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8/3/2019 Blue Ocean Strategy Credit Card0
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Chapter 6Crafting Business Strategy
for Dynamic Contexts
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2
OBJECTIVES
Identify the challenges to sustainable competitiveadvantage in dynamic contexts
1
Understand the fundamental dynamics of competition
2
Evaluate the advantages and disadvantages of choosing a first-mover strategy3
Analyze and develop strategies for managingindustry evolution
4
Analyze and develop strategies for technologicaldiscontinuities
5
Analyze and develop strategies for high-speedenvironmental change
6
Explain the implications of a dynamic strategy for the strategy diamond and strategy implementation
7
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THE TALE OF NAPSTER
S o l d
t o
S o
f t w a r e
B u
s i n e s s
s o l d
Business model options
RoxioSoftware
and musicSoftware Music
SoftwareSonicsolutions
Napster MusicBank-rupt
SubscriptionUnlimited downloadsfor $9.99/month
Streaming
Real-network's Rhap-sody lets music loverslisten as much as theywant for one monthlyfee
A la carteRoxio and iTunessell single songs
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THREE CAUSES OF DYNAMIC CONTEXTS
Examples
Competitive
Interaction
When incumbents and,especially, new entrants use anew business model they drivedynamism in market
Mini-mills entered with a newbusiness model and incumbentsteel companies did not respond
As industries evolve andcompetition shifts fromdifferentiation to price/low-cost,advantages shift between rivals
Arm and Hammer almost lost itslead position when baking sodabecame commoditized
Industry
evolution
When technological change isdiscontinuous, it does notsustain existing leadersadvantages
The shift to digital photographyfavors the strengths of Sony notphotography incumbent likeKodak
Technological
change
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PHASES OF COMPETITIVE INTERACTION
Phase 1
Discoveryandcompetitive
new action
Phase 2
Customer reaction
Phase 3
Competitor reaction
Phase 4
Evaluation of action andreaction
effectiveness
Source: Adapted from K.G. Smith, W.J. Ferrier, and C.M. Grimm, ³King of the Hill: Dethroning the Industry Leader,´ Academy of Management Executive 15:2 (2001), 59-70
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Competitive Response Strategies
Containment
Neutralization
Shaping
Absorption
Annulment
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CONTAINMENT
Containment
Neutralization
Shaping
Absorption
Annulment
Limit the extent to which the new entrant¶sinnovation impacts your business
For example: American Airlines can partiallycontain Southwest by using its bargainingpower to secure more exclusive airport gates
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NEUTRALIZATION
Containment
Neutralization
Shaping
Absorption
Annulment
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 afierce legal attack on Napster that itforced even smaller Napster-like firms tostay out of the fray
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SHAPING
Containment
Neutralization
Shaping
Absorption
Annulment
Shape the innovation so it becomessomething the incumbent can live with or
even benefit from
For example: For years the AmericanMedical Association used regulators toattack chiropractors; now they shapechiropractic medicine to become acomplement to traditional medicine
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ABSORPTION
Containment
Neutralization
Shaping
Absorption
Annulment
Minimize the risks entailed by beingeither a first mover or an imitator
For example: In the late 1980s Microsoftpurchased Intuit, the maker of Quickenand QuickBooks; because it identifiedmoney-management software as a high-growth opportunity.
