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8.3 Anticipating Market Dynamics

In earlier chapters, we have discussed analysis of customer value in a way that prompts growth strategy development. Ultimately, though, the growth strategies you propose need to be vetted. Our vetting process here first requires you to look closely at whether you have, or could get, the resources needed to effectively execute the growth strategy (Chapter 7 "Implementation: An Inside View of the Organization"). Next, though, is to think through how your growth strategies will fit as market conditions change and how those strategies may change the market.

The term dynamics is about change—how is the market likely to change in the future in part as a function of implementing a new growth strategy? Thinking “dynamically” is difficult. It means evaluating a decision as a game theorist might: anticipating decision options the firm might have, thinking about how different players in the market (customers, competitors) will react over time to each decision option by stepping into the shoes of those players, then working back from these anticipated outcomes to select the best option. It turns out that such predictions are often so uncertain and complex, that we just avoid the issue!The challenges that people have in estimating the likely reactions of others to their own actions have been discussed widely. One paper on competitive decision making found that only a minority of managers considered competitors’ future reactions in either describing past decisions or making future decisions. Across two studies—one examining actual managerial decisions and a second examining decision making in a simulated business gain—they were most likely to discuss current internal factors (e.g., sales/revenue goals, costs, capacity constraints), which are known and can be controlled with much greater certainty (see Montgomery et al. 2005). For discussion of the evidence and explanations of a low incidence of considering competitor reactions, see Urbany and Montgomery (1998) and Moore and Urbany (1994). Such dynamics can only be estimated with great uncertainty.

Our goal in concluding the chapter is to provoke some thinking about how to get your hands around the likely dynamics that your new growth strategies will face. It is beyond the scope of this chapter to provide a detailed analysis of market dynamics to cover all types of growth strategies, but we will plant a few seeds here for analysis and subsequent study. We will address anticipation of the dynamic aspects of customer, competitors, and capabilities.

Anticipating Customer Dynamics

A variety of theories—from the product life cycle to competitive rationality—help us understand that customer preferences will change over time. There are two primary reasons for this. First, there may be a natural change in customer preferences and demand to external environmental events. The rapid increase in fuel costs in the past few years has significantly affected customer value and associated attributes that they began to demand from the producers of automobiles. Toyota introduced the first widely accepted hybrid technology in the Prius and enjoyed a significant Area A around the hybrid technology. Since then, a number of other auto manufacturers have developed hybrid versions of their vehicles. A second driver of changes in customer preferences is the rate of innovation-imitation cycles themselves. Dickson (1997) noted in his book Marketing Management that between 1987 and 1992, the mountain bike market share grew from 12% to 58% of the overall bicycle market. This remarkable jump was not due to consumers waking up one morning with visions that they must have a mountain bike. Instead, it resulted from the experimentation of one bike manufacturer that was quickly imitated by others, creating a spike in the amount and variation of supply, which unearthed significant customer demand.

While there is no precise science of customer value dynamics we can summarize some important principles as follows:

  • Over time, as products become more alike, customers will become more price driven and tougher negotiators. This is the first thing business people tend to think about as markets mature. In the pioneering work that introduced the concept of cocreation in the business press, C. K. Prahalad and Venkat Ramaswamy describe today’s marketplace as one in which customers are increasingly powerful:

It’s perfectly feasible for a customer to approach a bank and say, “I will always leave a $5,000 balance in the bank. These are the services I want free in return for this commitment.”…A customer at one telecom provider, a heavy user of long-distance services, even obtained preferential long-distance rates in exchange for a commitment to that provider.Prahalad and Ramaswamy (2000).

  • This tendency is a natural outcome of more and better information for customers today, particularly via the Internet. Yet it is more significantly a function of the similarity in products that emerge as markets mature. As we have emphasized throughout this book, striving to deeply understand the value customers seek and producing unique solutions is an important strategic priority. As markets evolve, though, it is equally important to understand how to give customers an additional hand in this process.
  • Over time, customers will learn how features of a product or service link to their consumption problems and benefits desired. We once conducted an exploratory study of consumers who had recently purchased computers for their homes. We preselected half of those interviewed to be novices (first-time purchasers) and half to be experts (very experienced with purchasing and using computers). The difference between them was straightforward. The experts spoke in terms of how different types of computer features could be used for particular applications and what attribute levels were needed to accomplish particular goals. In short, they understood how to translate benefits into the task that needed to be done. In contrast, the novices’ basic approach was to take a newspaper ad for a computer to a retail salesperson or to an expert at work and to ask, “Are these the features I need?” In sum, the novices needed a translator! Essentially, experience leads to an ability to speak two languages: the language of features and the language of desired outcomes and results, and to be able to translate one to another.
  • Over time, as customers learn, they will add value if you let them. A still-developing, yet very important paradigm in the business press today is “cocreation.” In purest form, cocreation refers to a scenario in which firm and customer together define the product or service experience. An extreme form of cocreation is when users “take over” a brand, as Alex Wipperfurth describes in his book Brand Hijack.There are a variety of excellent case studies in Wipperfurth (2005). For example, the author describes the original music-sharing website as the prototype of a brand takeover by users. The founder developed a means of sharing music among users online with no intent of financial gain. Users stood to gain only in that the more people who participated, the more music that was available. A community spirit emerged because users were on the front end of helping build the idea from its inception and in having a joint sense of control—and a sense of rebellion. There is a more basic research tradition around lead users that was pioneered by Eric von Hippel of MIT, which explores how to leverage the ideas of innovative customers in product and service development.Von Hippel (1988). Von Hippel’s work has been seminal in helping firms understanding the role of customers in leading innovation. Cocreation, though, formalizes discussion of a new layer of value that emerges from the customer’s ownership in the ideas that emerge. An interesting example is the secret menu that customers codeveloped at In-N-Out Burger, a restaurant with a cult following and a very simple 4-item menu: burgers, fries, shakes, and soft drinks. The secret menu developed in response to customers’ special requests for variations of the menu (e.g., the “wish burger” is a vegetarian option not on the menu and named by customers). There is significant potential here for Area-G thinking as the product or service matures, and it exists in the thinking of the very people using the product.

