be curve offered should be
eliminated? created or added?
Raise
What factors should
be raised well above
the industry t d d?
th i d t standard?
Source: Adapted from W.C. Kim and R. Mauborgne, “Blue Ocean Strategy,” California Management Review 47:3 (2005), 105-121 17

19. HIGH AND LOW-END DISRUPTION
Strategy that may result in huge
new markets in which new
High-end
players redefine industry rules to
unseat the largest incumbents
Strategy that appears at the low
end of industry offerings,
Low-end
targeting the least desirable of
incumbents’ customers
18

20. VALUE CURVE for U.S. WINE INDUSTRY – YELLOW TAIL
Expensive wines
Yellow tail
Cheap wines
High
Low
Price Above-the-line Vineyard Wine Ease of
g
marketing p g
prestige range
g selection
Use of technical Aging Wine Easy Fun and
wine terminology quality complexity drinkability adventure
19

21. CONVENTIONAL VS. NEW MARKET-CREATION STRATEGIC MINDSETS
Dimensions
Di i
of competition Head-to-Head competition New-market creation
Emphasizes rivalry Emphasizes substitutes across
Industry industries
Emphasizes competitive position Looks across groups and
Strategic group and within group and segments segments
industry segments
Emphasizes better buyer service Emphasizes redefinition of the
Buyers buyer and buyer’s preferences
Emphasizes product or service Emphasizes complementary
Product and value and offerings within industry products and services within and
service offerings definition across industries and segments
Emphasizes efficient operation Emphasizes rethinking of the
Business model of the model industry business model
Emphasizes adaptation and capa capa- Emphasizes strategic intent
intent-
Time bilities that support competitive seeking to shape the external
retaliation environment over time
20

22. SOME WELL-KNOWN DISRUPTIONS
Microsoft took 15 years to grow from boutique
software firm to Goliath
Atari grew from $50 million to $1.6billion over 5
years,
years doubling every year
Compaq grew from zero revenues to $ 1billion
in 5 years
21

23. CREATING OPTIONS FOR FUTURE COMPETITIVE ADVANTAGE AND
PROFITABILITY
Profit
Horizon 3
H i
Tactical Seed options for future
probing growth business
Horizon 2
Drives growth in
emerging new business
Horizon 1
Defend and extend
current business
Time
22

24. IMPROVISATION AND SIMPLE RULES
Just as Jazz musicians can improvise
p ... corporations can become more
p
when they play together because they flexible by allowing improvisation
follow a set of simple rules ... under a set of simple rules
Simple rules
• Customer is always right
• Always run highest profitability
products
• Never
23

25. TACTICAL PROBING OPERATIONAL TACTICS CAN BECOME STRATEGICALLY
IMPORTANT
discount initiative
Tactical initiatives
nch
Merrill lyn
• Futures – trading
• Si lifi d mutual-fund offerings
Simplified t l f d ff i
Though some initia-
tives failed, several
Charles enabled Charles
Schwab
• Internet products services
p
S h b t f th
Schwab to further
differentiate itself
from its bare-bones
• Credit cards
competition
p
E* Trade
• Outline mortgage
E
24

26. STAGING AND PACING IN THE REAL WORLD
“Five years is the maximum that you can go without refreshing the brand ... We did it
British Airways (relaunched Club Europe Service) because we wanted to stay ahead so that we
could continue to win customers”
“In each of the last three years we’ve introduced more than 100 major new products,
Emerson Electric 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”
The inventor of Moore’s Law stated that the power of the computer chip would
Intel 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”
them, grow
40% of Gillette’s sales every five years must come from entirely new products (prior
Gillette 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
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
3M
Source: S. Brown and K. Eisenhardt, Competing on the Edge: Strategy as Structure Chaos (Boston: Harvard Business School Press, 1998)25

27. REAL OPTIONS – FIVE CATEGORIES
1. Waiting-to-invest options. The value of waiting to build a factory
until b tt market i f
til better k t information comes along may exceed th value
ti l d the l
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
p j
project in response to new information increases its value
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

28. THE VALUE OF REAL OPTIONS
DCF value Value of Total busi-
real options ness value
Current Real- Total
business + options = business
value value value
Source: 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. 27

29. SUMMARY
1 Identify the challenges to sustainable competitive
advantage in dynamic contexts
2 Understand the fundamental dynamics of
competition
3 E l t th advantages and di d
Evaluate the d t d disadvantages of
t f
choosing a first-mover strategy
4 Analyze and develop strategies for managing
industry evolution
5 Analyze and develop strategies for technological
discontinuities
6 Analyze and develop strategies for high speed
high-speed
environmental change
7 Explain the implications of a dynamic strategy for
the strategy diamond and strategy implementation
28