1. Conferencia DECONSTRUYENDO VALOR ROMPER LAS REGLAS

2. Mr. Richard A. D’Aveni Profesor de Dirección Estratégica de AmosTuck Business School, Dartmouth College

3. © Copyright by Richard A. D’Aveni 2005. All rights reserved. DECONSTRUCTING VALUE Professor Richard D'Aveni Breaking the Rules of the Competitive Game Tuck School of Business at Dartmouth College Instituto de Empresa Annual Alumni Conference November 25, 2005 Instituto de Empresa Annual Alumni Conference November 25, 2005

4. © Copyright by Richard A. D’Aveni 2005. All rights reserved. To Strategize About How to Use Rapid and Disruptive Change to Break the Old Rules of Competition To Change Mindsets by Embracing External Disruptions as Opportunities to Break the Rules To Examine How Traditional Strategic Rules Fail in Disruptive, Hypercompetitive Markets To Understand How to Win Using Fast Paced Disruption Strategies that Change the Rules of the Game Goals

5. © Copyright by Richard A. D’Aveni 2005. All rights reserved. Disruption and Unsustainable Advantage Competitive Advantage Short Period of Advantage Launch Rapid Counter Attack or Disruption Time Competitive Advantage Period of Advantage Launch Slow Counter Attack Time Stability and Traditional Sustainable Advantage We Live In a Disruptive World

6. © Copyright by Richard A. D’Aveni 2005. All rights reserved. Falling Entry Barriers Hypercompetition Capitalizing on the Four Driving Forces of Hypercompetition Rising Deep Pockets Accelerating Technological And Business Model Change Fragmenting and Escalating Customer Demands

7. © Copyright by Richard A. D’Aveni 2005. All rights reserved. Old Rules Don’t Apply Because Time, Speed and Maneuvering Matter

8. © Copyright by Richard A. D’Aveni 2005. All rights reserved. IN THE STONE AGE Perfect Competition

9. © Copyright by Richard A. D’Aveni 2005. All rights reserved. The Old Rules: Win By Reducing Rivalry Build Non-Competitive Industry Structures Strong Defensive Walls Barriers to Entry – Exclude Competitors Reduce Rivalry Avoid Price Wars Differentiate—Generic Strategies Segment and Divide Up Markets Use the Power of Monopoly Over Buyers Over Suppliers

10. © Copyright by Richard A. D’Aveni 2005. All rights reserved....Aggressive Disruption Shift in the Rules of Competition? Revolutionary Technology? New Business Model? Deregulation or Privatization? What Kind of World Do You Live In? Please Sit Down if Answer is Yes …Falling Barriers Unconventional Entrant? Foreign Entrant? Adjacent Industry? Convergence?...Escalating Competition Quality War? Price War?

11. © Copyright by Richard A. D’Aveni 2005. All rights reserved.

12. What are the New Rules of Hypercompetition?

13. Advantage Long-Term Advantage Time Strategic Dominance Time A Series of Advantages Advantage

14. © Copyright by Richard A. D’Aveni 2005. All rights reserved. Do Not Wait Until It Is Too Late Time Advantage Doing Setting Up Planning Envisioning Four Virtually Simultaneous Organizations Set Your Time Pacing Interval

15. © Copyright by Richard A. D’Aveni 2005. All rights reserved. Financial Strength/ Reliability Service/ Products Value Pricing Specialty Value Propositions Brand QUALITY Balance Sheet Management Agents Economies of Scale in Operations/ Overhead Link Marketing with Underwriting Distribution, Direct Selling, and Internet KNOW-HOW/ASSETS FUTURE Property & Casualty Insurance Industry Pre-Plan Your Disruption Sequence Create a Value and Competence Migration Path

16. © Copyright by Richard A. D’Aveni 2005. All rights reserved. The Essence of The Struggle Nothing is Sustainable!

17. © Copyright by Richard A. D’Aveni 2005. All rights reserved. Knocking Rivals Off Balance: The Center of Gravity Proactive Disruption of Competitors’ Advantages

18. © Copyright by Richard A. D’Aveni 2005. All rights reserved. The Disruption of the Brokerage Industry Disrupting the Center of Gravity Round 1: Challenging the Downstream End of the Brokerage Value Added Chain Merrill’s Strengths Largest Broker Network Tailored Advice Lower cost and 24-hr. service via electronic/telephone service Schwab’s Disruption DistributionMarketing Research/ Analysis Product Development Service Customer Account Reports

19. © Copyright by Richard A. D’Aveni 2005. All rights reserved. DistributionMarketing Research/ Analysis Product Development Service Round 2: Challenging the Upstream End of the Brokerage Value Added Chain Merrill’s Strengths Schwab’s Disruption Invention of CMA/Mutual Funds Securities Analysis One Source provides many new products and access to research by many funds Customer Account Reports The Disruption of the Brokerage Industry (cont.) Disrupting the Center of Gravity

