133 CHAPTER OUTLINE CASE 1 Timex and the Electronic Revolution CASE 2 Eastman Kodak and Digital Photography Introduction New Developments Affecting Competitive Advantage New Technology New Distribution Channels Economic Shifts Changes in Related or Neighboring Industries Government Regulation Response Options Prospecting Defending Harvesting Generic Change Situations Magnitude of Threat Ability to Adjust Common Change Situations Uncertainty Impact of Environmental Development Ability to Adjust Ethical Dimension Risk Preference Return Preference Summary Exercises and Discussion Questions Shifts in Competitive Advantage: Responding to Environmental Change WHAT YOU WILL LEARN • How and why a firm’s competitive advantage can change over time • Some important sources or triggers of change • Strategies that firms can undertake to respond to change 134 PART 1 Building Competitive Advantage During the 1950s and 1960s, Timex became the largest manu- facturer of watches in the world. It experienced phenomenal success. By 1970, one of every two watches sold in the United States was a Timex product. The company was rapidly increas- ing its market share abroad. Yet, by the mid-1990s, the name most people associate with watches designed for the broad market in the United States tends to be Seiko, Citizen, Pulsar, Accutron, or Swatch, and not so much a Timex as in times past. What happened in the watch industry during the 1970s, both in the United States and abroad? Despite the company’s initially impressive record, Timex’s long-term competitive advantage was not assured. One devel- opment that arose with full force during the early 1980s in par- ticular threatened the company’s continued prosperity. Elec- tronic watches were beginning to appear on the market. While still expensive (more than $200 apiece in 1970 versus $20 to $30 for the typical Timex watch), electronic watches underwent rapid price declines throughout the late 1970s and early 1980s until they overwhelmed the marketplace for mechanical, pin- level watches. It was thus conceivable that they might someday become a threat to Timex’s bread-and-butter mechanical watch business. To appreciate the extent of the threat that electronic watches posed for Timex, one needs to examine the core parts that make a watch. A watch consists of four major components: a power source, a timing mechanism, a channel for communicating tim- ing pulses, and a readout device. These parts are listed in Exhibit 5-1. In a mechanical watch, a hand-wound spring (power source) drives a balance wheel (timing mechanism). These movements are transmitted by gears (communication channel) to the hands of the watch (readout device). In an elec- tronic watch, a battery (power source) activates a quartz crystal (timing mechanism). These electric pulses are transmitted by an integrated circuit (communication channel) to a digital display (readout device). The electronic watch uses different parts than those in mechanical watches. It also makes use of different materials (exotic substances like crystals and light-emitting diodes (LEDs) instead of metal springs and gears). Different core technologies are needed (sophisticated electronic design and crystal chemistry instead of metallurgy), along with differ- ent design skills (stepper motors and integrated circuits). Even different machinery is required (equipment for making batter- ies, quartz crystals, and integrated semiconductor-based circuits instead of metal-cutting lathes and drills). Producing electronic watches thus requires a completely alternative set of skills that compels a traditional watchmaker to learn an entirely new set of technologies, value-adding skills, and approaches to product commercialization and development. In each of the watch’s core parts, new technologies and man- ufacturing methods displaced Timex from the market. Innova- tions in quartz crystal chemistry and LED (light-emitting diode) technologies made Timex’s spring-based parts obsolete. These LED, quartz, and other components gave Japanese firms, such as Citizen, Seiko, and Casio, a reputation for quality. Citizen Watch of Japan, for example, learned much of its watch tech- nology from Timex’s archrival Bulova, another U.S. manufac- turer that faced similar difficulties in adapting to a marketplace hungry for miniaturized, electronic watches during the 1970s and 1980s. Bulova regarded Citizen as a cheap source of well- made components, but did not endeavor to reinvent itself to assimilate and adapt new integrated circuits and sophisticated manufacturing to produce next-generation watch components. Over time, this relationship made Citizen a formidable com- petitor as the Japanese firm honed its skills and introduced its own line of products into the United States. New designs of electronic watches from Citizen, Seiko, and other entrants steadily uprooted Timex’s long-standing brand and quality image in the United States. These competitors also redefined distribution channels as they became more commonplace in department stores, catalog sales, and jewelry stores where ele- gant watches became increasingly synonymous with other per- sonal accessories. Customers became more sophisticated and wanted the higher quality watches. Firms that invest in new technologies often develop special skills that allow them to extend their technological reach and skills to other competitive arenas. For example, new watch- making skills also apply to tuning forks, laboratory