Creative Destruction Constructing Strategy

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Term Paper

3556 Words

Introduction: Background of the matter

The business environment can get quite dynamic and uncertainthroughout time. During such turbulent times, businesses in variousindustries perform differently, with some being successful whileothers becoming unsuccessful. According to Austrian economist JosephSchumpeter, major and dramatic changes affected by technologicaladvances (rather than a firm looking for its best fit within anindustry or by looking to identify its competencies and capabilitiesto suit its own internal structure) determine competitive behaviourin an industry.1To this effect, he coined the term “creative destruction” todescribe his ideology. This paper uses the media industry to explainthese singularities and to explain at large why some businesses tendto fail in turbulent business environments while others succeed. Therest of the paper is organized as follows an explanation of creativedestruction as put by Schumpeter, comparison and contrasting of thethings involved in inside-out strategy and outside-in strategy inresponse to competition within the media industry and finally thechallenges and obstacles faced by a business in implementing a valueinnovation strategy.

Schumpeter’s “creative destruction”

The defining characteristic of Schumpeter’s theory of competitionis that it focuses on the dynamics of competition on a broader scale,rather than using the approach of defining industry structure andresource based economics. While at it, he squarely downplayed theidea that competition is shaped by factors such as price, resourcesand capabilities. He maintained that that disruptive change is one ofthe major players, if not the main one, in determining the outcome ofcompetition in any industry. More specifically, Schumpeter arguedthat major revolutionary changes in any given industry are caused bytechnological advancement. 2These subsequently are identified by Schumpeter as being the maindrivers of industry structure and the behaviour of competitionamongst businesses.

Additionally, the emergence of a revolution is almost impossible toanticipate, not even by a firm that has been involved in initiatingthe revolution. For instance, in the media industry, a televisionnews channel can come up with a new method of presenting news to theaudience. This may take the form of inviting fans to present the newsduring news hours and such times. After a short while, the audienceratings of the news cable may shoot and overshadow the rivaltelevision stations. This may happen despite an earlier largelynegative perception of the technique, and after the success, therival television stations may find themselves having to trail behindthe innovative station. Despite any attempts to copy the innovator,none of the rivals may come close to matching their numbers. This istherefore a perfect example of the Schumpeterian revolution, whichwill redefine the way people receive news from the media.

As such, people can use this example to explain the phenomenon ofcreative destruction by Schumpeter. Once the television network hasinnovated a new way of presenting news to the audience, iteffectively creates a new market space and new services. However,this creation is destructive in the sense that it interrupts theexisting structure of the media industry and the balance of theforces that are in play within the industry. Therefore, in general,innovative businesses improve on their products and services, end upgaining the larger share of the market, and increase their profits,in the end expensing their rivals. This has been central in thegrowth of many economic theories, which emphasize on the importanceof improving services rather than developing on other firms’competitive bargain. The phenomenon has over time had implicationsfor optimal policy towards creativity and innovation amongstbusinesses in a number of industries. This introduces the idea of“value innovation”, which is an emerging field that has beensubject to critical application in almost all competitiveindustries.3

Value innovative approach

Proponents of the value innovative approach through blue oceanstrategy, disruptive innovation and experience innovation haveincorporated creative destruction. Many economists agree that Westernbusinesses have been unable to compete effectively in theever-growing market and specifically lost out to Pacific Rimcompetitors.4The main reason that has been identified almost unanimously is thatthe western managements emphasize on developing the wrong ideas,hence going astray. In the media industry, the blue ocean strategycan be applied in a number of ways to gain competitive advantage inthe market. For instance, a company can reconstruct market boundariesto look for new growth opportunities. The social media can be used tokeep track of the greatest and the latest pulses, and by payingattention to the trends, a business can predict the next big thing inthe market. Staying on the social media, a business needs to focus onthe bigger picture, and not just rely on the immediate numbers. Manya time businesses are misled by relying on the number of thefollowers they have on their online social media accounts, hencefocusing on developing non-existent plans. This is a good example ofhow Western businesses fail to compete effectively against theirPacific Rim competitors.

The main difference between the blue ocean strategy and disruptiveinnovation is the element of academic rigor in the latter andmanagerial appeal in the former.5Disruptive innovation is the explanation behind the toppling of largeand powerful businesses by upcoming ones. The upcoming businesses ina certain industry may lack the ability to compete against theestablished businesses, hence tend to adopt new strategies to servethem in their small market niche, which may have been ignored by theestablished firms. In the process of serving the “non-consumers”,the upcoming firms fall off the radar of the already establishedbusinesses whose focus is on the bigger market niche. For instance,in the media industry, new business models have been developed by theincomers, and by applying lessons of disruption, they have been ableto move beyond the “innovator’s dilemma”, hence gaining andcompetitive advantage over the already established media houses.

