Chapter 6: Sustaining a competitive advantage over time

1. Chapter 6: Sustaining a competitive advantage over time After this session you should be able to: • Understand the requirements for a successful imitation and the barriers to imitation. • Appreciate how companies can assess the threat of a disruptive innovation. • Identify the ways that companies can follow in order to deal with a disruptive innovation. • Recognise the cognitive frames that companies can adopt when facing a disruptive innovation and understand the reasons underlying their contradicting nature.

2. Imitator Exhibit 6.1 A company can build up numerous barriers against imitation Incumbent Requirements for successful imitation Barriers against successful imitation Must be able to identifycompetitive superiority • Withhold information about profitability • Forgo short-term profits for long-term success 1 Must be willing to imitate • Deterrence: signal promise of retaliation • Make commitments to make threat credible • Pre-emption: exploit all available investment opportunities/secure access to resources 2 Must be able to understand sources of competitive advantage • Tacit knowledge: rely on skills, processes or culture/resources that are implicit • Causal ambiguity: rely on a complex, multidimensional mix of sources 3 Must be able to build/acquirenecessary resources 4 • Base differentiation on resources that are rare/immobile/contracted • Exploit-time lags Source: Adapted from H. Hungenberg (2006), p. 251.

3. Sustaining innovations Disruptive innovations Exhibit 6.2 Disruptive innovations enter the market from below and improve over time until they meet the demands of mainstream customers Most demanding customers Performance demanded by mainstream customers Performance Least demanding customers Time Source: Adapted from C. Christensen and M. Raynor (2004), p. 33.

4. Exhibit 6.3 To overcome organisational rigidities, incumbentsneed to adopt two contradicting cognitive frames Rigid plan, high commitment Flexible plan, high commitment Threat Framing during resource commitment Rigid plan, low commitment Flexible plan, low commitment Opportunity Opportunity Threat Framing during implementation Source: Adapted from C. Gilbert (2006), p. 152

5. To determine whether there exists a threat of a disruptive innovation, managers need to consider the following Non-served customers Is there a large group of people who previously did not have the money or the skills to purchase the product themselves? Did customers have to go to a central, inconvenient location to purchase the product? Over-served customers Are there customers at the bottom end of the market who would buy the same product with fewer features for a lower price? Is it possible to build a profitable business model while keeping down prices? Disruptiveness to competitors Is the innovation disruptive relative to all relevant rival companies that are currently competing in that market?

6. There are numerous ways to deal with disruptive innovations Not responding at all Not responding is quite often based on ignoring or not properly assessing the underlying facts. Migrating/harvesting The migration strategy is based on a conscious decision to ‘milk existing resources’. Defending When defending their existing markets, incumbents need to improve their business model so that they are either able to lower their prices or increase the benefits they provide to their customers Straddling This strategy attempts to combine the best of both worlds. While this option might seem to be the most promising at first sight, it also entails major risks. Switching This option entails a complete switch to the new business model. Yet, it is also the riskiest of all options, since there is always a high degree of uncertainty associated. Leapfrogging Through this approach, a company tries to out-substitute the substitution. From a long-term strategic perspective, this option is highly attractive, yet it requires a very deep understanding of how technology and market demand will evolve. Source: See P. Ghemawat (2005), p. 106.