and testing equipment, robotics, miniaturized electronic tools, and even guidance systems. Other products that share a similar techno- logical competence set include calculators, VCRs, laboratory systems, microwaves, and personal computers. Timex thus faced a major dilemma. If it failed to develop electronic watch competences, it risked losing its industry leadership position. However, electronic technology was new to Timex, and efforts to develop expertise in this area would be expensive, as well as difficult for the existing organization to adapt. Additionally, a level of expertise needed to succeed in the new area might not be guaranteed for Timex. If the electronic watch niche never materialized, or if Timex failed to learn the needed skills, this investment would be largely lost. (Case 1) Timex and the Electronic Revolution 1 CHAPTER 5 Shifts in Competitive Advantage: Responding to Environmental Change 135 In reality, Timex indeed was one of the first firms to offer an electronic watch. However, it failed to promote the product aggressively, perhaps out of fear that it would cannibalize much of its preexisting investment and tooling designed for mechanical watches. It left development of the emerging market segment to others. This decision initially had little direct impact on Timex’s immediate fortunes during the 1970s. The company’s sales and profits in mechanical watches continued to grow throughout most of the decade and even into the early 1980s. However, the battle- ground for watches and similar devices changed steadily under Timex’s shadow over the marketplace. Quartz and digital display technologies became cheaper, more miniaturized, and more per- vasive in their commercial applications. Each new process and product improvement drove down costs. Timex continued to earn record profits into the late 1970s, but the situation changed rapidly when Japanese electronic watch firms established a firm beachhead in the United States in the early 1980s. With sales suddenly declining, Timex made a belated effort to build its electronic watch business. By then, it was too far behind in terms of manufacturing cost and expe- rience to match rivals on price and quality. Following several years of serious losses, Timex was finally taken over by a new ownership group. The new owners worked hard to build up Timex’s electronic business. Their effort has achieved some modest success. However, Timex has not been able to regain the leadership position it once enjoyed. That status now collectively goes to such well-established and recognized brands as Citizen, Casio, and Seiko. In fact, these Japanese manufacturers are becoming more vigilant about the rise of new popular brands such as Swatch and Fossil, whose products are intended to make more of a fashion statement rather than simply being a timepiece. As we enter the next century, consumer photography is also undergoing a revolutionary technological change. It follows much of the same pattern as the watch industry. Eastman Kodak is a global leader in developing chemical-based films. Even though its biggest competitor, Fuji Photo of Japan, sells lower- priced film, as recently as 1996, Kodak commanded upward of 60 percent of the U.S. market for all makes of consumer film. Kodak’s shares are even higher in the industrial and medical film segments. Yet throughout the 1990s, double-digit growth in the chemical-based film market slowed dramatically, leaving East- man Kodak in a real struggle to redefine its core technologies and products in the wake of technological change, revitalized com- petitors, the advent of the Internet, and different customer tastes. Kodak must now deal with the major challenge presented by the arrival of new competitors who are accelerating the transi- tion of chemical-based imaging to new electronic and digital imaging techniques that will change the way consumers use their cameras and how manufacturers link up the camera with other technological applications. Although Kodak still holds a large number of patents that protect both its core, proprietary silver-halide film coatings technology and many advances in digital imaging, the company now face challenges from emerg- ing technologies that threaten its chemical-based investments over the past century. Two particular agents of change threaten Kodak’s traditional technology. The first is the growing use of semiconductors in (Case 2) Eastman Kodak and Digital Photography 2 Major Watch Components Power Timing Communication Readout Source Mechanism Channel Display Mechanical Spring Balance wheel Gears Watch hands Watch assembly Electronic Battery Quartz crystal Integrated circuits Watch hands or Watch electronic display exhibit(5-1) 136 PART 1 Building Competitive Advantage cameras and other imaging equipment. During the 1990s, cam- eras incorporated ever more powerful semiconductor chips to improve picture quality and product performance. In particular, the rise of so-called “flash memory” has become a direct sub- stitute for chemical-based films. Flash memories serve to store a series of images on a disk or memory card that is then easily inserted into a personal computer for long-term storage, imag- ing manipulation, and eventual printing. Cameras that incorpo- rate these and other state-of-the-art chips use microprocessors and microcontrollers to control focus and shutter speed. As these chips improve, these new cameras have given weekend photography amateurs a growing ability to