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ANNULMENT
Containment
Neutralization
Shaping
Absorption
Annulment
Improve incumbent products andservices to annul an innovation or new
entrant¶s offering
For example: Kodak has improved thequality of its film-based prints so that theyare superior to many digital-basedalternatives
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PROS AND CONS OF FIRST MOVERS
Rapid technology advances allow afast-follower to leapfrog the first mover
It achieves absolute cost advantage
The first mover¶s offering strikes achord but is flawed
Its reputation and image advantagesare hard to copy
The first mover lacks a keycomplement (e.g., channel access) thatthe follower possesses
Its customers are locked in (i.e.,switching costs exist)
First-mover costs outweigh theadvantages of being the first-move
Scale of the first move makes imitationunlikely
A fast-follower is often better off than a
first mover when:
A first-mover is often better off than a
fast follower when:
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A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS
Product Pioneer(s)
Imitators/fast
followers Comments
Automatedteller machines(ATMs)
DeLaRue (1967)
Docutel (1969)
Diebold (1971)
IBM (1973)
NCR (1974)
The first movers were small entrepreneurialupstarts that faced two types of competitors: (1)larger firms with experience selling to banks and (2)the computer giants. The first movers did notsurvive
Ballpoint pens Reynolds (1945)
Eversharp (1946)
Parker (1954)
Bic (1960)
The pioneers disappeared when the fad first ended
in the late 1940s. Parker entered8
years later. Bicentered last and sold pens as cheap disposables
Commercial jets
DeHaviland (1952) Boeing (1958)
Douglas (1958)
The pioneers rushed to market with a jet that crashedfrequently. Boeing and Douglas (later known asMcDonnell-Douglas) followed with safer, larger, andmore powerful jets unsullied by tragic crashes
Credit cards Diners club (1950) Visa/Master-Card (1966)
AmericanExpress (1968)
The first mover was undercapitalized in a businessin which money is the key resource. American
Express entered last with funds and namerecognition 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 distributionadvantages of Coke and Pepsi. Nor did it have themoney or marketing expertise needed for massivepromotional campaigns
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A GALLERY OF FIRST-MOVERS AND FAST FOLLOWERS (CONT.)
Product Pioneer(s)
Imitators/fast
followers Comments
Light beer Rheingold¶s andGablinger¶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 and16 years before Budweiser, but financial problemsdrove both out of business. Marketing anddistribution determined the outcome. Costly legalbattles, again requiring access to capital, werecommonplace
PC operatingsystems
CP/M (1974) Microsoft DOS(1981)
MicrosoftWindows (1985)
The first mover set the early industry standard butdid not upgrade for the IBM PC. Microsoft boughtan imitative upgrade and became the newstandard. Windows entered later and borrowedheavily 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 likelyto make video games obsolete. Kids lost interestwhen games lacked challenge. Price competitionruled. Nintendo rekindled interest with better gamesand restored market order with managed competition.Microsoft entered with its Xbox when perceivedgaming to be a possible component of its wired world
Source: Adapted from S. Schnaars, Managing Imitation Strategies (New York Free Press, 1994), 37-43
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Status of complementary assets
EVALUATING A FIRM¶S FIRST-MOVER DEPENDENCIES
ON INDUSTRY COMPLEMENTS
Freely availableor unimportant
Tightly held andimportant
B a s e s o f f i r
s t m o v e r a d v a n t a
g e s
S t r o n g p r o t e c t i o n
f r o m i m i t a t i o n
W e a k p r o t e c t i o n
f r o m i m i t a t i o n
It is difficult for anyone tomake money: Industry
incumbent may simplygive new product or service away as part of itslarger bundle of offerings
Value-creationopportunities favor the
holder of complementaryassets, who will probablypursue a fast-follower strategy
First mover can do welldepending on theexecution of its strategy
Value will go either to firstmover or to party with themost bargaining power
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STRATEGIES FOR MANAGING COMMODITIZATION
Managing
commoditization
Anticipating
Responding
Value-in-use
approach
Process
innovationapproach
Market
focus
Service
innovation
Timken bundles commodityproduct with key components
Dell sells directly toconsumers
K-mart and KB Toys bothreduced number of customers
when they restructured
Hotels may charge extra for cable TV and computer hookups
Examples
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FOUR ACTIONS FRAMEWORK: KEY TO THE VALUE CURVE
ReduceWhat factors shouldbe reduced well
below the industrystandard?
Raise
What factors shouldbe raised well above
the industry standard?
The key to discovering a
new value curve lies in
answering four basic
questions
Source: Adapted from W.C. Kim and R. Mauborgne, ³Blue Ocean Strategy,´ California Management Review 47:3 (2005), 105-121
Creating
new markets:
A new valuecurve
Eliminate
What factors that theindustry has taken for granted should beeliminated?
Create/Add
What factors that theindustry has never offered should becreated or added?