The key question as you develop strategy should be, is your growth idea subject to these dynamics in a way that will reduce its probability of success? Or, can you leverage these forces to enhance your Area A?

Anticipating Competitor Dynamics

Customer learning and evolving participation can certainly have a significant impact on growth strategy as it develops. However, it is also important to note that the reactions of competitors can have an enormous impact on the success or failure of a new growth strategy. Northwest Airlines, for example, cut its prices on a route critical to a smaller regional competitor when that competitor slashed its prices on one of Northwest’s key routes, completely neutralizing the smaller rival’s strategy. But as we have noted, there is a fair amount of evidence suggesting that managers may not often take the time to anticipate competitor reactions. Interestingly, this may not be harmful, as there may be many circumstances in which competitors actually may not respond to particular moves. However, the likelihood of a competitive response to your new growth strategy will be a function of the degree of threat as perceived by the competitor. In a recent Harvard Business Review article, McKinsey consultants Kevin Coyne and John Horn provide a very practical template for thinking through the odds that competitors will react to your actions, organized around the following questions:Coyne and Horn (2009).

  • Will your rival see your actions? Coyne and Horn’s empirical research suggests that firms often do not observe rivals’ actions until it is too late to respond.
  • Will the competitor feel threatened? Here, it is important to get a sense of the rival’s goals for the product or service lines that might be affected.
  • Will mounting a response be a priority for the competitor? Of everything on the competitor’s plate, will reacting to your new strategy be a priority?
  • Can your rival overcome organizational inertia? Coyne and Horn point out the very real organizational barrier that reactions will require resource allocations and external commitments that the rival may find too cumbersome to overcome.

The first four questions all speak to gauging the probability that a competitor will even respond to your new growth strategy. This leads to another set of questions under the assumption that a reaction will be forthcoming:

  • If the competitor is likely to respond,

    • what options will the competitor actively consider;
    • which option will the competitor most likely choose?

The authors’ research suggests that competitors are likely to consider two to three options. Further, they suggest that much insight can be gained into predicting the competitor’s likely reaction if our team can put themselves in the rivals shoes by thinking through (a) the number of moves the rival is likely to look ahead and (b) the particular metrics the competitor is likely to use.

In all, Coyne and Horn’s framework provides an excellent series of prompts for considering whether competitor reactions to your new growth strategy are forthcoming and what actions are likely to be considered. But if the competitor is probably going to react to our new growth strategy, the question is, what is our next move? Here, we need to return to capabilities, which are themselves dynamic.

Capability Dynamics

Despite decades of industry leadership and a large Area A, in the early 1990s, IBM’s stock price plummeted, 60,000 employees were dismissed, and Wall Street had written the company off.Harreld et al. (2007). Like a driver stuck in the sand, IBM executives thought that if they spun their tires just a little bit longer, using the same tried and true strategies and resources, they could regain market leadership and move forward again. Louis Gerstner, who became IBM CEO in 1993, said that the company lost its market in the early 1990s because “all of [IBM’s] capabilities were of a business model that had fallen wildly out of step with marketplace realities.”Gerstner (2002), p. 123. In Chapter 7 "Implementation: An Inside View of the Organization", we described how successful companies become entrenched with the resources, capabilities, and assets that made them successful and become out of touch with changing customer values. This view was supported by Chandler’s research, where he found that successful companies typically pursue the same strategies and competencies that brought them success, and yet, they are fatal in the long run.Chandler (1990).

Harreld et al. described how IBM’s leadership used dynamic capabilities to redefine itself and regain and sustain market leadership. Dynamic capabilities require company executives to first “sense” or anticipate opportunities in the market. For IBM, this meant sensing new market opportunities through exploration and learning. Gerstner, IBM’s new CEO, forecasted that, over the next decade, “customers would increasingly value companies that could provide solutions-solutions that integrated technology from various suppliers and, more importantly integrated technology into the processes of the enterprise.”Gersnter (2002).

While anticipating new customer value propositions is necessary to firm positioning, execution is the key to delivering the value and capturing the market. An organization with dynamic capability is able to quickly and effectively adjust and restructure its internal resources, capabilities, and assets to capture the anticipated opportunities. Gerstner’s internal analysis of the firm’s capabilities found that IBM had intelligent and talented employees and that its problems were not with its technology. The primary problem was that IBM failed to build and configure bundles of resources, capabilities, and assets necessary to meet the needs of the changing market. IBM leveraged and reconfigured its resources and, in the process, provided the type of value desired by customers—value that was rare in the market and could not be easily imitated by the competition. Among other things, they created internal computer software technology with “open architecture, integrated processes and self-managing systems” to help IBM employees communicate better within the company and to quickly respond to customer needs. The change in the way information is managed within IBM has modified the internal capabilities and assets of the company, transforming the market brand from a computer-hardware to a computer-services business.Harreld et al. (2007). In short, IBM created a strong Area A, a competitive advantage.

Companies that anticipate or “sense” changes in customer value and have dynamic rather than static internal capabilities gain and sustain Area A advantages. In short, the 3-Circle model shifts as organizations anticipate external customer value by dynamically altering their internal competencies.