match the quality of professional photographers. The second development facing Kodak is the rise of digital imaging technology. More important, new advances in electron- ics now mean that cameras and other imaging equipment, such as X-rays, can store images as digital, binary codes. By storing images in digital, binary codes, people are able to transfer their pictures and images onto optical disks similar to those used in current personal computers. This ability means that customers can now manipulate images for clearer pictures, accentuate shadows or lines, and even make wholesale changes of the pic- ture’s background. The use of video-compression algorithms together with faster, smarter electronics heralds a new type of imaging technology, whereby digital images can be stored with different degrees of clarity and resolution, depending on what applications are used later. In fact, many of these digital images cannot only be stored on a computer or optical disk, but also be downloaded and shared through the Internet. Consequently, the production and use of cameras and film-development methods are becoming more similar to the technologies used to make compact discs, optical discs, semiconductors, and even software techniques for image manipulation. These technologies defined the evolution of the personal computer, consumer electronics, and computer peripherals industry. The power to edit photo- graphs on a computer or television screen, for example, means that photographers can custom build and assemble their own set of pictures; only the user’s imagination defines how far the tech- nology can be applied. Camera buffs, advertisers, copy editors, medical diagnosticians, and other industrial users will find many new uses for digital imaging methods to capture, store, and manipulate images. In particular, the rapid ability to digitize an image and send it through the Internet allows for fast capture and translation of images for medical applications (second opin- ions), insurance claims, real estate (virtual sales), and other forms of video transmission. This transformation of imaging at Eastman Kodak from chemical-based to digital, electronic- based methods is depicted in Exhibit 5-2. Currently, most electronic and digital imaging techniques cannot achieve the fine degree of resolution of chemical-based film. The number of tiny dots—known as pixels—in any square area determines the clarity of the image. The more dense the pixels, the finer is the resolution. Even though chemical-based films still outclass their digital counterparts in image clarity and fineness, many firms are steadily improving charged coupled devices (CCD’s), digital compression techniques, algorithms, flash memory density, and software interpolation techniques that will make it possible for electronic imaging to reduce the quality gap with chemical-based film imaging. Some analysts have already predicted that the quality gap for all practical pur- poses has already closed. Once this digital-based technology catches up, consumer and industrial users will no longer have to wait to develop their photos. Consumers already are taking and developing pictures with a digital, filmless cameras. The full magnitude of the new technology’s threat to East- man Kodak is difficult to grasp. Many rivals investing in new technologies include Japanese consumer electronics giants Canon, Toshiba, Ricoh, Sony, Epson, and Sharp. Epson, in par- ticular, has developed its own line of digital cameras under the Photo PC brand, in which the flash memory card is directly inserted into a personal computer accessory card interface for immediate image capture. Other rivals that have demonstrated a strong, compelling interest in the arena include Hewlett- Packard, Polaroid, Motorola, IBM, and Intel, all of which have strong semiconductor and/or imaging technologies in their own right. Hewlett-Packard’s advanced software and controller chips are already used in state-of-the-art laser and ink-jet print- ers, while Intel’s flash memory and microprocessor businesses are natural potential entrants into the digital imaging industry. Even U.S. chemical giant DuPont has expressed an interest in imaging technologies that take advantage of its new strengths in advanced materials related to imaging. Either way, Kodak faces both domestic and foreign competitors who have mastered and utilized advanced digital imaging techniques learned from their own respective core businesses. These technologies, in turn, could conceivably be used to design and to produce new, “smart” electronic or digital-based cameras that store images on semiconductor chips. In fact, as early as 1984, Sony attempted to introduce its digital-based camera known as the Sony Mav- ica. It floundered because of poor images from first-generation technology. However, the product reveals the depth of Sony’s skills and commitment to commercializing this new technology. The newest generation of Sony’s Mavica, reintroduced in 1997, has proven to be extremely popular since images are directly stored onto a floppy disk. Thus, Eastman Kodak during the 1990s faces a similar chal- lenge and dilemma to that confronting Timex during the 1970s. Kodak must now learn new semiconductor and digital-based imaging technologies that depart from its chemistry background and traditional technology. In the most extreme case of this CHAPTER 5 Shifts in Competitive Advantage: Responding to Environmental Change 137 threat, consumers can