Copyright © 2012 Pearson Canada Inc. 0 Chapter 6 Crafting Business Strategy for Dynamic Contexts

Copyright © 2012 Pearson Canada Inc. 1 Strategy and the Dynamic Environment – FOUR FACETS OF THE DYNAMIC ENVIRONMENT Examples Competitive Interaction When incumbents and, especially, new entrants use a new business model, they drive dynamism in market. In 2005, SABMiller regained market-share-growth leadership from Anheuser-Busch in the light-beer segment by using aggressive advertising. 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. Industry evolution When technological change is discontinuous, it does not sustain existing leaders’ advantages. Apple was proactive in creating its iPod to take advantage of the digitalization of music. Technological change

Copyright © 2012 Pearson Canada Inc. 2 Strategy and the Dynamic Environment – THE IMPORTANCE OF SPEED Speed of Change The speed of change is a critical factor in keeping up with the basis of competition in an industry. Speed tends to compound the effects of every driver of change, whether industry evolution, technological discontinuities, or other causes.

Copyright © 2012 Pearson Canada Inc. 3 First Movers and Second Movers (or Fast Followers) - 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-mover 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:

Copyright © 2012 Pearson Canada Inc. 4 When to Assert Change - 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

Copyright © 2012 Pearson Canada Inc. 5 Offensive Moves that Lead Industry Change Reconceive a Product or Service Reconfigure the Value Chain Redefine your Arenas Rescale the Industry Reconsidering the Competitive Mindset Shifting the Focus of Strategic Thinking

Copyright © 2012 Pearson Canada Inc. 6 Offensive Moves that Lead Industry Change - CONVENTIONAL VS. NEW MARKET- CREATION STRATEGIC MINDSETS Strategic group and industry segments Industry Buyers Business model Time Product and service offerings Emphasizes competitive position within group and segments Emphasizes rivalry Emphasizes better buyer service Emphasizes efficient operation of the model Emphasizes adaptation and capa- bilities that support competitive retaliation Emphasizes product or service value and offerings within industry definition Dimensions of competition Head-to-Head CompetitionNew-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 intent- seeking to shape the external environment over time Emphasizes complementary products and services within and across industries and segments

Copyright © 2012 Pearson Canada Inc. 7 Defensive Moves for Incumbents Caught Off Guard 1. ABSORBING The most direct way to deal with the new competitor is to buy it. (Rogers) 2. AVOIDING Another way to deal with a competitive entrant is to avoid it by moving on. (IBM)

Copyright © 2012 Pearson Canada Inc. 8 Defensive Moves for Incumbents Caught Off Guard 3. CONTAINING When the competitor is already present in the market, the business can work to contain the competitor. (Loblaw) 4. COUNTERING A company can counter the new entrant’s offer by improving its own offer. (Air Canada)

Copyright © 2012 Pearson Canada Inc. 9 Defensive Moves for Incumbents Caught Off Guard 5. COUNTERVAILING Countering an entrant already in business elsewhere is challenging because the entrant can draw on the resources it generates in the other market. One way to counter this is for the business under attack to enter the attacker’s other market. (Kodak) 6. LOCKING OUT The business can keep potential entrants out through such activities as patenting, behaviour channel control, and government regulations. (IKEA)

Copyright © 2012 Pearson Canada Inc. 10 Defensive Moves for Incumbents Caught Off Guard 7. SHAPING Sometimes denying the market to the entrant is impossible. Then the threatened business seeks to channel the direction in which the entrant develops and so remove the direct threat. (Canadian Medical Association)

Copyright © 2012 Pearson Canada Inc. 11 Defensive Moves for Incumbents Caught Off Guard - REAL OPTIONS 1. Waiting-to-invest options. The value of waiting to build a factory until better market information comes along may exceed the value 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 sell (or 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 company should add more capacity.

Copyright © 2012 Pearson Canada Inc. 12 Formulating and Implementing Dynamic Strategies - CREATING OPTIONS FOR FUTURE COMPETITIVE ADVANTAGE Horizon 3 Seed options for future growth businesses Horizon 2 Drive growth in emerging new businesses Horizon 1 Defend and extend current businesses Profit Time Tactical probing