MBA299: Strategy

1
MBA299 Strategy

• Leadership Online Barnes Noble vs Amazon
• Take-aways
• April 13, 2006

2
Discussion plan for Leadership Online

• Review positioning analysis
• On-line book reselling vs. off-line book
  reselling
• Digital music (iTunes) vs. CD retailing
• Understand Barnes Nobles response to advent of
  on-line book reselling
• Response to a substitution threat
• Can online retailers make money?

3
What is positioning analysis?

• Examines relative costs and relative willingness
  to pay between competitors
• a.k.a. relative competitive position (RCP)
  analysis
• A good starting point for assessing the strengths
  and weaknesses of a given strategy, threat of
  retaliation from direct rivals, and potential
  impact of substitute technologies
• despite weaknesses, provides quantitative
  benchmark for assessing position, sensitivities,
  etc.

Know the enemy and know your yourself, and you
can fight a hundred battles with no danger of
defeat Sun Tzu
4
Operating Performance Comparison, Coors vs.
Anheuser Busch
Prices and Costs Per Barrel
Dollars (1977)
5
Dell vs. a Compaq/Reseller Team in 1996
WTP for Compaq / Reseller Product
WTP for Dell Product (?)
Compaq / Reseller Price
500
Dell Price
Compaq / Reseller Cost
300
Dell Cost
6
Ryanair vs. Aer Lingus British Airways
Estimated Relative Cost Per Passenger Dublin -
London
7
Four threats to sustainability of competitive
advantage
Imitation
Substitution
Slack
Holdup
8
Positioning analysis can be performed on
substitutes

• Preceding examples all are positioning
  comparisons with rivals pursuing similar
  activities
• Same process can be performed with substitutes
• Traditional stock brokerage vs. online brokerage
• Online vs. offline bookselling
• Other examples
• iTunes vs. record stores
• Netflix vs. video store rentals
• How great is the threat? Will the current
  business model disappear? How can the existing
  firm modify its current way of doing business to
  respond to the threat?

9
Example of a Substitution Threat Economics of
Brokerage Business Models, 1996
Source Rajiv Lal, E-Trade Securities, Inc.
Stanford University Graduate School of Business
Case No. M-286, 1996
10
Cost Comparison of Online vs. Offline Business
Models, Based on 1996 Figures Projections
11
Responses to Substitution Threats

• Not responding.
• Fighting. Investing to improve the value
  generated by the existing products / business
  model
• Switching. Complete conversion to rivals
  business model
• Recombining. Incorporating elements of rivals
  business model
• Straddling. Short run measure to delay the
  penetration of rivals business model
• Harvesting. Manage business for cash,
  anticipating exit / reduction in scale

12
The Barnes and Noble Response Some lessons

• BN did some good things (relative to analogs in
  other industries)
• Identified and responded to the threat fairly
  early
• Broadened and shifted the scope of the strategic
  scanning effort (looked at players beyond the
  immediate threat for solutions)
• How would you solve if starting afresh (e-books,
  B-O-D, etc.)?
• Attempt to lock-out competitors from up and
  downstream
• Failed attempt to purchase Ingram
• Commitment to deter investment
• Increase superstore footprint
• Price cuts

13
The Barnes and Noble Response Some lessons

• But some problems?
• Straddle strategy was probably only choice
• Straddle however was primarily imitation
• Me-too was not very effective (particularly in
  hindsight)
• Some conflicts with existing business model make
  radical shifts difficult
• Offline not want to make it easy for .com?
• Worried about cannibalization that happened
  eventually?
• Leapfrogging to kill Amazon would have to damage
  its own business (B-O-D, e-books)
• Commitment is good but in this case, could price
  cuts could have been be ill-founded (sin of
  commission)
• Exploded online demand
• Failed to deter Amazon, may have inspired get
  big faster given increase in breakeven
• Removed headroom for BN to pay 5-7 sales tax
• Did not build on non-imitable pieces of business
  perhaps doomed therefore? (sin of omission)
• Very late to extract advantages and synergies
  from physical network
• Slow to build out vertical/horizontal scope
• Often times in face of radical/disruptive
  technologies recombination may be best avenue
• In sum, BN did well to recognize substitution
  threat early, but did not respond in ways that
  were likely to force Amazon to back down
  particularly because they did not build on areas
  of unique advantage

14
Generic Barriers to Effective Responses to
Substitution

• Substitutes tend to start out in small, less
  profitable niches, and are at their most
  dangerous when they initially underserve the
  needs of existing customers (but get better
  fast!)
• Substitutes tend to inspire mixed motives in
  incumbents, who may believe that their incentives
  to respond are dissipated by cannibalization
  threat
• There may be ambiguity about which business model
  will win out
• Responding to substitutes may require
  capabilities that incumbents lack and that are
  hard to acquire

15
Barnes Noble Corporation vs. Amazon.com
16
Can Amazon Be Successful? Some initial thoughts
on competing on the internet (more to come)

• Internet retailing is tough
• Limited entry barriers frictionless markets ?
  marginal cost pricing ? consumer surplus
  increased, tough to make profits
• Scale economies, distribution, brand equity
  replicable
• Substitution threats substantial e-books
• Holdups portals, IP walking out the door (key
  person risk)
• Slack risk creativity requires slack but also
  harms operational effectiveness
• Where will barriers come from?
• If distribution is complicated, it is possible to
  have barriers to imitation
• Non-digitizability (e-books could kill the
  business)
• Increase WTP (enhanced differentiation)
• Community (EBay edge?)
• Networks (Instant messaging)
• Information leverage
• Collaborative filtering
• Demand pricing
• Brand/reputation in absence of physical assurance
• Non-market activity may be critical
• Tax breaks