Shifts in Competitive Advantage: Responding to Environmental Change pptx

CHAPTER OUTLINE CASE 1 Timex and the Electronic Revolution CASE 2 Eastman Kodak and Digital Photography Introduction New Developments Affecting Competitive Advantage New Technology New D

CHAPTER OUTLINE

CASE 1 Timex and the Electronic

Revolution CASE 2 Eastman Kodak and Digital

Photography Introduction

New Developments Affecting Competitive

Advantage

New Technology New Distribution Channels Economic Shifts

Changes in Related or Neighboring Industries

Government Regulation

Response Options

Prospecting Defending Harvesting

Generic Change Situations

Magnitude of Threat Ability to Adjust Common Change Situations

Summary

Exercises and Discussion Questions

Shifts in Competitive Advantage: Responding

to Environmental Change

WHAT YOU WILL LEARN

• How and why a firm’s competitiveadvantage can change over time

• Some important sources or triggers

of change

• Strategies that firms can undertake torespond to change

During the 1950s and 1960s, Timex became the largest

manu-facturer of watches in the world It experienced phenomenal

success By 1970, one of every two watches sold in the United

States was a Timex product The company was rapidly

increas-ing its market share abroad Yet, by the mid-1990s, the name

most people associate with watches designed for the broad

market in the United States tends to be Seiko, Citizen, Pulsar,

Accutron, or Swatch, and not so much a Timex as in times past.

What happened in the watch industry during the 1970s, both in

the United States and abroad?

Despite the company’s initially impressive record, Timex’s

long-term competitive advantage was not assured One

devel-opment that arose with full force during the early 1980s in

par-ticular threatened the company’s continued prosperity

Elec-tronic watches were beginning to appear on the market While

still expensive (more than $200 apiece in 1970 versus $20 to

$30 for the typical Timex watch), electronic watches underwent

rapid price declines throughout the late 1970s and early 1980s

until they overwhelmed the marketplace for mechanical,

pin-level watches It was thus conceivable that they might someday

become a threat to Timex’s bread-and-butter mechanical watch

business.

To appreciate the extent of the threat that electronic watches

posed for Timex, one needs to examine the core parts that make

a watch A watch consists of four major components: a power

source, a timing mechanism, a channel for communicating

tim-ing pulses, and a readout device These parts are listed in

Exhibit 5-1 In a mechanical watch, a hand-wound spring

(power source) drives a balance wheel (timing mechanism).

These movements are transmitted by gears (communication

channel) to the hands of the watch (readout device) In an

elec-tronic watch, a battery (power source) activates a quartz crystal

(timing mechanism) These electric pulses are transmitted by an

integrated circuit (communication channel) to a digital display

(readout device) The electronic watch uses different parts than

those in mechanical watches It also makes use of different

materials (exotic substances like crystals and light-emitting

diodes (LEDs) instead of metal springs and gears) Different

core technologies are needed (sophisticated electronic design

and crystal chemistry instead of metallurgy), along with

differ-ent design skills (stepper motors and integrated circuits) Even

different machinery is required (equipment for making

batter-ies, quartz crystals, and integrated semiconductor-based circuits

instead of metal-cutting lathes and drills) Producing electronic

watches thus requires a completely alternative set of skills that

compels a traditional watchmaker to learn an entirely new set of technologies, value-adding skills, and approaches to product commercialization and development.

In each of the watch’s core parts, new technologies and ufacturing methods displaced Timex from the market Innova- tions in quartz crystal chemistry and LED (light-emitting diode) technologies made Timex’s spring-based parts obsolete These LED, quartz, and other components gave Japanese firms, such

man-as Citizen, Seiko, and Cman-asio, a reputation for quality Citizen Watch of Japan, for example, learned much of its watch tech- nology from Timex’s archrival Bulova, another U.S manufac- turer that faced similar difficulties in adapting to a marketplace hungry for miniaturized, electronic watches during the 1970s and 1980s Bulova regarded Citizen as a cheap source of well- made components, but did not endeavor to reinvent itself to assimilate and adapt new integrated circuits and sophisticated manufacturing to produce next-generation watch components Over time, this relationship made Citizen a formidable com- petitor as the Japanese firm honed its skills and introduced its own line of products into the United States New designs of electronic watches from Citizen, Seiko, and other entrants steadily uprooted Timex’s long-standing brand and quality image in the United States These competitors also redefined distribution channels as they became more commonplace in department stores, catalog sales, and jewelry stores where ele- gant watches became increasingly synonymous with other per- sonal accessories Customers became more sophisticated and wanted the higher quality watches.

Firms that invest in new technologies often develop special skills that allow them to extend their technological reach and skills to other competitive arenas For example, new watch- making skills also apply to tuning forks, laboratory and testing equipment, robotics, miniaturized electronic tools, and even guidance systems Other products that share a similar techno- logical competence set include calculators, VCRs, laboratory systems, microwaves, and personal computers Timex thus faced a major dilemma If it failed to develop electronic watch competences, it risked losing its industry leadership position However, electronic technology was new to Timex, and efforts

to develop expertise in this area would be expensive, as well as difficult for the existing organization to adapt Additionally, a level of expertise needed to succeed in the new area might not

be guaranteed for Timex If the electronic watch niche never materialized, or if Timex failed to learn the needed skills, this investment would be largely lost.

In reality, Timex indeed was one of the first firms to offer an

electronic watch However, it failed to promote the product

aggressively, perhaps out of fear that it would cannibalize much

of its preexisting investment and tooling designed for mechanical

watches It left development of the emerging market segment to

others This decision initially had little direct impact on Timex’s

immediate fortunes during the 1970s The company’s sales and

profits in mechanical watches continued to grow throughout most

of the decade and even into the early 1980s However, the

battle-ground for watches and similar devices changed steadily under

Timex’s shadow over the marketplace Quartz and digital display

technologies became cheaper, more miniaturized, and more

per-vasive in their commercial applications Each new process and

product improvement drove down costs.