Chell and Karatas-Ozkan suggested that despite the fact that focusingon innovation is a good move towards strategizing, prior research isstill largely focused on the individual business.6This is why a business needs to increase the attention that is paidby the role of the customers and the consumers in coming up with newproducts and services. This also means that the basis of valuedifferentiation is measured through experiences. For instance, in themedia industry, the number of a channels offered by a cabletelevision company is not as much the selling strength as the qualityof entertainment it offers the subscribers. This is why the companyhas to interact with the customers in order to facilitate exchange ofideas that help to formulate strategic goals to make their servicesmore exciting.

Formulating inside-out strategy in response to a new plane ofcompetition

While constructing strategy from the inside-out, the major strategicissues that are involved include strategic focus, protection againstthe five forces, value chain, trade-offs and competitive risk.7In the media industry, while addressing strategic focus, one of theareas considered under cost leadership strategy is standardizing ofthe products and services and creating features that appeal to theviewers. This may entail identifying the major audience and dividingthem to consumer groups and coming up with products and services thatbest suit them. For instance, a television network may divide itsviewers into two main groups, young people and the elderly. Fromthis, they can create programs, which attract each of them, and avoidmixing up audiences. On the other hand, differentiation strategy willentail integrated set of activities that produce non-standardizedproducts and services and a price that attracts the customers. Bothapproaches would help a media company to have a competitive advantagein the media industry and be successful even in the turbulent times.

As earlier identified, there is an eminent threat from new entrantsinto the industry. In addressing the strategic issue of protectionagainst the five forces, economies of experience weaken the existingrivals, making them to resist competing on price as it favours thecost leader. 8Thethreat posed by a new entrant into the media industry can be negatedlowering the prices to lure back any customers who may have beenlost. For instance, HBO, a leading cable television network inAmerica, had to reduce their prices, mainly in the US Market, toregain the subscribers it had lost to emerging cable televisionnetworks. On the other hand, the differentiation strategy forprotecting against the five forces is avoiding existing rivalsbecause of the unique services they may offer, of which there may beno exact equivalent. The tactic that is used is used to reducethreats is brand loyalty, which is achieved through differentiation,hence acting as barrier to entry. For instance, in the case of HBOgiven above, the new cable television companies will have to developtheir own point of differentiation to attract subscribers.

Value chain is another crucial element in strategic focus. As a costleadership strategy, marketing and service cost should be kept as lowas possible.9All other support activities have to be focused in reducing costs,for example through retaining stuff to reduce the cost of recruitmentand training. In the media industry, for instance, leading televisionnews channels maintain their staff, which the audience recognizeswith, as a strategy to maintaining their competitive advantage. Onthe other hand, the differentiation strategy focuses in marketing andservice. This, just as protection against the five forces bydifferentiation strategy, helps to maintain customer loyalty.

Whilst handling the strategy of trade-offs, the cost leader in anindustry must comply with the lower level of differentiation relativeto other firms that are competing within the same market niche.10Instead of being the first to bring a new product or service to themarket, the cost leader uses their reserves to get hold of patentsand offer lower priced services and products. A differentiator on theother hand resists attempts to serve all customer segments. In themedia industry, a media house can introduce live shows, which itpatents, and ignores all other segments, irrespective of their profitpotential. This can be the defining factor between success andfailure while venturing into new products and services.

Competitive risks are also equally important strategic issues.11In the media industry, a firm becomes highly vulnerable if the keyactivities, which define its cost leadership, become obsolete due tocompetition. A media business is set to loose top its competitors ifobsolete systems are unable to reposition in due course, especiallywhen there is stiff competition over a new product or service. On theother hand, while the differentiation strategy may lead to existingbusinesses losing customers to incomers, who may offer their productsand services at lower costs. This happens especially when the basisof differentiation becomes either outdated or no longer required bythe customers. A good example is the emergence of digital cameras,which have replaced manual ones, which led to Kodak Company losing alarge percentage of the market share that was initially under theircontrol to digital camera manufacturers. 12

Formulating outside-in strategy in response to a new plane ofcompetition

Deriving from the work of Michael Porter in industry and firmeconomics, many economists believe that the industry in which abusiness competes has a big influence on the business’ success,surpassing that of what goes on inside the firm itself.13In light of this, there are certain assumptions that have been made.First, it is assumed that most businesses in a given industry haveand control the same resources and work with almost similarstrategies, therefore reducing the difference between theiroperations, as regards to IO economics. Secondly, it would futile torely on resource-based advantage, as the resources are highly mobileacross firms in a given industry. The last assumption is that themajor consideration by organizational decision makers is maximizingreturns for the organization by taking up strategies that maximizeprofit. This means that other considerations in strategy are given alower priority.