practically capture images with a digital filmless camera and download these images directly on the Inter- net, thus completely bypassing all of Kodak’s traditional film business offerings. To begin meeting the growing needs of peo- ple that use electronic/digital imaging, Kodak has even begun to move beyond its current Photo-CD developing process. Photo- CD allows consumers to put their film negatives on optical disks, which can then be viewed on a television screen. However, from Kodak’s marketing perspective, this process has proved expen- sive and uncertain, as the image is still inextricably linked with a CD-like device that remains cumbersome to use. Competing flash memory cards may generate considerably more consumer interest, since they require even fewer stages of complexity. The next stage of photography and film development has already begun to unfold. Kodak has developed an Internet site that allows customers to drop off their film at a finishing lab, only to have the pictures available to them on the Internet through a special Web account with Kodak. This on-line serv- ice, known as PhotoNet, enables customers to develop their film cartridges or have negatives scanned into the system to be avail- able the next day on the Internet. Customers can then download these Net-based images into their PCs or send them to friends and family through e-mail. To help learn how better to compete in the semiconductor and digital-imaging arenas, Kodak formed a joint venture with Intel in May 1998 to codevelop new flash memories specifically for digital imaging applications. It is simultaneously working with Motorola to develop superior flash memory technology. These flash memory cards will pave the way for Kodak to com- pete more directly with Epson, Sony, and other firms that have similar ambitions. Already, Kodak has pushed through a new flash-derivative product that uses conventional 3.5 inch floppy disks as the “digital film” that captures images, although its storage capacity remains limited at this time and Sony has an initial lead. Kodak also entered into an array of relationships with Microsoft, Adobe Systems, Hewlett-Packard, and even a few Silicon Valley start-ups (e.g., Live Picture) to better under- stand how these new technologies will evolve. It has a signifi- cant ownership stake in an upstart firm known as PictureVision, which has developed a system to allow a consumer’s film to be developed by a photofinishing lab and then delivered to the cus- tomer through Kodak’s Website on the Internet. To further strengthen its hold over this technology, Kodak also entered into a partnership arrangement with America Online to ensure that its Web site is prominently displayed for potential users. These moves represent important learning steps for Kodak in Transformation of Imaging at Eastman Kodak Previous Era 35 mm film Chemical exposure and development Current Era Printing Negatives Hard copy (Paper) 35 mm film Chemical exposure and development Printing Negatives Hard copy (Paper) Image definition Image translation Image compression Image storage Image encoding Transfer to compact disk Disk memory storage Consumer or industrial use Retain or manipulate image Evolving Digital Era Digital Camera/CCD Analog/Digital Conversion Flash Memory Card or Floppy Disk Image Transfer Data Storage Personal Computer Software Interpolation Reproduction Transmission (e-mail) Storage/Print Hard Copy exhibit(5-2) 138 PART 1 Building Competitive Advantage INTRODUCTION Firms that have built substantial sources of competitive advantage often enjoy high levels of profitability. Yet, as we have seen in numerous examples, industries can change quickly. Although the product life cycle is an effective tool that describes how an industry evolves, numerous other factors can drive change as well. New developments in the environment can threaten a firm’s distinctive competence and existing sources of competitive advantage if the firm does not or cannot respond to change. Determining when and how to respond to environmental change is the subject of this chapter. We begin by examining different triggers of change that can seriously erode a firm’s distinctive competence and sources of competitive advantage. Then, we explore the options available to firms in their response to these changes. Finally, we consider the factors that influence the selection of these options. NEW DEVELOPMENTS AFFECTING COMPETITIVE ADVANTAGE Changes in the industry environment can have marked effects on firms’ sources of com- petitive advantage. These changes represent triggers, or new developments, that can rede- fine the way firms compete. In some instances, the developments are industrywide and substantially alter the nature of competition and the long-term structure of the industry. Changes in government regulations (such as deregulation in electric utilities, financial services, and telecommunications) can have major intended and unintended effects on the industry. Other developments may be “spillover” effects resulting from changes occurring in a neighboring or related industry (such as the impact of digital images and flash mem- ories or charged coupled devices on chemical-based film). Developments or triggers that frequently change the nature of competition and sources of competitive advantage include (1) new technology, (2) new distribution channels, (3) shifts in economic variables, (4) changes in related industries, and (5) government regulation. New