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Strategy and Management of Change. Hypercompetition and the impact of the internet on strategy Ian Knox and Julian Lowe School of Business. Focus questions. What is extreme or hypercompetition? Is strategy under conditions of extreme or hypercompetition different?

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strategy and management of change

Strategy and Management of Change

Hypercompetition and the impact of the internet on strategy

Ian Knox and Julian Lowe

School of Business

focus questions
Focus questions
  • What is extreme or hypercompetition?
  • Is strategy under conditions of extreme or hypercompetition different?
  • How does the internet influence value creation?
  • Can the internet deliver sustainable competitive advantage?
  • What is the impact of the internet in different industries?
  • Has it created new Business Models?
  • What are the latest emerging trends
  • How can we manage it?
what is hypercompetition
What is hypercompetition?
  • Term developed by Richard D’aveni (Hypercompetion) and extended by Eisenhardt and Brown (Competing on the Edge)
  • Situation in which competitive advantage is not sustainable without regular reinvention, new entry, and exit
  • Shift from slow to fast cycle markets
  • Commoditization – all products having similar price – quality characteristics
  • Process of creative destruction – innovation continually breaking established firm’s hold on markets
  • Low industry returns
hypercompetition and conventional models of strategy
Hypercompetition and conventional models of strategy

Five Forces Core Game Hypercompetion Competences Theory

Assumptions

Goal

Performance Driver

Strategy

Success

Source: S.L. Brown & K.M Eisenhardt (1998) ‘Competing on the Edge’ Boston: Harvard Business School Press p8

slide5
Move Back to HypercompetitionFigure 1-13 The cycle of price-quality competition moving up an escalation ladder

Need toMove to a New Arena of Competition

Return to Price Wars

Commodity-like Market Where Price & Quality & Product Offerings Cease to Be an Advantage

Attempt to Redefine Quality

Move toward Ultimate Value

Niching & Outflanking

Full-Line Producers

Price-Quality Manoeuvres

Price War

“Bottom of the Ladder”

sources of hyper competition

E-readiness

May 5th 2005 From The Economist print edition

Denmark is still the best place in the world to do e-business, reports the Economist Intelligence Unit, a sister firm of The Economist. It has ranked the “e-readiness” of the world's 65 largest economies to find the countries most amenable to internet-based business. The factors considered include broadband and mobile-phone penetration, as well as government regulation. America rose from sixth to second place in the ranking since last year. Britain fell from second to fifth place. India, despite being an IT superpower, is ranked only 49th.

Sources of hyper-competition
  • Disruptive technologies
  • Global competition
  • Internet
  • Better sources of information and ‘savvy’ customers
slide7

Disruptive technologies

  • New technologies with different price : performance ratios
  • New attributes
  • Effective in markets where dominant firms have focused on existing technologies and served markets and try to grow by improving the technology around old customer base
  • Examples: Sailing ships/Disk drives/Angioplasty and heart surgery
slide8

Globalisation

  • Increasingly homogeneous markets
  • Competition from anywhere
  • Anonymity of source of products and services
  • New entrants at low cost
  • Rapid diffusion of innovation
  • ……
internet enabled business
Internet enabled business
  • Wherever there are transactions or information flows, there is scope for internet enabled commerce
  • The internet is still in a developing state. At present it is just beginning to restructure transactions and business models – see next slide
  • The impact of the internet has been more in some areas than others – typically because of their information content
  • You can understand the impact of the internet partly by
    • using the 5 forces – how does it change competitive relationships
    • Using the value chain – where can it reconfigure or create new value
    • Understanding the nature of the network externalities – that is the effect of adding more users – with the internet this increases the value of the whole system
    • Creating new sources of value – social network sites
stages of technology change
Stages of technology change

Change in industry:

  • Substitution
  • Scale
  • Structural change

And a stage approach

  • Introduction – no standards, many competitors, product innovation
  • Growth – diffusion of ideas, development of a standard, reduction of competition
  • Maturity – dominant design, move to process innovation
slide11

Impact of internet on social and economic business models

??

??

Economic and social impact

time

Start-up/novelty

substitution

Scale-up

restructure

slide12

Internet enabled business – reduces the trade-off between richness (of relationships with customers) and reach (how many customers you can reach

with internet with good connectivity

?