Timex continued to earn record profits into the late 1970s,

but the situation changed rapidly when Japanese electronic

watch firms established a firm beachhead in the United States

in the early 1980s With sales suddenly declining, Timex made

a belated effort to build its electronic watch business By then,

it was too far behind in terms of manufacturing cost and rience to match rivals on price and quality Following several years of serious losses, Timex was finally taken over by a new ownership group The new owners worked hard to build up Timex’s electronic business Their effort has achieved some modest success However, Timex has not been able to regain the leadership position it once enjoyed That status now collectively goes to such well-established and recognized brands as Citizen, Casio, and Seiko In fact, these Japanese manufacturers are becoming more vigilant about the rise of new popular brands such as Swatch and Fossil, whose products are intended to make more of a fashion statement rather than simply being a timepiece.

expe-As we enter the next century, consumer photography is also

undergoing a revolutionary technological change It follows

much of the same pattern as the watch industry Eastman Kodak

is a global leader in developing chemical-based films Even

though its biggest competitor, Fuji Photo of Japan, sells

lower-priced film, as recently as 1996, Kodak commanded upward of

60 percent of the U.S market for all makes of consumer film.

Kodak’s shares are even higher in the industrial and medical film

segments Yet throughout the 1990s, double-digit growth in the

chemical-based film market slowed dramatically, leaving

East-man Kodak in a real struggle to redefine its core technologies and

products in the wake of technological change, revitalized

com-petitors, the advent of the Internet, and different customer tastes.

Kodak must now deal with the major challenge presented by the arrival of new competitors who are accelerating the transi- tion of chemical-based imaging to new electronic and digital imaging techniques that will change the way consumers use their cameras and how manufacturers link up the camera with other technological applications Although Kodak still holds a large number of patents that protect both its core, proprietary silver-halide film coatings technology and many advances in digital imaging, the company now face challenges from emerg- ing technologies that threaten its chemical-based investments over the past century.

Two particular agents of change threaten Kodak’s traditional technology The first is the growing use of semiconductors in

Major Watch Components

Electronic Battery Quartz crystal Integrated circuits Watch hands or

e x h i b i t (5-1)

cameras and other imaging equipment During the 1990s,

cam-eras incorporated ever more powerful semiconductor chips to

improve picture quality and product performance In particular,

the rise of so-called “flash memory” has become a direct

sub-stitute for chemical-based films Flash memories serve to store

a series of images on a disk or memory card that is then easily

inserted into a personal computer for long-term storage,

imag-ing manipulation, and eventual printimag-ing Cameras that

incorpo-rate these and other state-of-the-art chips use microprocessors

and microcontrollers to control focus and shutter speed As

these chips improve, these new cameras have given weekend

photography amateurs a growing ability to match the quality of

professional photographers.

The second development facing Kodak is the rise of digital

imaging technology More important, new advances in

electron-ics now mean that cameras and other imaging equipment, such

as X-rays, can store images as digital, binary codes By storing

images in digital, binary codes, people are able to transfer their

pictures and images onto optical disks similar to those used in

current personal computers This ability means that customers

can now manipulate images for clearer pictures, accentuate

shadows or lines, and even make wholesale changes of the

pic-ture’s background The use of video-compression algorithms

together with faster, smarter electronics heralds a new type of

imaging technology, whereby digital images can be stored with

different degrees of clarity and resolution, depending on what

applications are used later In fact, many of these digital images

cannot only be stored on a computer or optical disk, but also be

downloaded and shared through the Internet Consequently, the

production and use of cameras and film-development methods

are becoming more similar to the technologies used to make

compact discs, optical discs, semiconductors, and even software

techniques for image manipulation These technologies defined

the evolution of the personal computer, consumer electronics,

and computer peripherals industry The power to edit

photo-graphs on a computer or television screen, for example, means

that photographers can custom build and assemble their own set

of pictures; only the user’s imagination defines how far the

tech-nology can be applied Camera buffs, advertisers, copy editors,

medical diagnosticians, and other industrial users will find many

new uses for digital imaging methods to capture, store, and

manipulate images In particular, the rapid ability to digitize an

image and send it through the Internet allows for fast capture and

translation of images for medical applications (second

opin-ions), insurance claims, real estate (virtual sales), and other

forms of video transmission This transformation of imaging at

Eastman Kodak from chemical-based to digital,

electronic-based methods is depicted in Exhibit 5-2.

Currently, most electronic and digital imaging techniques

cannot achieve the fine degree of resolution of chemical-based

film The number of tiny dots—known as pixels—in any square area determines the clarity of the image The more dense the pixels, the finer is the resolution Even though chemical-based films still outclass their digital counterparts in image clarity and fineness, many firms are steadily improving charged coupled devices (CCD’s), digital compression techniques, algorithms, flash memory density, and software interpolation techniques that will make it possible for electronic imaging to reduce the quality gap with chemical-based film imaging Some analysts have already predicted that the quality gap for all practical pur- poses has already closed Once this digital-based technology catches up, consumer and industrial users will no longer have to wait to develop their photos Consumers already are taking and developing pictures with a digital, filmless cameras.