Technology In any industry, a firm invests considerable resources in the technologies used in its value- adding activities. The choice of technology determines the materials, designs, methods, processes, and equipment used to carry out its activities. Over time, a firm learns and builds a considerable base of expertise in dealing with the technologies that directly impact its value chain configuration (business system). Often, these technologies involve both prod- ucts and processes. Recall that product technologies relate to the product’s design, patents, and components, and process technologies refer to plant and equipment, operational meth- ods and practices, and manufacturing improvements. The emergence of a new or superior product or process technology represents a potential threat to existing sources of competi- tive advantage, since it can undermine the value of a current distinctive competence. On a general level, all firms face the potential threat of obsolescence. This problem is especially salient, however, for pioneering firms that defined current industry standards revitalizing its skills along a series of new technologies. Whether Kodak’s growing experience with making newer disc and flash memory-related devices will help it compete in the professional and consumer video market remains difficult to assess. If Kodak becomes successful in learning and applying newer, digital-based imaging technologies, then the photogra- phy giant could become an important player in such newly emerging industries as multimedia, Internet-based transmis- sion, advanced color printers, software interpolation, and advanced color optics. CHAPTER 5 Shifts in Competitive Advantage: Responding to Environmental Change 139 or practices. When new technologies threaten to undermine a current product standard or process technology, they are known as competence-changing technologies. Competence- changing technologies are advances that could redefine an industry’s structure and tech- nological format. In many situations, competence-changing technologies represent sub- stitutes for existing industry processes and methods. 3 For example, Eastman Kodak faces a competence-changing threat from digital imaging technologies, which are unlike its established competences in silver-halide film technologies. In the automobile industry, ceramic-based engines and even sophisticated battery-powered systems promise the pos- sibility of better efficiencies and performance than internal combustion engines. They represent competence-changing technologies for all U.S., European, and Japanese play- ers that build gasoline and diesel technologies. Broad examples of competence-changing technologies are described in the following sections. New Materials. Fiber-optic cable made of glass is rapidly replacing copper as a medium for transmitting telecommunication signals. This development enables new competitors like Corning Incorporated and Lucent Technologies to enter the telecommunications sup- ply field. In addition, these new materials create opportunities for both Corning and Lucent to shape the kinds of capabilities and offerings that telecommunications companies can offer to their customers. In another example, newly engineered plastics are replacing steel and other metal parts in automobiles and heavy machinery. Composite body panels, doors, and dashboards made of synthetic fibers and plastics, for example, can be found in almost all cars. These materials help reduce the weight and cost of automobiles. Their develop- ment creates important opportunities for chemical manufacturers that produce these plas- tics and for the firms that use them. New Manufacturing Techniques. In the steel industry, mini-mills use an alternative technology to make steel rather than the traditional open hearth method. Using this new low-cost manufacturing technology, new entrants such as Nucor and Chaparral have achieved spectacular success. By using scrap iron and metal, mini-mills avoid the high fixed costs of more traditional, integrated steelmakers, such as U.S. Steel and Bethlehem Steel to produce steel wires, rods, and beams used in the construction and road-building industries. The older firms depend upon much larger mills and higher ore-based processing costs. In another case, many firms in the plastics industry are using new types of liquid-injection molding technologies to produce plastic products. These machines inject hot plastic liquids into molds directly to make parts, components, and toys more quickly and efficiently than past methods. This development provides new entrants to the industry a valuable opportu- nity for technology differentiation. Both Timex and Kodak faced threats of competence-changing technologies in the 1970s and 1990s respectively. As noted in the opening cases, both firms built their original busi- ness around older technologies. They achieved distinctive competence and substantial competitive advantage in these areas. Electronic technology entering the watch industry in the 1970s brought radically different materials, designs, procedures, and tools. Likewise, digital-based technologies promise to change the way images are created, transferred, stored, manipulated, and even transmitted along today’s information media. The steel, plastics, watch, and film industries are not the only settings to have experi- enced this kind of technological change. As shown in Exhibit 5-3, superior technology has emerged in a wide range of settings. In each of the industries shown, a new technology eventually surpassed the traditional one in terms of market acceptance. Firms unable or unwilling to build expertise in the new areas experienced erosion and, in some instances, extinction of their market positions. competence-changing technology: a technology that markedly changes or redefines the structure of an industry; often new processes or innovations that disrupt and erode the market for existing products. 