Bussiness Strategy


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Hope this slide will help you Identify and analysis the challenges to sustainable competitive advantage in a dynamic context

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Bussiness Strategy

  1. 1. Crafting Business Strategy for Dynamic Contexts C t t
  2. 2. OBJECTIVES 1 Identify the challenges to sustainable competitive advantage in dynamic contexts 2 Understand the fundamental dynamics of competition 3 E l t th advantages and di d Evaluate the d t d disadvantages of t f 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 high-speed environmental change 7 Explain the implications of a dynamic strategy for the strategy diamond and strategy implementation 1
  3. 3. THE TALE OF NAPSTER Business model options Bank- Napster p Music rupt Roxio and iTunes A la carte sell single songs Sold to Software Unlimited downloads Roxio Software Music Subscription and music for $9.99/month usiness oftware Real-network's Rhap- sody lets music lovers old Streaming So Bu so listen as much as they want for one monthly fee Sonic Software solutions 2
  4. 4. THREE CAUSES OF DYNAMIC CONTEXTS Examples E l When incumbents and, Mini-mills entered with a new Competitive especially, new entrants use a business model and incumbent Interaction new business model they drive steel companies did not respond dynamism in market As industries evolve and Arm and Hammer almost lost its Industry competition shifts from lead position when baking soda evolution l ti diff i i differentiation to price/low-cost, i /l became commoditized b di i d advantages shift between rivals When technological change is The shift to digital photography Technological discontinuous, it does not favors the strengths of Sony not change sustain e isting s stain existing leaders photography inc mbent photograph incumbent like advantages Kodak 3
  5. 5. PHASES OF COMPETITIVE INTERACTION Phase 1 Phase 2 Phase 3 Phase 4 Discovery Customer Competitor Evaluation of and reaction reaction action and competitive reaction new action ti effectiveness ff ti 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 15:2 (2001), 59-70 4
  6. 6. THE SPECTRUM OF COMPETITIVE RESPONSES STRATEGIES Difficult D Ease with thre can led eat be controll e t Great Limited Extensive Scope of response 5
  7. 7. CONTAINMENT Containment Neutralization Limit the extent to which the new entrant’s innovation impacts y p your business For example: American Airlines can partially contain Southwest by using its bargaining Shaping power to secure more exclusive airport gates Absorption Annulment 6
  8. 8. NEUTRALIZATION Containment Neutralization Try to short-circuit the moves of innovators or new entrants before they y make them For example: The Recording Industry Shaping 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 7
  9. 9. SHAPING Containment Neutralization Shape the innovation so it becomes something the incumbent can live with or g even benefit from For example: For years the American Shaping Medical Association used regulators to attack chiropractors; now they shape chiropractic medicine to become a complement to traditional medicine Absorption Annulment 8
  10. 10. ABSORPTION Containment Neutralization 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 Shaping and QuickBooks; because it identified money-management software as a high- growth opportunity. Absorption Annulment 9
  11. 11. ANNULMENT Containment Neutralization Improve incumbent products and services to annul an innovation or new entrant’s offering For example: Kodak has improved the Shaping quality of its film-based prints so that they are superior to many digital-based alternatives Absorption Annulment 10
  12. 12. PROS AND CONS OF FIRST MOVERS A first-mover is often better off than a A first-follower is often better off than fast follower when: 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 • The first mover’s offering strikes a are hard to copy chord but is flawed • Its customers are locked in (i.e., • The first mover lacks a key switching costs exist) complement (e.g., channel access) that the follower possesses • Scale of the first move makes imitation • First-mover costs outweigh the unlikely advantages of being the first-move 11