Richness -customisation, knowing your customer(bandwidth)

with internet in early years

without internet

Reach – how large or broad your market is (connectivity)

….and relationships?

internet created value
Internet created value

novelty

Transaction structures, content

Search costs, information, speed, scale

Trust, switching costs, network externalities

value

Efficiency

Lock - in

Between products and services, on line and off line

complementarities

conventional drivers of value
Conventional drivers of Value
  • Innovation (schumpeter)
  • Reconfigure the value chain
  • Improve use of resources/create new competences
  • Change the nature and scope of networks
  • Change transaction costs
  • ….
a view from a guru
A view from a guru
  • The dot com crash showed that there is no value in internet companies unless they already have the fundamentals of competitive advantage in place
  • Porter suggests it changes nothing but merely leverages existing strengths
  • But not all agree
porter and anti porter
Complements existing advantages

Impact on industry structure

Conventional cost curves

Embeds switching

Competition at firm level

Redefines strategy and more customer focused

Changes and creates new industries

Network externalities

Speeds up switching

Competition at network level

Porter and Anti-Porter
bricks or clicks
Bricks or Clicks?
  • A fundamental question is should existing firms compete in the electronic and physical world at the same time or should they run these businesses separately?
slide20

Some Examples: Book Retailing

Traditional value nets

Broad

Narrow concentrated

Narrow fragmented

Size and dispersion of market

Innovative value nets

Segmented Sequential Precise Interactive total partial

Methods of access of information

the strategic challenge of e commerce
The Strategic Challenge of E-commerce
  • Connectivity
  • Intra-org
  • Inter-org
  • The value chain
  • Incumbents v new entrants
  • New forms of competition
  • Bricks / Clicks
  • Protection and capture
  • Complementary with other forces
    • Globalisation
    • Technology
    • Communications
  • New industry boundaries

… … But why did .coms fail?

issues for individual firms
Issues for Individual Firms
  • How and where in the current value chain is information a component of value?
  • Where are the current trade offs being made between connectivity and customisation? How will eCommerce change these?
  • Which critical activities – especially informational activities can be spun off?
  • Could the underlying businesses be made more efficient if the informational activities were stripped away?
  • What new activities – especially facilitating agent roles – might be required?
  • How are risks distributed in the chain break up?
  • What happens to value capture?
  • What happens to control?
  • Which strategic assets become liabilities?
  • What are the new capabilities required in the emerging businesses?
new opportunities
New Opportunities
  • Release Trapped Value
  • Efficient markets
  • Efficient value systems
  • Case of access
  • Disrupt incumbent power
  • New ! Value
  • Customised offerings
  • Radically extended reach
  • Building a community and brand value
  • New functionality
recent developments
Recent developments
  • Increased speed of broadband and wireless means the internet is increasing in impact – Korea – 100mb/s download
  • Symmetric download and up load
  • Development of Web 2.0
  • Rapid growth of Social network sites
  • TV advertising, traditional newsmedia are all in decline
slide25

EMERGING-MARKET INDICATORSE-readiness

May 5th 2005 From The Economist print edition

Denmark is still the best place in the world to do e-business, reports the Economist Intelligence Unit, a sister firm of The Economist. It has ranked the “e-readiness” of the world's 65 largest economies to find the countries most amenable to internet-based business. The factors considered include broadband and mobile-phone penetration, as well as government regulation. America rose from sixth to second place in the ranking since last year. Britain fell from second to fifth place. India, despite being an IT superpower, is ranked only 49th.

EMERGING-MARKET INDICATORSE-readiness

May 5th 2005 From The Economist print edition

Denmark is still the best place in the world to do e-business, reports the Economist Intelligence Unit, a sister firm of The Economist. It has ranked the “e-readiness” of the world's 65 largest economies to find the countries most amenable to internet-based business. The factors considered include broadband and mobile-phone penetration, as well as government regulation. America rose from sixth to second place in the ranking since last year. Britain fell from second to fifth place. India, despite being an IT superpower, is ranked only 49th.

technology and the internet
Technology and the internet
  • What is the impact of the internet on your organisation?
  • Will the internet change the nature of competition?
  • Will it generate new sources of value?
  • Operational or strategic changes?
  • Will it create or change industry boundaries?
hypercompetion building blocks
Hypercompetion - Building Blocks
  • Setting the pace
  • Time pacing
  • Transition
  • Rhythm
  • Gaining advantages of the past
  • Regeneration
    • Natural selection
    • Genetic algorithms
    • Modularity
  • Winning tomorrow today
  • Experimentation
    • Options
    • Learning
  • Playing the improvisational Edge
  • Improvisation
    • Real-time communication
    • Semi-structures
  • Capturing cross-business synergies
  • Co-adaptation
    • Focus
    • Nexus of strategy and tactics
    • Unique roles

Source: S.L. Brown & K.M Eisenhardt (1998) ‘Competing on the Edge’ Boston: Harvard Business School Press p.23

the 10 rules for competing on the edge
The 10 Rules for Competing on the Edge

If you want to play in the new strategy game, you’ve got to know the rules. Here are Shona Brown and Kathleen Eisenhardt’s guidelines for managers who want to abandontheir old-strategy mindset for today’s “on the edge” strategy… where the name of the game is change:

Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

strategy rule 1 advantage is temporary
StrategyRule 1: Advantage Is Temporary

On-the-edge managers understand that competitive advantage is fleeting. So, they focus on continuously generating new sources of advantage and never lose sight of the fact that today’s winning strategy will probably not work tomorrow. In their minds, change is an opportunity—not a threat.

Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

strategy rule 2 strategy is diverse emergent and complicated
StrategyRule 2: Strategy is Diverse, Emergent, and Complicated

Strategy is a diverse collection of moves that are loosely linked together in a semi-coherent direction. Managers who compete on the edge let strategy emerge by making a variety of moves, seeing what happens, and following through on those that work. They end up playing a broader and more surprising set of strategic options than others.

Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

strategy r ule 3 reinvention is the goal
StrategyRule 3: Reinvention is the Goal

On-the-edge managers scan for opportunities to reinvent the business and then let profits follow. Creating value takes higher priority than improving efficiency when it’s accepted that profit juggernauts are rare finds and continual reinvention is the smarter path to long-term profitability.

Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

organization ru le 4 live in the present
OrganizationRule 4: Live in the Present

The most important time frame is today. The key to effectively managing today is to maximize the minimum organizational structure. Firms that compete on the edge use just enough structure to prevent things from flying apart, keep businesses poised for change and managers aware of opportunities, but allow enough room for innovation, personalization, and experimentation.

Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

organization rule 5 stretch o ut the past
OrganizationRule 5: Stretch Out the Past

On-the-edge managers realize that the past is often the greatest competitive advantage when chasing new opportunities. Wise use of the past saves time, saves money, and mitigates risk. Most significant, the past lets managers jump-start new opportunities and focus on the truly new. Past experience also shows up in exploiting derivative products more effectively and extending out product and service platforms. These managers stretch out the past but don’t get stuck in it.

Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

organization rule 6 reach into the future
Organization Rule 6: Reach Into the Future

On-the-edge managers compete across a longer time horizon than most. Driven by the paranoia that the market is constantly and unpredictably shifting, they frequently probe the future. They launch more experimental products and services, create more strategic alliances in nascent markets and technologies, and employ more futurists than other firms. But they strike a balance between the future and the present so as not to reach for future gains at the expense of present rewards.

Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

organization rule 7 time pacing
OrganizationRule 7: “Time Pacing”

On-the-edge strategy uses time (as distinct from speed) as a critical strategic weapon. On-the-edge companies set a metronome-like pace around the number of new products launched per year, the refreshment of brands, or the building of manufacturing capacity. Companies that set the pace of change in their industry hold a potent advantage; they understand the power of rhythm to get their businesses into a winning groove and keep them there.

Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

leadership rule 8 grow the strategy
LeadershipRule 8: Grow the Strategy

Managers who compete on the edge grow their businesses like prairies, rather than assemble them like toasters. They don’t compile the pieces of strategy at once. They coax them by pruning back on overstructuring, while setting priorities, major responsibilities, and key operating measures where they don’t already exist. The strategy is grown, starting with the current businesses, then incorporating some of the past, and then linking to future opportunities. Then it’s time paced. Never start with the future when growing a strategy—begin with the basics of today’s businesses.

Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

leadership rule 9 drive strategy from the business level
LeadershipRule 9: Drive Strategy From the Business Level

Managers in on-the-edge companies realize that in high-velocity markets, strategy cannot be driven top-down. There’s too much change that comes too quickly and unpredictably to wait for strategy to trickle through hierarchy. Success comes from skilled, fast, and agile moves at the business level.

Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

leadership rule 10 repatch businesses to markets and articulate the whole
LeadershipRule 10: Repatch Businesses to Markets and Articulate the Whole

It’s tough to find a once-for-all match of businesses with markets in a rapidly changing world—any that exist are fleeting. Continuously realigning businesses with emerging opportunities and articulating that emergent strategy are the principal responsibilities for on-the-edge senior managers. Pattern recognition, articulation of those patterns, and flexible thinking across time frames are the skills at the heart of the senior manager’s job in an on-the-edge company.

Source: http://www.hbsp.harvard.edu/products/press/books/competing/rules.html

verdict
Verdict?
  • Cycles are getting faster in some sectors. (eg cameras)
  • Hypercompetition as defined by move to same price-quality ratios exist in many non-technology markets
  • Evidence across industries is mixed
  • Where it is evident, very difficult strategies and strategic processes are required.
  • The internet is now creating fundamental change