j

.,"';#.:*;i;r*li.'*$4{lir.i:*i1'ai*;&* ii'}{!

and Cooprative Dynamics

84 CHAPTER 4 Anticipating Comptitive

VALUE
THREATS TO ADDED
popula-
tr"q.r"r-,tty i'ii"-t"Ji" L-iog)' i,'' the context of20the
Imitationandsubstitutionboth.threatenthesustainabilityofabusiness,sadded
ot
value. Irtititionis most
f1*t;il irtr.'gli" ior existence'" In terms
tior-, p."rr.,r", *i,f1i" u ,p".i", t# busi-
uit" diffusion of successfui
business strategy, imitation."^;"';;;i."',"a deploved and/or activities per-
ness models-defined in
t"rmi'J';;;;;;;;t the
the population ftr*t i^itation ii this sense diminishes if it
"i be missed
formed-across
;;;;;";sful busines, *oa"t would
extent to which the originato, ";
simplydisappeared'(aheuristicforaddedvalue'asnotedinChapter3)'
is a less-direct threit
to added value
evorutr"^;;;;;;;;ic, ^Uttlogical
substitition,as an j" terms' substitution can be
f"rr'irr{pliffi.
*;i1*t*l species' In ierms'of busi-
although ,ro
than imitation,
U"r*lifit"ii"t^in^" a different
of being displaced by
interpreted as competitior",
ness strategy, it can be envirioi;;;;;iht*t
business model'

lmitation perv.asive' A:l:T:jt by one

cross-industry e-viden1e,
Imitation is, according to the trrgger additions by competitors
player t" i*,*," its ;apacity.;;; ";"*pi;l9it",-'
intento'il;;yiii:ij5_.fl i.,$i1lffi :l*f 5"Tiill,x"ff T:TilL'i:;
tend to PromPt comPetltol: u"t"a on RgD'(as opposed to
marketing
attempts at pioduct air.r"r.,tluii* indicate' that competi-
,".r".ul counts: egg'"gut" data
strategies) are vulnerabt" or',
utrt ;i."";";;Jucts within one year of
tors secure detailed ir1ior*uti-oi"]-,,n" fait to deter imiiation'
and imi-
their development, patenrbasli;;;;F;;tually ilnnovation and to be a
third quicker to mal-
tation t"r.,ds to cost one-third i;;hu^ than product
dr.", ;;;io u" ,igr"riri.ur1riy less imitable
ket. r,rocess innovations
innovations'21 - , r r-i+6+i^n ran sorrletimes lend credibility to a new
llSl;:;"'.:ffi ;;d;l;i"""iAiso''fhe
;iili?$:;n:ix'Jf,""lii;"ilifi ;ffectiveness'22 When
imitationofcertaintyPesotmarketingmoves,,,.hu,loyal'tyschemesandmeet-
tnuit
the-competition clauses d""#;;:;;i^'iiytiu'"to'-
""ao*i'-'"a supposedlY |nique
business
enough,;'iil;;;;io the added
ho*"rr"', i;';;i"ily does hurt
imitatioir is broad
moder into something quite;;;;i.; tt.tat moaet' In landscape
terms'
business(es) thai of a
value of the "ttlJ;liil;""toq"a
;; L't^t"t*"ied as the subsidence
that depress",
j:'Jil;;i;;"";;#tri1*#:**::.:*',T"ilii:"'lrt'u"..rut
imitation
p""o
"d:"";%il
Part o{ the reason lml
healthrelatestohowfu"t'lu'i'ptot""O;1111'"l#classicaleconomicsindicates
to'zero'informational
#hen imitat"*' p;t"iiit Jrop even further' one
thai imitation will be curtarled i,';;; proceed
:!l
consid.r;il;, ;;gg"ri,n", i'information cascades"' in
and motivationai #l"ur.n- to'lt"l"i
relevant strand or *i.ro".lnl*i. o{ other participants ratio.
i"f;;;;;^ from the
wlriclr players irrferring ";i;;
:l
 ,",1:il9t