  13. 13. A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS Imitators/fast Product Pioneer(s) followers Comments Automated DeLaRue (1967) Diebold (1971) The first movers were small entrepreneurial teller machines Docutel (1969) ( ) IBM (1973) ( ) upstarts that faced two types of competitors: (1) (ATMs) NCR (1974) larger firms with experience selling to banks and (2) the computer giants. The first movers did not survive Ballpoint pens Reynolds (1945) Parker (1954) The pioneers disappeared when the fad first ended Eversharp (1946) Bic (1960) in the late 1940s. Parker t d i th l t 1940 P k entered 8 years l t later. Bi Bic entered last and sold pens as cheap disposables Commercial DeHaviland (1952) Boeing (1958) The pioneers rushed to market with a jet that crashed jets Douglas (1958) frequently. Boeing and Douglas (later known as McDonnell-Douglas) McDonnell Douglas) followed with safer, larger, and safer larger more powerful jets unsullied by tragic crashes Credit cards Diners club (1950) Visa/Master- The first mover was undercapitalized in a business Card (1966) in which money is the key resource. American American A i Express entered last with funds and name Express (1968) recognition from its traveler’s check business Diet soda Kirsch’s No-Cal Pepsi’s Patio Cola The first mover could not match the distribution (1952) (1963) advantages of Coke and Pepsi. Nor did it have the R Royal C l Crown’s Di t ’ Diet C k ’ T b (1964) Coke’s Tab money or marketing expertise needed for massive Rite Cola (1962) Diet Pepsi (1964) promotional campaigns Diet Coke (1982) 12
  14. 14. A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS (CONT.) Imitators/fast Product Pioneer(s) followers Comments Light beer Rheingold’s and Miller Lite (1975) The first movers entered 9 years before Miller and Gablinger’s (1968) Natural light g 16 years before Budweiser, but financial problems Meister Brau Lite (1977) drove both out of business. Marketing and (1967) Coors light distribution determined the outcome. Costly legal (1978) battles, again requiring access to capital, were commonplace Bud light (1982) PC operating CP/M (1974) Microsoft DOS The first mover set the early industry standard but systems (1981) did not upgrade for the IBM PC. Microsoft bought Microsoft an imitative upgrade and became the new Windows (1985) standard. standard Windows entered later and borrowed heavily from predecessors (and competitor Apple), then emerged as the leading interface Video games Magnavox’s Nintendo (1985) The market went from boom to bust to boom. The Odyssey (1972) Sega (1989) bust occurred when home computers seemed likely Atan’s Pong (1972) Microsoft (1998) 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 Source: Adapted from S. Schnaars, Managing Imitation Strategies (New York Free Press, 1994), 37-43 13
  15. 15. EVALUATING A FIRM’S FIRST-MOVER DEPENDENCIES ON INDUSTRY COMPLEMENTS Status of complementary assets Freely available Tightly held and or unimportant i t t important i t t ction It is difficult for anyone to Value-creation ges on make money: Industry y y opportunities favor the pp Weak protec ases of fir mover advantag fro imitatio incumbent may simply holder of complementary give new product or assets, who will probably service away as part of its pursue a fast-follower om larger bundle of offerings strategy W r tion rst Stro protect from imitation First mover can do well Value will go either to first depending on the mover or to party with the execution of its strategy most bargaining power ong Ba m 14
  16. 16. STRATEGIES FOR MANAGING COMMODITIZATION Examples E l Value-in-use Timken bundles commodity approach product with key components Anticipating Process Dell ll directly to D ll sells di tl t innovation consumers approach Managing commoditization diti ti K-mart and KB Toys both Market reduced number of customers focus when they restructured Responding Service Hotels may charge extra for y g innovation cable TV and computer hookups 15
  17. 17. EFFECT OF TECHNOLOGICAL DISRUPTION Performance Maturity Maturity Growth Disruption Growth Embryonic Embryonic y Time 16
  18. 18. FOUR ACTIONS FRAMEWORK: KEY TO THE VALUE CURVE Reduce The key to discovering a What factors should new value curve lies in be reduced well answering four basic belo the industry below ind str questions standard? Eliminate Create/Add Creating What factors that the new markets: What factors that the industry has taken for A new value industry has never granted should be curve offered should be eliminated? created or added? Raise What factors should be raised well above the industry t d d? th i d t standard? Source: Adapted from W.C. Kim and R. Mauborgne, “Blue Ocean Strategy,” California Management Review 47:3 (2005), 105-121 17
  19. 19. HIGH AND LOW-END DISRUPTION Strategy that may result in huge new markets in which new High-end players redefine industry rules to unseat the largest incumbents Strategy that appears at the low end of industry offerings, Low-end targeting the least desirable of incumbents’ customers 18