The full magnitude of the new technology’s threat to man Kodak is difficult to grasp Many rivals investing in new technologies include Japanese consumer electronics giants Canon, Toshiba, Ricoh, Sony, Epson, and Sharp Epson, in par- ticular, has developed its own line of digital cameras under the Photo PC brand, in which the flash memory card is directly inserted into a personal computer accessory card interface for immediate image capture Other rivals that have demonstrated a strong, compelling interest in the arena include Hewlett- Packard, Polaroid, Motorola, IBM, and Intel, all of which have strong semiconductor and/or imaging technologies in their own right Hewlett-Packard’s advanced software and controller chips are already used in state-of-the-art laser and ink-jet print- ers, while Intel’s flash memory and microprocessor businesses are natural potential entrants into the digital imaging industry Even U.S chemical giant DuPont has expressed an interest in imaging technologies that take advantage of its new strengths in advanced materials related to imaging Either way, Kodak faces both domestic and foreign competitors who have mastered and utilized advanced digital imaging techniques learned from their own respective core businesses These technologies, in turn, could conceivably be used to design and to produce new,

East-“smart” electronic or digital-based cameras that store images on semiconductor chips In fact, as early as 1984, Sony attempted

to introduce its digital-based camera known as the Sony ica It floundered because of poor images from first-generation technology However, the product reveals the depth of Sony’s skills and commitment to commercializing this new technology The newest generation of Sony’s Mavica, reintroduced in 1997, has proven to be extremely popular since images are directly stored onto a floppy disk.

Mav-Thus, Eastman Kodak during the 1990s faces a similar lenge and dilemma to that confronting Timex during the 1970s Kodak must now learn new semiconductor and digital-based imaging technologies that depart from its chemistry background and traditional technology In the most extreme case of this

chal-threat, consumers can practically capture images with a digital

filmless camera and download these images directly on the

Inter-net, thus completely bypassing all of Kodak’s traditional film

business offerings To begin meeting the growing needs of

peo-ple that use electronic/digital imaging, Kodak has even begun to

move beyond its current CD developing process

Photo-CD allows consumers to put their film negatives on optical disks,

which can then be viewed on a television screen However, from

Kodak’s marketing perspective, this process has proved

expen-sive and uncertain, as the image is still inextricably linked with a

CD-like device that remains cumbersome to use Competing

flash memory cards may generate considerably more consumer

interest, since they require even fewer stages of complexity.

The next stage of photography and film development has

already begun to unfold Kodak has developed an Internet site

that allows customers to drop off their film at a finishing lab,

only to have the pictures available to them on the Internet

through a special Web account with Kodak This on-line

serv-ice, known as PhotoNet, enables customers to develop their film

cartridges or have negatives scanned into the system to be

avail-able the next day on the Internet Customers can then download

these Net-based images into their PCs or send them to friends

and family through e-mail.

To help learn how better to compete in the semiconductor and digital-imaging arenas, Kodak formed a joint venture with Intel in May 1998 to codevelop new flash memories specifically for digital imaging applications It is simultaneously working with Motorola to develop superior flash memory technology These flash memory cards will pave the way for Kodak to com- pete more directly with Epson, Sony, and other firms that have similar ambitions Already, Kodak has pushed through a new flash-derivative product that uses conventional 3.5 inch floppy disks as the “digital film” that captures images, although its storage capacity remains limited at this time and Sony has an initial lead Kodak also entered into an array of relationships with Microsoft, Adobe Systems, Hewlett-Packard, and even a few Silicon Valley start-ups (e.g., Live Picture) to better under- stand how these new technologies will evolve It has a signifi- cant ownership stake in an upstart firm known as PictureVision, which has developed a system to allow a consumer’s film to be developed by a photofinishing lab and then delivered to the cus- tomer through Kodak’s Website on the Internet To further strengthen its hold over this technology, Kodak also entered into a partnership arrangement with America Online to ensure that its Web site is prominently displayed for potential users These moves represent important learning steps for Kodak in

Transformation of Imaging at Eastman Kodak

Hard copy (Paper)

Image definition

Image translation

Image compression

Image storage

Image encoding

Transfer to compact disk

Disk memory storage

Consumer or industrial use

Retain or manipulate image

Evolving Digital Era

Digital Camera/CCD Analog/Digital Conversion Flash Memory Card

or Floppy Disk

Image Transfer

Data Storage Personal Computer

Software Interpolation

Reproduction

Transmission (e-mail) Storage/Print

Hard Copy

e x h i b i t (5-2)

Firms that have built substantial sources of competitive advantage often enjoy high levels

of profitability Yet, as we have seen in numerous examples, industries can change quickly.Although the product life cycle is an effective tool that describes how an industry evolves,numerous other factors can drive change as well New developments in the environmentcan threaten a firm’s distinctive competence and existing sources of competitive advantage

if the firm does not or cannot respond to change Determining when and how to respond

to environmental change is the subject of this chapter We begin by examining differenttriggers of change that can seriously erode a firm’s distinctive competence and sources ofcompetitive advantage Then, we explore the options available to firms in their response tothese changes Finally, we consider the factors that influence the selection of these options

NEW DEVELOPMENTS AFFECTING COMPETITIVE ADVANTAGE

Changes in the industry environment can have marked effects on firms’ sources of

com-petitive advantage These changes represent triggers, or new developments, that can

rede-fine the way firms compete In some instances, the developments are industrywide andsubstantially alter the nature of competition and the long-term structure of the industry.Changes in government regulations (such as deregulation in electric utilities, financialservices, and telecommunications) can have major intended and unintended effects on theindustry Other developments may be “spillover” effects resulting from changes occurring

in a neighboring or related industry (such as the impact of digital images and flash ories or charged coupled devices on chemical-based film) Developments or triggers thatfrequently change the nature of competition and sources of competitive advantage include(1) new technology, (2) new distribution channels, (3) shifts in economic variables,(4) changes in related industries, and (5) government regulation

mem-New Technology

In any industry, a firm invests considerable resources in the technologies used in its adding activities The choice of technology determines the materials, designs, methods,processes, and equipment used to carry out its activities Over time, a firm learns and builds

value-a considervalue-able bvalue-ase of expertise in devalue-aling with the technologies thvalue-at directly impvalue-act itsvalue chain configuration (business system) Often, these technologies involve both prod-ucts and processes Recall that product technologies relate to the product’s design, patents,and components, and process technologies refer to plant and equipment, operational meth-ods and practices, and manufacturing improvements The emergence of a new or superiorproduct or process technology represents a potential threat to existing sources of competi-tive advantage, since it can undermine the value of a current distinctive competence

On a general level, all firms face the potential threat of obsolescence This problem isespecially salient, however, for pioneering firms that defined current industry standards

revitalizing its skills along a series of new technologies.