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VALUE CURVE for U.S. WINE INDUSTRY ± YELLOW TAIL
Expensive wines
Yellow tailCheap wines
Price
Use of technicalwine terminology
Above-the-linemarketing
Agingquality
Vineyardprestige
Winecomplexity
Winerange
Easydrinkability
Ease of selection
Fun andadventure
Low
High
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CONVENTIONAL VS. NEW MARKET-CREATION STRATEGIC MINDSETS
Strategic group andindustry segments
Industry
Buyers
Business model
Time
Product andservice offerings
Emphasizes competitive positionwithin group and segments
Emphasizes rivalry
Emphasizes better buyer service
Emphasizes efficient operationof the model
Emphasizes adaptation and capa-bilities that support competitiveretaliation
Emphasizes product or servicevalue and offerings within industrydefinition
Dimensions
of competition Head-to-Head competition New-market creation
Looks across groups andsegments
Emphasizes substitutes acrossindustries
Emphasizes redefinition of thebuyer and buyer¶s preferences
Emphasizes rethinking of theindustry business model
Emphasizes strategic intent-seeking to shape the externalenvironment over time
Emphasizes complementaryproducts and services within andacross industries and segments
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SOMEWELL-KNOWN DISRUPTIONS
Compaq grew from zero revenues to $ 1billionin 5 years
Microsoft took 15 years to grow from boutiquesoftware firm to Goliath
Atari grew from $50 million to $1.6billion over 5years, doubling every year
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IMPROVISATION AND SIMPLE RULES
Just as Jazz musicians can improvise
when they play together because they
follow a set of simple rules ...
... corporations can become more
flexible by allowing improvisation
under a set of simple rules
Simple rules
Customer is always right
Always run highest profitabilityproducts
Never
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TACTICAL PROBING OPERATIONAL TACTICS CAN BECOME STRATEGICALLY
IMPORTANT
Though some initia-tives failed, severalenabled CharlesSchwab to further differentiate itself from its bare-bones
competition
M e r r i l l l y n c h
d i s c o u n t i n i t i a t i v e
E * T r a d e
Charles
Schwab
Tactical initiatives
Futures ± trading
Simplified mutual-fund offerings
Internet products services
Credit cards
Outline mortgage
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STAGING AND PACING IN THE REAL WORLD
Source: S. Brown and K. Eisenhardt, Competing on the Edge: Strategy as Structure Chaos (Boston: Harvard Business School Press, 1998)
British Airways ³Five 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 wecould continue to win customers´
Emerson Electric³In 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 rateand, overall, have targeted increasing new products to (equal) 35% of total sales´
IntelThe inventor of Moore¶s Law stated that the power of the computer chip woulddouble every 18 months. IBM builds a new manufacturing facility every ninemonths. ³We build factories two years in advance of needing them, before we havethe products to run in them, and before we know the industry is going to grow´
Gillette40% 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 theprice of the market basket.
3M30% of sales must come from products that are fewer than 4 years old
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REAL OPTIONS ± FIVE CATEGORIES
1. Waiting-to-invest options. The value of waiting to build a factoryuntil better market information comes along may exceed the valueof immediate expansion
2. Growth options. An entry investment may create opportunities to
pursue valuable follow-up projects3. Flexibility options. Serving markets on two continents by building
two plants instead of one gives a firm the option of switchingproduction from one plant to the other as conditions dictate
4. Exit (or abandonment) options. The option to walk away from aproject 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 determinewhether the firm should add more capacity
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THE VALUE OF REAL OPTIONS
Total busi-
ness value
DCF value Value of
real options
Source: L.E.K. Consulting LLC, Shareholder Value Added: Making Real Decisions with Real Options (Accessed September 12, 2005),www.lek.com/ideas/publications/sva16.pdf.
+ =Currentbusiness
value
Real-optionsvalue
Totalbusiness
value
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SUMMARY
Identify the challenges to sustainable competitiveadvantage in dynamic contexts
1
Understand the fundamental dynamics of competition
2
Evaluate the advantages and disadvantages of choosing a first-mover strategy3
Analyze and develop strategies for managingindustry evolution
4
Analyze and develop strategies for technologicaldiscontinuities
5
Analyze and develop strategies for high-speedenvironmental change
6
Explain the implications of a dynamic strategy for the strategy diamond and strategy implementation
7