20. © Copyright by Richard A. D’Aveni 2005. All rights reserved. DistributionMarketing Research/ Analysis Product Development Service Round 3: Rechallenging the Downstream End of the Brokerage Value Added Chain Merrill’s Strengths Largest Broker Network Tailored Advice Schwab Advisor Network & Schwab OnLine Schwab’s Disruption Customer Account Reports The Disruption of the Brokerage Industry (cont.) Disrupting the Center of Gravity

21. © Copyright by Richard A. D’Aveni 2005. All rights reserved. DistributionMarketing Research/ Analysis Product Development Service Round 4: The Empire Strikes Back Merrill Drops Megatonage Major Cost Cut Backs (overseas & U.S.) Major Employee Reductions Schwab Responds by Imitating Full Line Brokers Customer Account Reports Schwab Direct Detail (In-depth Mutual Fund Insights) Upscale Rebranding U.S. Trust Computerized Stock Advice and Portfolio Planning & Wireless Trading My Financial Picture Online New Compensation System [No commission paid on small account trading] Retirement Planning Network Disrupting the Center of Gravity

22. © Copyright by Richard A. D’Aveni 2005. All rights reserved. DistributionMarketing Research/ Analysis Product Development Service Round 5: The Guerilla Strikes Back Merrill’s Investment Banking Strengths Research Tied to Investment Banking Deals Schwab Challenges Conflicts of Interest Customer Account Reports IPOs Tied to Investment Banking Deals & CMA Funds Used For M&A Loans Advertising De-Legitimizing Investment Banks—Biased Toward IB Clients Over Brokerage Clients Advertising De-Legitimizing Investment Banks—Biased Toward IB Clients Over Brokerage Clients Disrupting the Center of Gravity

23. © Copyright by Richard A. D’Aveni 2005. All rights reserved. In Hypercompetition The Only Defense is a Good Offense

24. © Copyright by Richard A. D’Aveni 2005. All rights reserved. Industry Average Stock Performance Industry Rivalry 1980’s - 1990’s 1950’s - 1970’s Embracing The Hypercompetitive Shift N = 200 Industries Drive Growth to Create Shareholder Value

25. © Copyright by Richard A. D’Aveni 2005. All rights reserved. The Goals of the Struggle Outmaneuver your opponent by serving your customer better Compete to neutralize or obsolete the opponent’s advantage at serving the customer Not to sustain your advantage

26. © Copyright by Richard A. D’Aveni 2005. All rights reserved. Chivalry is Dead The New Golden Rule Do Unto Yourself Before Others Do Unto You The New Goals Disrupt the Status Quo Reshape and Reinvent the Industry

27. © Copyright by Richard A. D’Aveni 2005. All rights reserved. Only Two Types of Firms The Disruptive The Dead

28. © Copyright by Richard A. D’Aveni 2005. All rights reserved. Type of Disruption High Fluctuating Equilibrium (Near Equilibrium) Disequilibrium (Chaos) Low Equilibrium (Stability) Punctuated Equilibrium (Periodic Disequilibrium) Competence Neutral/ Enhancing Competence Destroying Frequency of Disruption The Nature of Change: Turbulence Turbulence is Disruption of the Status Quo Time Equilibrium Turbulence Time Punctuated Equilibrium Turbulence Time Fluctuating Equilibrium Turbulence Time Disequilibrium Turbulence

29. © Copyright by Richard A. D’Aveni 2005. All rights reserved. Matching Your Mindset to Turbulence The Nature of Change Changes the Nature of Competitive Advantage Type of Disruption High Fluctuating Equilibrium Leverage & Layer Core Competencies Disequilibrium Hypercompetitive Strategies Low Equilibrium Strong Barriers & Monopoly Power Punctuated Equilibrium Strategy as Revolution Competence Neutral/ Enhancing Competence Destroying The Nature of Change and Strategy

30. © Copyright by Richard A. D’Aveni 2005. All rights reserved. Type of Disruption Frequency of Disruption Which Type of Market are You In? Do Your People Have the Right Strategic Mindset for the Type of Turbulence You Face? High Fluctuating Equilibrium (Near Equilibrium) Disequilibrium (Chaos) Low Equilibrium (Stability) Punctuated Equilibrium (Periodic Disequilibrium) Competence Neutral/ Enhancing Competence Destroying Time Equilibrium Turbulence Time Punctuated Equilibrium Turbulence Time Fluctuating Equilibrium Turbulence Time Disequilibrium Turbulence