Chapter 6 - Crafting Business Strategy for Dynamic Contexts pptx

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 e

Chapter 6

Crafting Business Strategy for Dynamic Contexts

OBJECTIVES

Distinguish the ways in which firms’ strategies are related to dynamic contexts 1

Identify, compare, and contrast the various routes

to revolutionary strategies2

Evaluate the advantages and disadvantages of choosing a first-mover strategy

3

Recognize when an incumbent is caught off guard by revolutionary strategy and identify defensive tactics to reduce the effects of this competition

4

Explain the difficulties and solutions to implementing revolutionary strategies5

Business model options

Roxio Software Software and music Music

Rhap-A la carte Roxio and iTunes

sell single songs

SOUTHWEST AIRLINES

“Think and act big and we’ll get smaller Think and act small and we’ll get bigger.”

– Herb Kelleher

Mini-mills entered with a new business model and incumbent steel companies did not respond

As industries evolve and competition shifts from differentiation to price/low-cost, advantages shift between rivals

Arm and Hammer almost lost its lead position when baking soda became commoditized

Kodak

Technological

change

REVERSE ENGINEERING

Reverse Engineering

PHASES OF COMPETITIVE INTERACTION

Phase 1

Discoveryand

competitive new action

Phase 2

Customer reaction

Phase 3

Competitor reaction

Phase 4

Evaluation of action and reaction effectiveness

Academy of Management Executive 15:2 (2001), 59-70

COMMODITIZATION

Based on priceBased on price?

Making a choice for a gas station

THE IMPORTANCE OF SPEED

“What counts most in expeditionary marketing is not hitting a bull’s eye the first time, but how quickly one can improve one’s aim and get another arrow

on the way to the target.”

– Hamel and Prahalad

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

High-end

Low-end

What factors should

be raised well above

the industry standard?

The key to discovering a

new value curve lies in

answering four basic

questions

Creating new markets:

A new value curve

Creating new markets:

A new value curve

Eliminate

What factors that theindustry has taken forgranted should be eliminated?

Create/Add

What factors that the industry has never offered should be created or added?

COMPETITOR OR COMPLEMENTOR?

Competitor if customers value your product less when they have the other firm’s product than when they have your product alone OR it is less

attractive for a supplier to provide resources to you when it is also supplying the other firm than when

it is supplying you alone

Complementor if customers value your product more when they have the other player’s

product than when they have your product alone OR if it is more attractive for a supplier to provide resources to you when it is also

supplying the other firm than when it is supplying you alone

Emphasizes better buyer service

Emphasizes efficient operation

of the model

Emphasizes adaptation and bilities that support competitive retaliation

capa-Emphasizes product or service value and offerings within industry definition

Dimensions

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

Looks across groups and segments

Emphasizes substitutes across industries

Emphasizes redefinition of the buyer and buyer’s preferences

Emphasizes rethinking of the industry business model

Emphasizes strategic seeking to shape the external environment over time

intent-Emphasizes complementary products and services within and across industries and segments

PROS AND CONS OF FIRST MOVERS

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

• It achieves absolute cost advantage

• 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

A first-follower is often better off than

a first mover when:

A first-mover is often better off than a

fast follower when:

A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS

Product Pioneer(s)

Imitators/fast followers Comments

Automated

teller machines

(ATMs)

DeLaRue (1967) Docutel (1969)

Diebold (1971) IBM (1973) NCR (1974)

The first movers were small entrepreneurial upstarts that faced two types of competitors: (1) larger firms with experience selling to banks and (2) the computer giants The first movers did not survive

Ballpoint pens Reynolds (1945)

Eversharp (1946)

Parker (1954) Bic (1960)

The pioneers disappeared when the fad first ended

in the late 1940s Parker entered 8 years later Bic entered last and sold pens as cheap

disposables Commercial

Credit cards Diners club (1950)

Visa/Master-Card (1966) American Express (1968)

The first mover was undercapitalized in a business

in which money is the key resource American Express entered last with funds and name recognition from its traveler’s check business Diet soda Kirsch’s No-Cal

(1952) Royal Crown’s Diet Rite Cola (1962)

Pepsi’s Patio Cola (1963)

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

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 promotional campaigns

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

Product Pioneer(s)

Imitators/fast followers Comments

Light beer Rheingold’s and

Gablinger’s (1968) Meister Brau Lite (1967)

Miller Lite (1975) Natural light (1977)

Coors light (1978) Bud light (1982)

The first movers entered 9 years before Miller and

16 years before Budweiser, but financial problems 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 borrowed heavily from predecessors (and competitor Apple), then emerged as the leading interface

Video games Magnavox’s

Odyssey (1972) Atan’s Pong (1972)

Nintendo (1985) Sega (1989) Microsoft (1998)

The market went from boom to bust to boom The 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 Microsoft entered with its Xbox when perceived gaming to be a possible component of its wired world

Status of complementary assets

EVALUATING A FIRM’S FIRST-MOVER DEPENDENCIES

n It is difficult for anyone to make money: Industry

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

Value-creation opportunities favor the holder of complementary assets, who will probably pursue a fast-follower strategy

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

For example: American Airlines can partially

contain Southwest by using its bargaining power to secure more exclusive airport gates

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

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

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

For example: Kodak has improved the

quality of its film-based prints so that they are superior to many digital-based

alternatives

REAL OPTIONS – FIVE CATEGORIES

1. Waiting-to-invest options The value of waiting to build a factory until better market information comes along may exceed the value

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 value

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

probing

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”

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 newspaper, a candy bar, and a can of soda) Gillette prices are never raised faster than the price

of the market basket.

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