i;,,.t.1;
r:'.i* Threats to Added Value
:.;:1,19*
i,.:.'15*
L:i*.&
:li.i:i!
:rlr,::t-:l'
'i ;..1*. nally decide to ignore their own information
and act alike-even in situations
il l;* where might do berte4 on average, by
.they
work shows that r
u.ti;; lrff.rJnti;." Another strand of
imperrectryt"r;;,,i"T:i:T,ilK:"ril1'";:il:,ttil#i;:i:"#ilIl#';H,T
,::,':F being evaiuable, or "ridethe herd,,,ro u, to signal quality.2a It is
':. :a:1t
of noneconomic reasons for ,,hercling,, possible to think
r!.flli as well, such as envy or norms.
HSC's entry into the market for"aspartame
:':t':rffi provides one exampre of imitation
r,
,l:.;!6
':
al,*
that apparently proved unprofitable fir
the imitato.
.ii:,:::
ing the innovator's profitability. Another -nil" ,ig"ificantly depress-
:.::l'* instance in which imitation seems to
ii;l: have overshot the zero-profit c;ndition
invorve, th" ;"r;;;prime-time network
television in the United States. The three
{i$ established netwoiks (ABC, CBS, and
NBC) have historicaily competed with
one another principally on the basis of
:,,* their programming. iasual observation
suggests_ that their programming
.:. I
sions have tended to rook,alike aiong deci_
u of measures, iurrgir-rg from when
they announ." ,n"o,,:.1-:dules 'r.r-L"",
th? upcoming
{o1 year (May),to when they intro_
duce new programs (September),
to the topicar fJcus of thoJe new programs.
The X-Fites (introduced 6y Fox), Thus
was a highiy ,;..;;;f"11l"lo,
ill ::: extraterrestrials and. th_e supernatLrrai-iui frogru* focused on
not the onry o.el lmitators incruded
Profiler, Dark skies, The Burning Zone,
The visitor, prey, and rrrc psi Factor,a
i
':l
of which quickly flopped. number
some of the similirity in the networks' programming decisions
be due to shifts in viewer pr"f"r"'r."s over time may
w"r,"i.,r, f";;i"*pi;, accounted for at
least 10% of the nelwork prime-time
...:a::lt
schedule in the 1960s,but their combined
': r -il slrare dropped ro 3% in the earry 1oz's.
'n A broader anarysis b;ilil;,'K;";$;
suggests, however, that shifts in demand
7. do not pr""iJJ,rr" 7not" storv behini
'':l the topical bunching of programs
.the
works'2s starting with a data
inrroduced by the ,hr;;;;;iJ#';:;:
;i',' set tiat classified all pririre-ii*" ,"r""irion
ming by the networks. into 15 categories, program-
..:!
::t Kennedy tracked each network,s
introductions in each category (g67 iniotar)
,ri: over zsjy";, p;riod (1961 to r9g9).
He found that when one network emphasized "
a particular .itego.y of program in
.ilV its new introductions, rivars tended to
emphasize the same.ul"go.y-"ven after
accounting for changes in the totar Niersen
ratings points per category and the
average rating per show in that category.
In additlon, t<enn6dy showed that pro_
grams introduced in trendy categoriEs
fa"fi""a-o, thi;;il;l of new program_
t._
ming categories) experienied, or-r"uverage,significantly
iower ratings and shorter
I
u
]l:-:.,t1 p.og'u*, introduced i"
third). Exhibit 4.5 "o"?;;;;?;;;1#A;*d
summarizes the average differences.
as rhe bottom
:q As a postscript, it is worth noting that imitative
:tt:l

.: other dimensions did-more than just directly

behavior along these and
.l depress the profitability of the three
tdL traditionai networks' It also left room for Fox to
become the first successful entrant
'ts into the industrv since the 195os byemptofing-particularly
!al
initialry-a very dif_
l::T, Ot:q.amming strategy.26r";,? as a full_fledged network in the
1990s put further pt"sr.rr" or. the ail;g"nce
- r1e
added ,riir", of the netwoit, uy affecting
.ln advertising dollars that,they courd charge the
.: and the terms on wirich they could
ln- procure programming (e.g., rights to bioadcast
professional footbail gu-"ri-
 86

EXHIBIT 4.5
programming of New Television Series (sourcet
Trends and succsss in the Convergencer An Empirical
fenniJ' "strategy Fads and Competitive
Data from Robert e.
TestforHerdBehaviorinprlmeTlmeTelevisionProgramming,''Unpublishedworking
School' January 1 998)
Baper, Harvard Business

Years Broadcast % Surviving 3 Years

Year 1 Ratings Year 3 Ratings
Averages

1.8 21o/"
15.3 16.4
Trendy
introductions

2.3 27%
16.3 20.4
Nontrend}/
introductions

Reflectingthatreality,authorKenAulettatitledhisbest-sellingbookonthenet-
**b'#i;: pose an inescapable
?#:"Y:;:"'mples' i*itili?-l does not alwavs It'sometimes can be' and
threat to the sustainability of a competitl""la"utttage: to test the efficacy
is, deterred' g.o'1o*i'i"hut'" "'"d
gu*"-ttreoretic"models
ofvariousbarrierstoimitationintheprese"."'ralertcompetitionbyconsider- can cost-
und u'ki"g whether the laggards
ing possibly ury*'n"i'il outcomes
,rl