Whether Kodak’s growing experience with making newer disc

and flash memory-related devices will help it compete in the

professional and consumer video market remains difficult to

assess If Kodak becomes successful in learning and applying

newer, digital-based imaging technologies, then the phy giant could become an important player in such newly emerging industries as multimedia, Internet-based transmis- sion, advanced color printers, software interpolation, and advanced color optics.

photogra-or practices When new technologies threaten to undermine a current product standard photogra-or

process technology, they are known as competence-changing technologies

Competence-changing technologies are advances that could redefine an industry’s structure and

tech-nological format In many situations, competence-changing technologies represent

sub-stitutes for existing industry processes and methods.3For example, Eastman Kodak faces

a competence-changing threat from digital imaging technologies, which are unlike its

established competences in silver-halide film technologies In the automobile industry,

ceramic-based engines and even sophisticated battery-powered systems promise the

pos-sibility of better efficiencies and performance than internal combustion engines They

represent competence-changing technologies for all U.S., European, and Japanese

play-ers that build gasoline and diesel technologies Broad examples of competence-changing

technologies are described in the following sections

New Materials. Fiber-optic cable made of glass is rapidly replacing copper as a medium

for transmitting telecommunication signals This development enables new competitors

like Corning Incorporated and Lucent Technologies to enter the telecommunications

sup-ply field In addition, these new materials create opportunities for both Corning and Lucent

to shape the kinds of capabilities and offerings that telecommunications companies can

offer to their customers In another example, newly engineered plastics are replacing steel

and other metal parts in automobiles and heavy machinery Composite body panels, doors,

and dashboards made of synthetic fibers and plastics, for example, can be found in almost

all cars These materials help reduce the weight and cost of automobiles Their

develop-ment creates important opportunities for chemical manufacturers that produce these

plas-tics and for the firms that use them

New Manufacturing Techniques. In the steel industry, mini-mills use an alternative

technology to make steel rather than the traditional open hearth method Using this new

low-cost manufacturing technology, new entrants such as Nucor and Chaparral have

achieved spectacular success By using scrap iron and metal, mini-mills avoid the high fixed

costs of more traditional, integrated steelmakers, such as U.S Steel and Bethlehem Steel to

produce steel wires, rods, and beams used in the construction and road-building industries

The older firms depend upon much larger mills and higher ore-based processing costs In

another case, many firms in the plastics industry are using new types of liquid-injection

molding technologies to produce plastic products These machines inject hot plastic liquids

into molds directly to make parts, components, and toys more quickly and efficiently than

past methods This development provides new entrants to the industry a valuable

opportu-nity for technology differentiation

Both Timex and Kodak faced threats of competence-changing technologies in the 1970s

and 1990s respectively As noted in the opening cases, both firms built their original

busi-ness around older technologies They achieved distinctive competence and substantial

competitive advantage in these areas Electronic technology entering the watch industry in

the 1970s brought radically different materials, designs, procedures, and tools Likewise,

digital-based technologies promise to change the way images are created, transferred,

stored, manipulated, and even transmitted along today’s information media

The steel, plastics, watch, and film industries are not the only settings to have

experi-enced this kind of technological change As shown in Exhibit 5-3, superior technology has

emerged in a wide range of settings In each of the industries shown, a new technology

eventually surpassed the traditional one in terms of market acceptance Firms unable or

unwilling to build expertise in the new areas experienced erosion and, in some instances,

extinction of their market positions

competence-changing technology: a technology

that markedly changes or redefines the structure of an industry; often new processes or innovations that disrupt and erode the market for existing products.

New Distribution Channels

Established firms must monitor their distribution and marketing activities to detect tial threats or opportunities to their current distribution methods Distribution represents avital component of every industry, and certainly any change in the method or channel usedcould redefine the basis of future competitive strategies In the late 1990s, perhaps the sin-gle greatest change in distribution channels now affecting every industry and organization

poten-is the growing use of the Internet and the World-Wide Web to provide on-line ordering,distribution, sales, and even manufacturing A variety of firms are now investing heavily inbuilding up a strong presence on the Internet to sell a variety of different products Forexample, Amazon.com is threatening established competitors Barnes & Noble and BordersGroup in the book retailing industry CD-Now and N2K are threatening to displace exist-ing music retailers such as Blockbuster Music and Sam Goody’s More broadly, the Inter-net is also forcing existing firms in the travel agency, real estate, financial services, officesupplies, and airline industries to rethink how best to reconfigure their distribution andmarketing systems to serve their customers

A broad understanding of how alternative distribution systems evolve, especially thoseinvolving the Internet, can help the firm better scan its environment for new developments

or competitors In many instances, the arrival of a new distribution channel or methodoften signals the entry of a new competitor Certainly, for Barnes & Noble and BordersGroup, the arrival of Amazon.com on the Internet signifies a potentially dangerous threatbecause the upstart can sell to anybody who has access to the World-Wide Web The wideproliferation of Web pages by many domestic airlines (e.g., American, United, Delta, andContinental) has allowed customers to select, price, and purchase their own tickets inde-pendently of travel agents Home shopping using the Internet is becoming a real possibil-ity as more television sets and personal computers gain high-speed access to advancedtelecommunications and computer networks that are now becoming an integral part ofcable and phone companies around the nation