140 PART 1 Building Competitive Advantage New Distribution Channels Established firms must monitor their distribution and marketing activities to detect poten- tial threats or opportunities to their current distribution methods. Distribution represents a vital component of every industry, and certainly any change in the method or channel used could redefine the basis of future competitive strategies. In the late 1990s, perhaps the sin- gle greatest change in distribution channels now affecting every industry and organization is the growing use of the Internet and the World-Wide Web to provide on-line ordering, distribution, sales, and even manufacturing. A variety of firms are now investing heavily in building up a strong presence on the Internet to sell a variety of different products. For example,Amazon.com is threatening established competitors Barnes & Noble and Borders Group in the book retailing industry. CD-Now and N2K are threatening to displace exist- ing music retailers such as Blockbuster Music and Sam Goody’s. More broadly, the Inter- net is also forcing existing firms in the travel agency, real estate, financial services, office supplies, and airline industries to rethink how best to reconfigure their distribution and marketing systems to serve their customers. A broad understanding of how alternative distribution systems evolve, especially those involving the Internet, can help the firm better scan its environment for new developments or competitors. In many instances, the arrival of a new distribution channel or method often signals the entry of a new competitor. Certainly, for Barnes & Noble and Borders Group, the arrival of Amazon.com on the Internet signifies a potentially dangerous threat because the upstart can sell to anybody who has access to the World-Wide Web. The wide proliferation of Web pages by many domestic airlines (e.g., American, United, Delta, and Continental) has allowed customers to select, price, and purchase their own tickets inde- pendently of travel agents. Home shopping using the Internet is becoming a real possibil- ity as more television sets and personal computers gain high-speed access to advanced telecommunications and computer networks that are now becoming an integral part of cable and phone companies around the nation. Pitney Bowes, a company best known for making postage machines, is now facing a similar type of challenge from the rise of the Internet. For over seventy years, Pitney Industry Old Technology New Technology Electronics Transistors Integrated circuits Shoe materials Leather Engineered polymers Appliances Discrete controls Fuzzy logic Airframes Steel, Metal Composite materials Automobile engines Aluminum Ceramics Automobile body Welded pieces Unibody, single piece frames construction Computers Mainframes Personal computers Networked systems Medical equipment Stand-alone x-ray CAT scans, MRI TV manufacturing Handcrafted Automated insertion tools Cameras Silver-halide film Flash memory cards exhibit(5-3) Emergence of New Technology CHAPTER 5 Shifts in Competitive Advantage: Responding to Environmental Change 141 Bowes has provided a valuable service to many businesses through the durable machines that allow them to issue the right amount of postage needed to mail letters and packages on their own. Companies prepurchase the amount of postage they want from the U.S. Postal Service. In turn, the Postal Service gives each customer’s postage machine an assigned number that designates permission to issue postage on their outgoing mail. How- ever, by late 1998, new upstarts using the Internet have begun to challenge Pitney Bowes’ long-held dominance in the postage machine market. Companies such as E-Stamp, Stamp- Master, and others are now designing Web sites that enable customers to pay for postage over the Internet, download a customer-specific set of coded data into their computers, and then print it out on mailing labels and envelopes. In effect, the Internet, with the permis- sion of the U.S. Postal Service, now allows customers to print their own stamps. 4 In turn, Pitney Bowes has introduced its own version of user-friendly, Internet-based software to help customers order pre-paid postage with greater ease. In our watch industry example, Timex was unaware of how new distribution channels paved the way for fierce competition from Japanese watches. Timex failed to realize that department stores represented an opening for Seiko and Citizen in offering higher-quality, more attractively designed watches. By paying scant attention to distribution changes, Timex was soon “locked out” from penetrating the higher-end department stores that pre- fer higher-quality, Japanese-made electronic quartz watches. Instead, Timex limited itself to selling its watches in drug stores and discount chains where margins are substantially lower. In the mid-1990s, Timex still found itself shut out from moving to other consumer segments because of its inability to reach new distribution