leaders 2i'Soit"Slttt 'hu"':l in

addition' flagged
'i effectively close the gap with the than simply
intri"nsicaliy infe.asible rather
mechanisms that mighl make imitation both sorts of
to lmitaiion that follows covers
cost-ineffective. The iir,'riil^.iers
'a

or
ptt'po't to be either mutuallv exclusive
mechanisms, although it does 'tot multiple barri-
comoletely r. r".i, i-l,"it"*t, i-"r, in.*t"ni"g when
-., "*huurti.?".
reinforce each other'
,
t1
tt itttitution
:4,
"r,
EconomiesofScaleandScopeThemostobviousbarriertoimitationisthat
of being large in a particular
.. ...;t namely' tnt
supplied by scale u"J*":: TuI p.otentially deter imi-
"J"""t^jes
market or
"to"o*i"''
segment. If scaie is advantage""i ^
ugi,",g ,{1urg"'ar'tui*"tra-be
imitators are held back
tation by committing u*i; ;"
exceed demand by enough
itJscale' tltpp't
bv the fear that ir trli" -utthed ^Uht
Jan work on a global, national'
to make them rue;Jffi;;.;;;;;;i";.;;i.i1r", not be confined to manufactur-
regional, or even I;;;;i, and their
"ir".tr """a
ir', u t"t"i.e business is provided
by
A good examprJoi to*i ,.ut" small
ing. ".orro"riiJ,
()J ;;; ihtutut'' which focuses on
Carmike, a highty *tt""ft'f operator two
by;';;;"mpetitors' Most of these towns'cannot support
towns neglected
cinemas,sooncecu,*it"-uk",aninvestmentinamultiplextheatertoservrce
iocal monopoly'
such a town, it g"i"!^;ittitation-proof
 Thrats to Added Value
87

, Scope economies are a second familiar form of size economies: They derive
from the advantages of being large in interrelated markets or segments. They
can
work just like scale economies in deterring imitation. For examile, if a company
can share resources or activities across
marlets or segments while ensuring that its
costs rema-in largely fixed, it may be able to stake out alarge, profitablelosition
for itself. In addition, even in the absence of such oppo"rtunities for sharing,
bundling complementary goods or services can elevate barriers to imitation.
Of
course, exploiting scope economies in any of these ways requires extensive
coor,
dination across markets or segments.

Learning/Private lnformation Learning, especially if interpreted in terms of

the
experience curve, can be envisioned as a third form of size^economies, albeit
one
that relates to the advantages of being large in a particular business over time
rather than at one point in time. But instead of revisiting size-based deterrence
here, we can consider a different kind of impediment to imitation that
underlies
learning
.effects:,superior information or know-how. To the extent that superior
information can be kept private-that is, to the extent that it is costly for would-be
imitators to tap into it-imitation will be inhibited. Although u poii.y of nondis-
closure can sometimes ensure privacy, many other channels"of potential informa-
tional leakage exist, including suppriers, customers, spinoffs, ,"rrurr"-"rrgineering,
and even patent documents. As a result, privacy of iniormation is most achievable
when information is tacit rather than specifiubl" (i."., doesn't lend itself to blue-
printing), and when it is collectively held by the organization, rather than con-
sisting of something that one or two parties 5ut the door. will expand
"i^ "utry of superiorwe
on these themes when we discuss the development capabilities in
Chapter 5.

ontracts and Relationships It may sometimes be possible to enter into contracts

or
establish relationships with buyers, suppliers, or complementors on better
terms than
those available to late movers. \A4ren s.r-h u.ruttge*ents are enforceable,
competitors
may desist from imitation on the grounds that dven if this approach ,,succeei
ed.,,, it
would leave them at too much of an absolute disadvantug"--La"p"ndent of differ-
ences in size or information-to be worthwhile. Enforciability may derive
either
f from third-party enforcement or from self-enforcement. Exarnples" of third-party
iI enforcement include property rights and other formatly specified contracts that
are
enforceable in court. strategists have, in this context, piu."a particular emphasis
on
t the control of physically unique resources (e.g., owning or hiving a long-tlrm
lease
ilt on the best retail location in town). Examples of self-eiforcemen-t include relation-
il, ships that have not been formalized t-o the sarne extent but are nevertheless
[- expected to be sustained by reputations, switching costs, risk aversion, or inertia.
)y We will probe enforceability in more detail later o"tl ltr thlr chapter, when
we look
lll at the threat of holdup.
{0

le Network Externalities As barriers to imitation, network externalities embody

elements of scale, complementarity, learning effects, and relationships-all of th!