Pitney Bowes, a company best known for making postage machines, is now facing asimilar type of challenge from the rise of the Internet For over seventy years, Pitney

Electronics Transistors Integrated circuits Shoe materials Leather Engineered polymers Appliances Discrete controls Fuzzy logic

Airframes Steel, Metal Composite materials Automobile engines Aluminum Ceramics

Automobile body Welded pieces Unibody, single piece

Computers Mainframes Personal computers

Networked systems Medical equipment Stand-alone x-ray CAT scans, MRI

TV manufacturing Handcrafted Automated insertion tools Cameras Silver-halide film Flash memory cards

e x h i b i t (5-3) Emergence of New Technology

Bowes has provided a valuable service to many businesses through the durable machines

that allow them to issue the right amount of postage needed to mail letters and packages

on their own Companies prepurchase the amount of postage they want from the U.S

Postal Service In turn, the Postal Service gives each customer’s postage machine an

assigned number that designates permission to issue postage on their outgoing mail

How-ever, by late 1998, new upstarts using the Internet have begun to challenge Pitney Bowes’

long-held dominance in the postage machine market Companies such as E-Stamp,

Stamp-Master, and others are now designing Web sites that enable customers to pay for postage

over the Internet, download a customer-specific set of coded data into their computers, and

then print it out on mailing labels and envelopes In effect, the Internet, with the

permis-sion of the U.S Postal Service, now allows customers to print their own stamps.4 In turn,

Pitney Bowes has introduced its own version of user-friendly, Internet-based software to

help customers order pre-paid postage with greater ease

In our watch industry example, Timex was unaware of how new distribution channels

paved the way for fierce competition from Japanese watches Timex failed to realize that

department stores represented an opening for Seiko and Citizen in offering higher-quality,

more attractively designed watches By paying scant attention to distribution changes,

Timex was soon “locked out” from penetrating the higher-end department stores that

pre-fer higher-quality, Japanese-made electronic quartz watches Instead, Timex limited itself

to selling its watches in drug stores and discount chains where margins are substantially

lower In the mid-1990s, Timex still found itself shut out from moving to other consumer

segments because of its inability to reach new distribution channels

Kodak is also embracing the Internet as a means to reach its customers more quickly

and lucratively Using its new PhotoNet technology, Kodak has developed a Web site that

enables customers to sign up for an account in which the images from their pictures and

negatives will be available to them through the Internet Customers now can drop off their

film cartridges at Kodak-affiliated outlets (drug store chains, grocery chains, camera

out-lets, and convenience stores) and receive the images on the Web Once the images are

available to customers, they can choose which ones to download to their own PCs or to

send to other people through e-mail America Online and PictureVision are two firms that

have become important partners for Kodak in this evolving Internet-based venture

Firms in many other industries have found their existing sources of competitive

advan-tage threatened by the arrival of new methods of distribution, even those that are not

specifically Internet-driven Brokerage houses, such as Merrill Lynch and Citigroup’s

Smith Barney, have been hurt by the growth of discount brokers Discount brokers such as

Fidelity Investments, Charles Schwab, and Quick & Reilly have eroded the once-dominant

position of established, full-service brokers by offering lower-cost commissions on stock

and bond trades These discount brokers, in turn, face the problem of dealing with on-line

brokerage firms, such as Ameritrade, E*Trade, and other upstarts that can directly access

their customers In addition, since they tend to have small research departments (if any),

their overhead costs are lower and they can pass these savings on to consumers

In a similar vein, network television leaders like Disney’s Capital Cities/ABC unit,

CBS, and NBC have been threatened by new cable, pay-per-view, and home video outlets,

where competing offerings have sliced market share for networks expecting large numbers

of viewers NBC is rethinking its current approach and business model in the broadcasting

industry to pre-empt some of these threats.5

Department stores are also coming under siege from newly emerging Internet and

television-based shopping (e.g., Home Shopping Channel and QVC Network) Newly

emergent distribution channels sometimes enable firms, particularly later entrants, to

reach neglected customers Combining both Internet access and traditional catalog sales

has enabled upstarts such as Lands’ End, Early Winters, Touch of Class, and L L Bean

to reach customers whose specialized needs are not effectively satisfied by existing

“brick-and-mortar” department stores and discount chains When a television viewer orcomputer user surfing the Web sees a product or service that is of interest, the viewersimply calls a toll-free telephone number or downloads ordering and billing information

on the Internet to purchase the item More recently, Blockbuster Entertainment’s wide franchises in videotape rentals face the long-term challenge of pay-per-view pro-gramming coming from cable, telecommunications, and satellite companies Thesealternative means of distributing movies and entertainment threaten Blockbuster’s cur-rent distinctive competence in offering low-cost video rentals Families can watchmovies directly through expanded forms of cable television Thus, telecommunicationsand satellite companies could make most of Blockbuster’s current distribution channelsobsolete by offering direct, pay-per-view movies, sporting events, and other entertain-ment avenues to customers The rise of pay-per-view technology means that customerswill be increasingly able to rent and pay for movies directly from their television setswithout going to a Blockbuster outlet

