Crafting Business Strategy for Dynamic Contexts

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Chapter 6
Crafting Business Strategy for Dynamic Contexts
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OBJECTIVES
Identify the challenges to sustainable
competitive advantage in dynamic contexts

1
Understand the fundamental dynamics of competition
2
Evaluate the advantages and disadvantages of
choosing a first-mover strategy
3
Analyze and develop strategies for managing
industry evolution
4
Analyze and develop strategies for technological
discontinuities
5
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
3
THE TALE OF NAPSTER
Business model options
Napster
Music
Software and music
Software
Music
Roxio
Sonic solutions
4
THREE CAUSES OF DYNAMIC CONTEXTS
Examples
CompetitiveInteraction
Industryevolution
Technologicalchange
5
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
152 (2001), 59-70
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THE SPECTRUM OF COMPETITIVE RESPONSES STRATEGIES
Difficult
Ease with threat can be controlled
Containment/Neutralization/Shaping/Absorption/Annu
lment
Great
Any firm that invests in resources and
capabilities that support retaliation to the
exclusion of innovation and change may only be
prolonging its inevitable demise
Limited
Extensive
Scope of response
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CONTAINMENT
Containment
Limit the extent to which the new entrants
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
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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
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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
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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
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ANNULMENT
Containment
Improve incumbent products and services to annul
an innovation or new entrants 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
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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

• The first movers 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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A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS
Imitators/fast followers
Product
Pioneer(s)
Comments
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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
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EVALUATING A FIRMS 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
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STRATEGIES FOR MANAGING COMMODITIZATION
Examples
Value-in-useapproach
Anticipating
Processinnovation approach
Managingcommoditization
Marketfocus
Responding
Service innovation
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EFFECT OF TECHNOLOGICAL DISRUPTION
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FOUR ACTIONS FRAMEWORK KEY TO THE VALUE CURVE
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
Cirque du Soleil example
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 473 (2005), 105-121
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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
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VALUE CURVE for U.S. WINE INDUSTRY YELLOW TAIL
High
Low
Price
Above-the-linemarketing
Vineyardprestige
Winerange
Ease ofselection
Use of technicalwine terminology
Agingquality
Winecomplexity
Easydrinkability
Fun andadventure
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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
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SOME WELL-KNOWN DISRUPTIONS
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CREATING OPTIONS FOR FUTURE COMPETITIVE ADVANTAGE
AND PROFITABILITY
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IMPROVISATION AND SIMPLE RULES
Just as Jazz musicians can improvise when they
play together because they follow a set of simple
rules ...
... corporations can become more flexible by
allowing improvisation under a set of simple
rules
Simple rules

• Customer is always right

• Always run highest profitability products

• Never

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TACTICAL PROBING OPERATIONAL TACTICS CAN BECOME
STRATEGICALLY IMPORTANT
Charles Schwab
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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 weve 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 Moores 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 Gillettes sales every five years must
come from entirely new products (prior to its
acquisition by PG). 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)
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REAL OPTIONS FIVE CATEGORIES
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THE VALUE OF REAL OPTIONS
Total busi-ness value
DCF value
Value ofreal options
Current businessvalue
Real-options value
Total businessvalue


Source L.E.K. Consulting LLC, Shareholder Value
Added Making Real Decisions with Real Options
(Accessed September 12, 2005), www.lek.com/ideas/p
ublications/sva 16.pdf.
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SUMMARY
Identify the challenges to sustainable
competitive advantage in dynamic contexts

1
Understand the fundamental dynamics of competition
2
Evaluate the advantages and disadvantages of
choosing a first-mover strategy
3
Analyze and develop strategies for managing
industry evolution
4
Analyze and develop strategies for technological
discontinuities
5
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
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EXERCISES

• If you were the CEO of Napster, what material
  from this chapter would be most relevant to you?
  How might it help you formulate strategy? What
  might the key components of the strategy be? How
  should Microsoft use this chapter to formulate a
  strategic response to Napster?
• Consider first and second mover advantages. What
  specific resources and capabilities do you think
  successful first and second movers must possess?
  Do you think a firm could be both a first mover
  and fast follower if it wanted to be?
• Choose an industry you believe is very dynamic
  and identify the drivers of that dynamism. Now
  pick a firm in that industry and formulate a
  strategy and basic implementation scheme to
  exploit its dynamic context