As per the assumptions made above, the purpose of strategy in themedia industry should be to note the underlying competitive forces,manipulating weaknesses with the aim of taking advantage andrestructuring the business to accommodate the returns. Therefore,whilst constructing an outside-in strategy in response to a new planeof competition in the media industry, industry analysis, genericstrategies and value chain are considered.

In the media industry, a firm has to analyse the industry’sdynamics and market to determine the strength of competition. Thefirm must also have a comprehensive understanding of the governmentregulations as regard to the media industry. The procedures forconducting the industry analysis can include both secondary andprimary research, SWOT analysis, ATU studies and marketsegmentation.14The primary research can be conducted by a media house by phone orinternet survey, and this is to have an in-depth of customers’perception of the firm. For instance, CNN, which created its ownbrand around reporting resources and reach, carried out an industryanalysis research between 2007 and 2012, and decided to invest moreon brand-in-depth stories and live event coverage, becoming theleading big cable news channel to produce the most commentary.15

The generic strategies, as described by porter, could help a mediafirm to describe how it may pursue competitive advantage in themarket. These strategies have attributed that can help to defendagainst competitive forces in the media industry. Almost similar tothe inside-out strategy formulation, the five industrial forces canbe addressed through cost leadership and differentiation strategies.A good example is BBC World’s entry into India in the mid-1990s. Toincrease its market research activities and identifying its targetmedia, BBC World used generic strategies to gain a competitiveadvantage by understanding the factors that influence a foreignchannel’s decision for localized programming. This helped it toconsolidate its presence in India and attracting advertisers, besidesedging out local competitors in content delivery.

One of the shortcoming of the generic strategy‘s basis on cost ordifferentiation is that it necessitates a certain degree ofrestructuring of the firm.16In the media industry, this may imply use of extra resources and workforce, which may lead to opportunity costs and unnecessary spending.To address this issue, Michael Porter came up with value chain, whichwas to address specifically the issue of implementing the genericstrategy. Value chain builds a bridge between strategy andimplementation, rather than treating the two as separate entities. Inthe digital media, growth has affected the entire industry and allbusinesses have to respond adequately. Therefore, digitalentertainment companies, such as Netflix and Google, have to managenew work streams and control how to keep their content secure andavailable to the customers, and this is made possible by applyingvalue chain.

Challenges and obstacles faced in implementing a value innovationstrategy in media

The blue Ocean Strategy is one of the value innovation strategies inthat have been discussed by economists. The Blue ocean strategyentails creating an uncontested market space, making any arisingcompetition irrelevant, creating and capturing new demand, brakingthe value cost off trade and simultaneously pursuing strategy ofdifferentiation and low cost.17In the media industry, all these requirements present uniquechallenges and are hindered by obstacles that either slow down theimplementation of the Blue Ocean Strategy or make it impossible toachieve altogether. Creating an uncontested market space in the mediaindustry is almost impossible. Media firms always compete in theexisting market space, as almost all channels have already beenexploited. For instance, in the digital entertainment industry,television shows, movies and gaming are all channels that have beenexploited by the major players, and they have subsequently investedin occupying the untapped markets, such as those in the third worldcountries.

Therefore, for a firm to occupy a new market space and take it over,finances and logistics would be the major obstacles. Additionally, itwould be impossible for a digital entertainment firm to eliminatecompetition in the market, as the existing competitors have equallyinvested a lot in holding onto their market share. This does notmean that it is entirely impossible for firms to venture intouncontested market space and making competition irrelevant. SomeMedia and telecommunication companies have effectively done so.Google advanced the development of keyword search InternetAdvertising, and it took over as the leading search engine online.EBay also revolutionized electronic auctioning on the internet, whichhelped it create the world’s largest online marketplace. Amazonalso created a very successful EC business model, which specializedin book and retail items delivery.18However, the amount of resources and work force these selectedcompanies have dedicated to their strategies gives a picture of thefinancial obstacles most firms would face.