nation-Economic Shifts

Changes in the basic economic parameters or structure of an industry can dramaticallyshift the nature of competitive advantage Consider the current difficulties facing Japaneseautomobile and electronics manufacturers, for example Their highly advanced, quality-driven, Japan-based manufacturing facilities once enjoyed an enormous cost advantageover U.S factories and competitors Rising wages of Japanese workers, a dramatic slow-down in the domestic economy, and severe fluctuations in the value of its currency (theyen) have combined to undermine many Japanese firms’ advantage substantially over thepast decade Now Japanese manufacturers are taking aggressive steps to reduce coststhrough such means as automation, outsourcing, reduced number of product variations,and shifting manufacturing to facilities outside of Japan, particularly through aggressiveinvestments in Southeast Asia In fact, Japanese investment in this region has grown so dra-matically that economic downturns and recessions in many Southeast Asian economies(e.g., Indonesia, Thailand, Malaysia, Singapore) in the late 1990s affected the profitability

of Japanese firms The same developments have strengthened the market and cost positions

of General Motors, Ford, and DaimlerChrysler—both in the United States and in otherexport markets Thus, sharp swings or changes in the exchange rate, domestic demand,commodity prices, or even the receptivity of trade partners can dramatically alter the com-petitive advantage of firms across many industries

Changes in Related or Neighboring Industries

Sometimes, shifts in one industry’s competitive environment may be precipitated or

trig-gered by changes in a neighboring or related industry A related industry is one that

shares many of the same economic, technological, or market-based drivers or istics For example, consumer electronics and personal computers may be thought of asrelated, since these two industries often rely on the same type of mass-market distribu-tion channel, incorporate many of the same electronic components, and even manufac-ture key components or peripherals in the same factories Increasingly, the telephone,Internet, and computer-networking industries are becoming more related since theyshare the same basic telecommunications architecture and are growing more linkedtogether through the use of common information transfer technologies (e.g., routers,

character-bridges, and packet switches) Even the cable TV business is becoming more similar to

the telecommunications industry as well In a similar vein, the rise of so-called “digital

media” reflects the growing recognition that traditional content media (television,

pub-lishing, broadcasting, radio, and music) are becoming ever more interwoven with new

forms of Internet and satellite distribution systems that allow for growing digitization of

traditional media forms (e.g., print, broadcast, paper, and tape) These two sectors,

con-tent and communications, are becoming more related as both industries increasingly

look to one another to access customers and markets more cheaply and effectively The

massive growth of Internet “portals,” such as Yahoo!, Lycos, America Online and

Microsoft Network, reveals the growing convergence between content providers and

communication channels/distribution

Let us consider a hypothetical example of how changes in one industry can trigger

changes in another Take the relationship between leather shoes, the tanning industry, and

chemicals Countries such as Italy and Brazil have large and profitable shoe industries

because their manufacturers often can purchase large quantities of high-quality, processed

leather from long-standing tanning firms The high quality and output of Brazilian and

Ital-ian shoes are based not only on the economies of scale and experience effects that

estab-lished shoe firms have built up but also on the close relationships they have developed with

tanning firms Innovations in tanning leather are likely to have been passed on to shoe

mak-ers; conversely, shoe firms have probably suggested ways to improve the tanning process

However, if a chemical firm were to develop a cheaper, alternative material that could be

used to make more durable and comfortable shoes, then growing use of this new material

could dramatically change the competitiveness of the Brazilian and Italian shoe industries

First, the arrival of a substitute material would reduce the amount of leather that Brazilian

and Italian shoe factories purchase from tanning firms over time Thus, tanning firms would

face an enormous amount of new competition and a sharp drop-off in business Second, a

new chemical material might be used in new ways to make even less costly shoes If the

chemical material lends itself to more efficient or perhaps automated means of production,

then this material would threaten the existing cost advantages and investment in equipment

by Brazilian and Italian firms The growing availability of the new chemical-based material

might also encourage entry by other shoe firms into the niches currently served by the

exist-ing firms, since cheaper shoe materials would lower the cost of differentiation Thus,

tech-nological, economic, or other developments in a related industry can trigger marked

changes and shifts in sources of competitive advantage in another industry.6

Government Regulation

Actions taken by the government can markedly shift or threaten the sources of advantage

needed to compete in an industry For example, the U.S government’s imposition of high

tariffs on Japanese motorcycle imports in the 1970s damaged the competitive position of

Japanese manufacturers such as Kawasaki, Honda, and Yamaha More recently, quotas

imposed in the early 1990s on Japanese auto imports, especially minivans, threatened

Honda, Toyota, and Nissan, forcing them to increase U.S manufacturing capacity more

rapidly to remain competitive in this country Likewise, the Clean Air Act of 1990

threat-ened to render obsolete many U.S oil refinery operations because of the extremely high

costs required to meet new regulations Changes in antitrust regulations can alter the

com-petitive dynamics in an industry For example, the recent sparring and court battles

between Microsoft and the Department of Justice reduces Microsoft’s near monopoly

power over the PC software industry, especially as it relates to Internet search engines

This agreement makes it easier for personal computer manufacturers to use Internet search

engines software made by other firms (in particular, Netscape Communications) over, PC makers are not required to pay as much in royalties to Microsoft as in the past.The impact of this agreement has not yet been felt in either the PC or the software indus-try, but it is likely to stimulate further effort by other software firms seeking to design newforms of PC operating systems.

