Chapter 6 Crafting Business Strategy for Dynamic Contexts OBJECTIVES 1 Identify the challenges to sustainable competitive advantage in dynamic contexts 2 Understand the fundamental dynamics of competition 3 Evaluate the advantages and disadvantages of 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 environmental change 7 Explain the implications of a dynamic strategy for the strategy diamond and strategy implementation 2 THE TALE OF NAPSTER Business model options Music Bankrupt A la carte Roxio and iTunes sell single songs Subscription Unlimited downloads for 9 99 month Sold to Napster Sonic solutions Business sold Software Music and music Software Roxio Software Streaming Real network s Rhapsody lets music lovers listen as much as they want for one monthly fee Software 3 THREE CAUSES OF DYNAMIC CONTEXTS Examples Competitive Interaction When incumbents and especially new entrants use a new business model they drive dynamism in market Mini mills entered with a new business model and incumbent steel companies did not respond Industry evolution 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 Technological change When technological change is discontinuous it does not sustain existing leaders advantages The shift to digital photography favors the strengths of Sony not photography incumbent like Kodak 4 PHASES OF COMPETITIVE INTERACTION Phase 1 Discovery and competitive new action Source Phase 2 Customer reaction Phase 3 Competitor reaction Phase 4 Evaluation of action and reaction effectiveness 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 5 Great Ease with threat can be controlled Difficult THE SPECTRUM OF COMPETITIVE RESPONSES STRATEGIES Any firm that invests in resources and capabilities thatLimited support retaliation to the exclusion of innovation and change may only be prolonging its inevitable demise nt o C e m ain n tra u e t N tio a liz ha S n g n pi so b A rp A n tio nt e lm u nn Extensive Scope of response 6 CONTAINMENT Containment Neutralization Shaping Limit the extent to which the new entrant s innovation impacts your business For example American Airlines can partially contain Southwest by using its bargaining power to secure more exclusive airport gates Absorption Annulment 7 NEUTRALIZATION Containment Neutralization Shaping 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 Absorption Annulment 8 SHAPING Containment Neutralization Shaping 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 Absorption Annulment 9 ABSORPTION Containment Neutralization Minimize the risks entailed by being either a first mover or an imitator Shaping For example In the late 1980s Microsoft purchased Intuit the maker of Quicken and QuickBooks because it identified money management software as a highgrowth opportunity Absorption Annulment 10 ANNULMENT Containment Neutralization Shaping Improve incumbent products and services to annul an innovation or new entrant s offering For example Kodak has improved the quality of its film based prints so that they are superior to many digital based alternatives Absorption Annulment 11 PROS AND CONS OF FIRST MOVERS A first mover is often better off than a fast follower when A first follower is often better off than 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 are hard to copy Its customers are locked in i e switching costs exist Scale of the first move makes imitation unlikely The first mover s offering strikes a chord but is flawed The first mover lacks a key complement e g channel access that the follower possesses First mover costs outweigh the advantages of being the first move 12 A GALLERY OF FIRST MOVERS AND FAST FOLLOWERS Imitators fast followers Product Pioneer s 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 Commercial jets DeHaviland 1952 Boeing 1958 Douglas 1958 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 The pioneers rushed to market with a jet that crashed frequently Boeing and Douglas later known as McDonnell Douglas followed with safer larger and more powerful jets unsullied by tragic crashes Credit cards Diners club 1950 Visa MasterCard 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 13 A GALLERY OF FIRST MOVERS AND FAST FOLLOWERS CONT Imitators fast followers Product Pioneer s 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