  20. 20. VALUE CURVE for U.S. WINE INDUSTRY – YELLOW TAIL Expensive wines Yellow tail Cheap wines High Low Price Above-the-line Vineyard Wine Ease of g marketing p g prestige range g selection Use of technical Aging Wine Easy Fun and wine terminology quality complexity drinkability adventure 19
  21. 21. CONVENTIONAL VS. NEW MARKET-CREATION STRATEGIC MINDSETS Dimensions Di i of competition Head-to-Head competition New-market creation Emphasizes rivalry Emphasizes substitutes across Industry industries Emphasizes competitive position Looks across groups and Strategic group and within group and segments segments industry segments Emphasizes better buyer service Emphasizes redefinition of the Buyers buyer and buyer’s preferences Emphasizes product or service Emphasizes complementary Product and value and offerings within industry products and services within and service offerings definition across industries and segments Emphasizes efficient operation Emphasizes rethinking of the Business model of the model industry business model Emphasizes adaptation and capa capa- Emphasizes strategic intent intent- Time bilities that support competitive seeking to shape the external retaliation environment over time 20
  22. 22. SOME WELL-KNOWN DISRUPTIONS Microsoft took 15 years to grow from boutique software firm to Goliath Atari grew from $50 million to $1.6billion over 5 years, years doubling every year Compaq grew from zero revenues to $ 1billion in 5 years 21
  23. 23. CREATING OPTIONS FOR FUTURE COMPETITIVE ADVANTAGE AND PROFITABILITY Profit Horizon 3 H i Tactical Seed options for future probing growth business Horizon 2 Drives growth in emerging new business Horizon 1 Defend and extend current business Time 22
  24. 24. IMPROVISATION AND SIMPLE RULES Just as Jazz musicians can improvise p ... corporations can become more p when they play together because they flexible by allowing improvisation follow a set of simple rules ... under a set of simple rules Simple rules • Customer is always right • Always run highest profitability products • Never 23
  25. 25. TACTICAL PROBING OPERATIONAL TACTICS CAN BECOME STRATEGICALLY IMPORTANT discount initiative Tactical initiatives nch Merrill lyn • Futures – trading • Si lifi d mutual-fund offerings Simplified t l f d ff i Though some initia- tives failed, several Charles enabled Charles Schwab • Internet products services p S h b t f th Schwab to further differentiate itself from its bare-bones • Credit cards competition p E* Trade • Outline mortgage E 24
  26. 26. STAGING AND PACING IN THE REAL WORLD “Five years is the maximum that you can go without refreshing the brand ... We did it British Airways (relaunched Club Europe Service) because we wanted to stay ahead so that we could continue to win customers” “In each of the last three years we’ve introduced more than 100 major new products, Emerson Electric 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” The inventor of Moore’s Law stated that the power of the computer chip would Intel 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” them, grow 40% of Gillette’s sales every five years must come from entirely new products (prior Gillette 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 newspaper, a candy bar, and a can of soda). Gillette prices are never raised faster than the price of the market basket. 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)25
  27. 27. REAL OPTIONS – FIVE CATEGORIES 1. Waiting-to-invest options. The value of waiting to build a factory until b tt market i f til better k t information comes along may exceed th value ti l d the l of immediate expansion 2. Growth options. An entry investment may create opportunities to pursue valuable follow-up projects 3. Flexibility options. Serving markets on two continents by building two plants instead of one gives a firm the option of switching production from one plant to the other as conditions dictate 4. Exit (or abandonment) options. The option to walk away from a p j project in response to new information increases its value p 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 26
  28. 28. THE VALUE OF REAL OPTIONS DCF value Value of Total busi- real options ness value Current Real- Total business + options = business value value value Source: L.E.K. Consulting LLC, Shareholder Value Added: Making Real Decisions with Real Options (Accessed September 12, 2005), www.lek.com/ideas/publications/sva 16.pdf. 27
  29. 29. SUMMARY 1 Identify the challenges to sustainable competitive advantage in dynamic contexts 2 Understand the fundamental dynamics of competition 3 E l t th advantages and di d Evaluate the d t d disadvantages of t f 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 high-speed environmental change 7 Explain the implications of a dynamic strategy for the strategy diamond and strategy implementation 28