More-A significant degree of deregulation was occurring in many industries within the UnitedStates during the late 1990s For example, deregulation of the telecommunications indus-try, through the Telecommunications Act of 1996, makes it legally possible for local phonecompanies (e.g., Regional Bell Operating Companies such as SBC Communications,Ameritech, NYNEX, and U.S West) to enter the long-distance market once held solely bylarger inter-exchange carriers that are the heart of the national telephone system (e.g.,AT&T, Sprint, MCI WorldCom) Likewise, the same act enables cable television compa-nies (e.g., Tele-Communications Inc., Cox Communications, Comcast, Media One, Cable-vision) to enter the telephone and data transmission markets directly as well Deregulation

of this industry has already promoted a tremendous degree of consolidation pressuresamong existing, incumbent firms For example, AT&T agreed to purchase cable giant Tele-Communications Inc (TCI) in May 1998 to enter the cable television and possibly thelocal phone market Other Regional Bell Operating Companies (RBOCs) are now in themidst of their own consolidation with SBC Communications (formerly known as South-western Bell) purchasing West Coast giant Pacific Telesis and Ameritech (now under gov-ernment review) while Bell Atlantic considers a merger with GTE (also under governmentreview) MCI WorldCom and Sprint are also speeding up their acquisitions of cable andwireless cable companies to offer local phone service and high-speed Internet access

RESPONSE OPTIONS

Firms can respond to environmental developments in three fundamentally different ways:

by prospecting, defending, or harvesting (see Exhibit 5-4) Each approach aims at a cific objective, requires specific adjustments, and has varying advantages and drawbacks

spe-Response Option Typical Implementing Actions Prospect Develop new distinctive competence

Initiate R & D in new technology Learn new manufacturing processes Learn how to design and promote new product

Defend Preserve existing distinctive competence

Reduce price on existing product Increase promotion of existing product Intensify R & D in existing technology

Harvest Gradually dissolve the business

Increase price of existing product Reduce expenditures for promotion, equipment maintenance, R & D, etc., for existing product

e x h i b i t (5-4) Implementing Strategic Response

The most aggressive approach a firm can adopt to deal with environmental change is to

strive to be the first to accommodate it Since the objective is to acknowledge and exploit

the new development first, we refer to it as prospecting.7 The actions required of a

prospector vary depending on the nature of the environmental development involved

Con-sider the emergence of new, potentially superior product technology—the kind of change

that Timex faced in the 1970s and Kodak faced in the mid-1990s A prospector

experienc-ing this kind of development must strive to be the first competitor to launch a product

incorporating the new technology To achieve this end, it will need to undertake a series of

initiatives These include conducting research into the new technology, designing

proto-types that incorporate the new approach, retooling manufacturing equipment to produce

the new design, and promoting finished products once they are ready for market

From Timex’s perspective, a prospecting strategy designed to penetrate and secure a

portion of the electronic watch market would involve significantly higher levels of

invest-ment in learning new forms of electronics and in adopting highly automated tooling

processes These tools would fabricate and assemble quartz and light-emitting diode

(LED) components Eventually, they would displace standard mechanical parts of winding

gears, springwheels, and turning movements Understanding the new product, learning the

new process technologies, and designing a new promotional campaign would represent

significant changes in both managerial attention and focus Pioneering would also cause

Timex’s existing distinctive competence in mechanical watches to become less relevant

over time Equally important, Timex would have to make capital expenditures in many

high fixed cost investments before uncertainties surrounding the electronic watch would be

resolved

In the currently fast-changing semiconductor industry, many firms in the 1990s have

attempted to become prospectors by developing new industry and technological standards

that attempt to combine many once disparate functions onto a single sliver of silicon These

standards promise to improve a product’s performance on some critical dimension, such as

processing speed or compatibility with different types of computer operating systems,

con-sumer electronics, and even Internet applications Probably the best example of prospecting

in this industry during the early 1990s included the activities of two leading U.S designers

and manufacturers of RISC-based microprocessors (reduced instruction set computer), Sun

Microsystems and Silicon Graphics Because Intel has a well-entrenched, dominant market

position, both Sun Microsystems and Silicon Graphics were forced to adopt prospector-type

strategies to stake out new niches Both firms began full-scale production of their

compet-ing chip that provide processcompet-ing capabilities with less power use The advantage of these

chips is that they are easier to produce, lower in cost, and give off less heat than competing

microprocessors However, both firms’ endeavors in this arena largely failed by the late

1990s because the technology offered was not substantially better, more versatile, or

lower-cost than that of Intel’s existing product line More recently, smaller companies such as

Inte-grated Device Technologies (IDTI), Advanced Micro Devices, and Cyrix (acquired by

National Semiconductor in July 1997) have begun to challenge Intel through

prospector-type strategies by offering new microprocessor designs that provide “system-on-a-chip”

capabilities These new chips, also designed to outflank and ambush Intel in the emerging

market for microprocessors and controllers in the consumer electronics and sub-$1,000

(and now the sub-$600) personal computer market, have made significant gains against

Intel throughout 1997 and 1998 Advanced Micro Devices and National Semiconductor

(Cyrix), in particular, have begun to steadily chip away at Intel’s total market share and

dominance of the microprocessor market (at about 76 percent share in 1999) Unlike

prospecting: an activity

designed to help the firm search, understand, and accomodate environmental change; a proactive attempt by a firm to make

an environmental change favorable to itself (see defending).

Sun Microsystems and Silicon Graphics, these three firms implemented prospector-typestrategies more effectively by targeting a niche that Intel either ignored or was unable torespond to effectively.