channels. Kodak is also embracing the Internet as a means to reach its customers more quickly and lucratively. Using its new PhotoNet technology, Kodak has developed a Web site that enables customers to sign up for an account in which the images from their pictures and negatives will be available to them through the Internet. Customers now can drop off their film cartridges at Kodak-affiliated outlets (drug store chains, grocery chains, camera out- lets, and convenience stores) and receive the images on the Web. Once the images are available to customers, they can choose which ones to download to their own PCs or to send to other people through e-mail. America Online and PictureVision are two firms that have become important partners for Kodak in this evolving Internet-based venture. Firms in many other industries have found their existing sources of competitive advan- tage threatened by the arrival of new methods of distribution, even those that are not specifically Internet-driven. Brokerage houses, such as Merrill Lynch and Citigroup’s Smith Barney, have been hurt by the growth of discount brokers. Discount brokers such as Fidelity Investments, Charles Schwab, and Quick & Reilly have eroded the once-dominant position of established, full-service brokers by offering lower-cost commissions on stock and bond trades. These discount brokers, in turn, face the problem of dealing with on-line brokerage firms, such as Ameritrade, E * Trade, and other upstarts that can directly access their customers. In addition, since they tend to have small research departments (if any), their overhead costs are lower and they can pass these savings on to consumers. In a similar vein, network television leaders like Disney’s Capital Cities/ABC unit, CBS, and NBC have been threatened by new cable, pay-per-view, and home video outlets, where competing offerings have sliced market share for networks expecting large numbers of viewers. NBC is rethinking its current approach and business model in the broadcasting industry to pre-empt some of these threats. 5 Department stores are also coming under siege from newly emerging Internet and television-based shopping (e.g., Home Shopping Channel and QVC Network). Newly emergent distribution channels sometimes enable firms, particularly later entrants, to reach neglected customers. Combining both Internet access and traditional catalog sales 142 PART 1 Building Competitive Advantage has enabled upstarts such as Lands’ End, Early Winters, Touch of Class, and L. L. Bean to reach customers whose specialized needs are not effectively satisfied by existing “brick-and-mortar” department stores and discount chains. When a television viewer or computer user surfing the Web sees a product or service that is of interest, the viewer simply calls a toll-free telephone number or downloads ordering and billing information on the Internet to purchase the item. More recently, Blockbuster Entertainment’s nation- wide franchises in videotape rentals face the long-term challenge of pay-per-view pro- gramming coming from cable, telecommunications, and satellite companies. These alternative means of distributing movies and entertainment threaten Blockbuster’s cur- rent distinctive competence in offering low-cost video rentals. Families can watch movies directly through expanded forms of cable television. Thus, telecommunications and satellite companies could make most of Blockbuster’s current distribution channels obsolete by offering direct, pay-per-view movies, sporting events, and other entertain- ment avenues to customers. The rise of pay-per-view technology means that customers will be increasingly able to rent and pay for movies directly from their television sets without going to a Blockbuster outlet. Economic Shifts Changes in the basic economic parameters or structure of an industry can dramatically shift the nature of competitive advantage. Consider the current difficulties facing Japanese automobile and electronics manufacturers, for example. Their highly advanced, quality- driven, Japan-based manufacturing facilities once enjoyed an enormous cost advantage over U.S. factories and competitors. Rising wages of Japanese workers, a dramatic slow- down in the domestic economy, and severe fluctuations in the value of its currency (the yen) have combined to undermine many Japanese firms’ advantage substantially over the past decade. Now Japanese manufacturers are taking aggressive steps to reduce costs through such means as automation, outsourcing, reduced number of product variations, and shifting manufacturing to facilities outside of Japan, particularly through aggressive investments in Southeast Asia. In fact, Japanese investment in this region has grown so dra- matically that economic downturns and recessions in many Southeast Asian economies (e.g., Indonesia, Thailand, Malaysia, Singapore) in the late 1990s affected the profitability of Japanese firms. The same developments have strengthened the market and cost positions of General Motors, Ford, and DaimlerChrysler—both in the United States and in other export markets. Thus, sharp swings or changes in the exchange rate, domestic demand, commodity prices, or even the receptivity of trade partners can dramatically alter the com- petitive advantage of firms across many industries. Changes in Related or Neighboring Industries Sometimes, shifts in one industry’s competitive environment may be precipitated or trig- gered by changes in a neighboring or related industry. A related industry is one that shares many of the same economic, technological, or market-based drivers or character- istics. For example, consumer electronics and personal computers may be thought of as related, since these two industries often rely on the same type of mass-market distribu- tion channel, incorporate many of the same electronic components, and even manufac- ture key components or peripherals in the same factories. Increasingly, the telephone, Internet, and computer-networking industries are becoming more related since they share the same basic telecommunications architecture and are growing more linked together through the use of common information transfer technologies (e.g., routers, [...]