In the media industry, disruptive innovation is a value innovationstrategy that would help a business to gain a competitive edge overthe existing and upcoming rivals. Most media companies boastfinancial muscle and talented workforce. However, when there is a newventure within the organization, the management gets their people towork on it within organizational structures. This creates the problemof surmounting old challenges, instead of the new ones that theventure is facing. One of the biggest challenges is the lack of theright organizational processes to innovate, which are supposed tosupport decision-making protocols and coordination patterns. 19For instance, when a news channel decides to venture into a newterritory, they may meet challenges such as climate change andgovernment regulations, which despite the talent of their work force,may hinder productivity. Secondly, most media companies may lack theright value to innovate. Under this, the challenge becomes toleratinglower profit margins than the firm demands. Finally, getting theright team and structure to best support the firm’s innovationeffort is a challenge that hinders most media firms’ valueinnovation strategies. However, by selecting the right team andorganizational structure for a firm’s innovation, alongsideincorporating the right resources and protocols, the challenges ofimplementing disruptive innovation are mitigated. This means thatbefore rushing into decisions, the management has the obligation ofunderstanding precisely the types of challenges that their respectivemedia firms can and cannot handle. This entails recognizing thefirm’s core capabilities and organizational levels, followed byexamination of these capabilities as the company grows over time.

The very nature of experience innovation demands that there belogic, which underpins both firm-level behaviour and sider discourseof strategic management.20When a company uses experience innovation as a value innovationstrategy, it needs to exchange value between the firm and thecustomers. This is particularly a challenge in the media industry, asit involves research, work force and finance. Additionally, bycreating value at the point of exchange, a media firm may makeassumptions that may misguide the strategy formulators. The fact thatvalue is co-created by the consumer and the firm may limit some mediaindustry firms, such as entertainment companies, to narrow optionsthat may not work in line with the company’s ambitions. Forinstance, YouTube, a leading online video streaming company,introduced in-video advertisements, that come before or during thestreaming of the actual video the subscriber is watching. Initially,the company had thought that it was improving advertisement servicesand aiding consumer knowledge, but most users have criticized thisaction, terming it “annoying” or simply unnecessary. This is agood example of the challenges the company encountered while makingnew assumptions of experience-based value, as provided for byexperience innovation.

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1 B.M. Enis and Kenneth J. Roering, Review of Marketing 1981 (New York, NY: Marketing Classics Press, 2011). 237.

2 Ibid., 80.

3 C. Gekonge O, Emerging Business Opportunities in Africa: Market Entry, Competitive Strategy, and the Promotion of Foreign Direct Investments (New York, NY: IGI Global, 2013) 221.

4 I. Kaur and Nirvikar Singh, The Oxford Handbook of the Economics of the Pacific Rim (Oxford, UK: Oxford University Press, 2014) 324.

5 W. Chan Kim and Renee Mauborgne, Blue Ocean Strategy: Expanded Edition (Boston, MA: Harvard Business School, 2015) 223.

6 E. Chell and Mine Karatas-Ozkan, Handbook of Research on Small Business and Entrepreneurship (Cheltenham, UK: Edward Edgar Publishing Limited, 2014) 189.

7 A.G. Warner, Strategic analysis and Choice: A Structured Approach (New York, NY: Business Expert Press, 2010) 71.

8 Ibid., 103.

9 A. Henry, Understanding Strategic Management (Oxford, UK: Oxford University Press, 2011) 107.

10 R. Holden and Mark Burton, Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table (Hoboken, NJ: John Wiley &amp Sons, 2010) 75.

11 Kim and Mauborgne, Opt. Cit., 105.

12 M. De Kare-Silver, E-Shock 2020: How the Digital Technology Revolution is Changing Business and All our lives (New York, NY: Palgrave MacMillan, 2011) 11.

13 Warner, Op. Cit. 21.

14 A. A. Thompson, Alonzo J. Strickland and John E. Gamble, Crafting and Executing Strategy: Text and Readings (New York, NY: McGrawHill Irwin, 2010) 165.

15 M. Jurkowitz, Paul Hitlin, Amy Mitchell, Laura Santhanam, Steve Adams, Monica Anderson and Nancy Vogt, ‘The State of the News Media 2013’ [Online Article] &lt http://www.stateofthemedia.org/2013/special-reports-landing-page/the-changing-tv-news-landscape/&gt Accessed 12 January 2014.

16 Thompson, Strickland and Gamble, Op. Cit., 241.

17 Henry, Op. Cit., 155.

18 R.A Gershon. Media Management, Telecommunication and Business Strategy. ,( New York, NY: Routledge, 2013) 308.

19 Kim and Mauborgne, Opt. Cit., 125.

20 Thompson, Strickland and Gamble, Op. Cit., 253.