When formulated and implemented effectively, prospecting enables a firm to gain ahead start in exploiting a new development or market trend, thereby securing first-mover,surprise, and timing advantages over later entrants Prospecting therefore could help a firmpreserve its industry position that might erode if it failed to respond However, prospect-ing is not without substantial risks, as demonstrated by Sun Microsystems and SiliconGraphics If an anticipated change or development never materializes, or if it evolves in anunanticipated direction, or if the product or service conceived is inadequate, the investmentmade by a prospector could be partially or wholly lost

Defending

Another approach to dealing with an environmental change is to make a deliberate choice not

to accommodate it Instead, the firm seeks to defend its traditional business from the

devel-opment’s potentially adverse effects The chief objective in defending is to protect a firm’s

traditional business from direct or collateral damage brought about by a new development.8

One of the most common actions to defend a business’s current position is a price cut Bylowering price, an established firm can sometimes sustain sales of its traditional productdespite stiff competition from a new product or substitute Recently, Philip-Morris engaged

in a series of massive price cuts in its premier Marlboro brand of cigarettes to counter theeffects of lower-priced generic and off-brand cigarettes that were beginning to erode its mar-gins By cutting prices aggressively, Philip-Morris is hoping to slow down the inroads ofgeneric cigarette makers who must themselves lower their own margins to capture new buy-ers Price warfare is also extremely common among consumer nondurable products such assoft drinks, snacks, and other food products Established firms hope to protect their core mar-ket positions and brand recognition from inroads by other firms or new entrants practicingtheir own form of prospecting in a given segment Frito-Lay is now aggressively defendingits market position in salt-based snack foods through “value pricing” that enables it to slowthe prospecting efforts of generic products made by other food companies

Another common defensive move is increased promotion By beefing up its advertisingoutlay, a defender can delay consumer acceptance of a new approach One firm that hasrelied extensively on increased promotion is AT&T in the long-distance industry AT&T’sheavy promotional efforts are designed to ward off the discounting strategies used by MCIWorldCom, Sprint, and other long-distance carriers AT&T is hoping that consumers asso-ciate its corporate name with a higher level of quality and reliability than would be foundwith a smaller, less experienced firm Traditional broadcasting networks, such as NBC intelevision and Infinity Broadcasting in radio, are aggressively increasing promotion oftheir offerings, stars, and new shows to ward off the potential erosion brought about bynew digital mediums and Internet transmission technology

Intensified development or refinement of a traditional or upgraded technology can alsohelp defend an established firm’s position by enhancing the attractiveness of its traditionalproduct Motorola has followed this strategy in its wireless radio business by incorporat-ing the latest advances in microchips to upgrade the two-way radios used for police andemergency services systems It is now pursuing this same technology improvement strat-egy to fend off the prospecting moves by cellular phone competitors Nokia, Ericsson, andQualcomm in the digital phone market Newer chips and circuit designs make Motorola’sofferings more efficient and modernized and give them greater versatility On the otherhand, Motorola’s efforts in the satellite transmission business follows a prospector-based

defending: an activity

designed to help the firm

shield or insulate itself

from environmental

change (see prospecting)

strategy Motorola’s investment in Iridium and Teledesic, two leading satellite

infrastruc-ture firms that promise users the ability to make a call to anybody around the world, is

attempting to set the new industry-leading standards for price, quality, and reliability for

consumer use of commercial, satellite-based wireless systems

While defending enables a firm to avoid the prospecting risks described above, it subjects

the firm to risk of another kind Some environmental developments and changes are so

pow-erful that even the most vigorous defense cannot thwart them This result is particularly likely

if the defending firm faces a radical shift in competence-changing technology or new

distri-bution channels In particular, many retailing firms are facing this kind of threat and

encroachment from Internet-driven commercial firms that seek to gain access to new

cus-tomers without investing in the traditional “brick-and-mortar” infrastructures and costs

Book, music, sporting goods, video rentals, travel agencies, and even brokerage firms are

faced with a tidal wave of change brought about by compressed and cheap Internet

distribu-tion systems Even pharmacies and drugstores are facing a new threat in the Internet space

with the arrival of drugstore.com, a new Web site offering low prices and speedy delivery

New technologies or Internet distribution systems threaten to render obsolete the firm’s

ini-tial investment in its distinctive competences, brand names, market positions, and other

sources of competitive advantage Defending against such major shifts can lead to serious

loss of competitive position, regardless of later steps taken to reorient the firm’s strategy This

situation may now be occurring with many smaller book retailers, who are located in smaller

cities and rural areas These local book retailers not only face the growing might of Barnes

& Noble in the traditional book distribution channels, but also that of Amazon.com in the

Internet distribution system Similarly, today’s VCRs may be fading rapidly in the wake of

new digital video disks (also known as DVDs) DVD technology enables the viewer to

cap-ture double the clarity and resolution of traditional videotapes When these new devices

allow users to record their music and video on advanced DVD-R systems in the next few

years, the market for existing VCR systems, videotapes, and movies will likely plummet

More importantly, DVD technology is already beginning to pervade many households

through stand-alone DVD machines that connect with the television set as well as built-in

DVD-ROM systems that are now integrated with next generation PCs Customers’

expecta-tions and demand patterns will likely drive the rapid adoption and diffusion of this new

tech-nological standard in both home and commercial settings as the price of DVD technology

drops Thus, the advent of new, more versatile DVD technology means that both VCRs and

existing CD formats are likely to fade rapidly in the near future Defending strategies to ward

off the advances of DVD firms are likely to be futile in the long run

Harvesting

A third general option for a firm facing an environmental shift is to harvest its business

while it still has time to do so The objective of harvesting is to generate as much cash

from a business as possible before the adverse consequences of an environmental threat

materialize As mentioned in the previous chapter, a key difficulty associated with

har-vesting is high exit barriers facing the firm Exit barriers usually exist in the form of

ded-icated production equipment, specialized assets, and other sunk costs, some of which may

have not been completely paid for (amortized) As a result of such barriers, exit often costs

as much as investing in new equipment to serve another possible niche or segment

To harvest a business, a leader must take actions opposite of those described for

defend-ing: increase the price of its products and reduce expenditures for such things as research,

maintenance, and advertising Westinghouse Electric during the late 1980s and early 1990s

pursued a modified version of this harvesting strategy by selling factories gradually to

harvesting: the systematic

removal of cash and other assets from a slow-growth

or declining business; may

be thought of as “milking”

a business before it loses all its value.