... existing distinctive competence Reduce price on existing product Increase promotion of existing product Intensify R & D in existing technology Harvest Gradually dissolve the business Increase price of existing product Reduce expenditures for promotion, equipment maintenance, R & D, etc., for existing product CHAPTER 5 Shifts in Competitive Advantage: Responding to Environmental Change 145 Prospecting... faced in the 1970s and Kodak faced in the mid-1990s A prospector experiencing this kind of development must strive to be the first competitor to launch a product incorporating the new technology To achieve this end, it will need to undertake a series of initiatives These include conducting research into the new technology, designing prototypes that incorporate the new approach, retooling manufacturing... within an industry is a case in point Such a development may cause defection of only a few of the established firms’ traditional customers When new niches remain small and confined, the need to adapt is relatively minor For example, the rise of Polaroid in instant photography resulted in limited inroads into Kodak’s business Although customers were initially fascinated with the concept of instant photography... learning about developments in related or neighboring industries, finding out what other competitors are doing, studying technology research, developing prototypes of new products, and conducting market research Investigating enables firms to avoid making a large investment that may ultimately be unsuccessful However, simply investigating poses another kind of risk: a firm that spends too much time investigating... the growing use of Internet technologies by upstart entrants, this appears to be happening in a variety of different distribution-intensive industries Ability to Adjust Adjusting to an environmental development or shift generally obliges a firm to build some sort of new skills and competences To offer electronic watches, for example, Timex CHAPTER 5 Shifts in Competitive Advantage: Responding to Environmental. .. Motorola’s offerings more efficient and modernized and give them greater versatility On the other hand, Motorola’s efforts in the satellite transmission business follows a prospector-based CHAPTER 5 Shifts in Competitive Advantage: Responding to Environmental Change 147 strategy Motorola’s investment in Iridium and Teledesic, two leading satellite infrastructure firms that promise users the ability to. .. harvesting? Should top managers seek to “get ahead of the curve” and sell a currently prosperous business before being confronted with the decision to harvest? How much should senior management tilt their judgment toward prospecting versus defending? Clearly, no single answer is applicable to firms in different types of change CHAPTER 5 Shifts in Competitive Advantage: Responding to Environmental Change situations... distribution, or demand changes in one industry can have ripple effects that ultimately require a shift in a firm’s strategy, resource allocation, and sources of competitive advantage in another CHAPTER 5 Shifts in Competitive Advantage: Responding to Environmental Change • Firms facing new developments or shifts can respond in three fundamentally different ways: prospecting, defending, or harvesting • Selection...CHAPTER 5 Shifts in Competitive Advantage: Responding to Environmental Change bridges, and packet switches) Even the cable TV business is becoming more similar to the telecommunications industry as well In a similar vein, the rise of so-called “digital media” reflects the growing recognition that traditional content media (television, publishing, broadcasting, radio, and music) are becoming ever more interwoven... costs CHAPTER 5 Shifts in Competitive Advantage: Responding to Environmental Change One approach for a firm in this kind of situation is harvesting—extracting cash from a business before adverse consequences take full effect Harvesting represents an extreme and generally undesirable solution, since it deliberately and methodically reduces a once healthy business to extinction Moreover, environmental . prospector-based defending: an activity designed to help the firm shield or insulate itself from environmental change (see prospecting). CHAPTER 5 Shifts in Competitive Advantage: Responding to Environmental Change. and are growing more linked together through the use of common information transfer technologies (e.g., routers, CHAPTER 5 Shifts in Competitive Advantage: Responding to Environmental Change 143 bridges,. Advantage: Responding to Environmental Change 145 Prospecting The most aggressive approach a firm can adopt to deal with environmental change is to strive to be the first to accommodate it. Since the