Judo Strategy: The Competitive Dynamics of Internet Time
With the rise of Internet-based competition, David and Goliath battles between companies are becoming more and more common. Fast, flexible entrants are taking on dominant incumbents, not only in high-tech sectors such as software and networking equipment, but also in traditionally low-tech industries like retail. Well-known examples include the conflicts between booksellers Amazon.com and Barnes & Noble; toy retailers eToys and Toys R Us; and, most notably, Netscape, an upstart Internet-software maker, and Microsoft, the most powerful software company in the world.
Many of these companies use a competitive approach that we call judo strategy.1 In the martial art of judo, a combatant uses the weight and strength of his opponent to his own advantage rather than opposing blow directly to blow. Similarly, smart Internet start-ups aim to turn their opponents’ resources, strength, and size against them. Judo strategy is based on three elements—rapid movement, flexibility, and leverage—each of which translates into a competitive principle. The first principle requires judo players to move rapidly to new markets and uncontested ground, thus avoiding head-to-head combat. The second principle demands that players give way to superior force when squarely attacked. Finally—and most important—the third principle calls for players to use the weight and strength of opponents against them.
A judo combatant uses the weight and strength of his opponent to his own advantage rather than opposing blow directly to blow.
What judo strategists try to avoid are sumo matches. In a sumo match, combatants wrestle each other directly; the goal is to force the opponent either to the ground or out of the ring. Agility and brains matter, but weight and strength matter far more. If a small challenger gets into a sumo match—in other words, if it goes head-to-head against a large player with deep pockets—it is generally bound to lose.
What judo strategists try to avoid are sumo matches, in which combatants go head-to-head.
Judo strategy is a useful mind-set for any small company competing with a large, better-established one, and it’s especially well suited to turbulent, technology-driven Internet competition. However, judo strategy can be a powerful tool for any company—new or old, high-tech or low-tech, large or small. In fact, one irony of the Netscape-Microsoft story is that giant Microsoft has turned out to be just as skilled a judo player as Netscape—and maybe a better one.
Judo strategy is especially useful for any small company competing with a large, better-established one.
In the following pages, we will discuss the principles of judo strategy, as well as some of its limitations, using the battles between Netscape and Microsoft as an illustration.
Netscape Communications Corporation was formed in April 1994 by Jim Clark, the founder of Silicon Graphics, and Marc Andreessen, then a recent graduate of the University of Illinois. While still in college, Andreessen had been the driving force behind the creation of Mosaic, the first mass-market browser for the World Wide Web. Mosaic had an easy-to-use, button-based interface, and it integrated images with text; those elements made information on the Internet as attractive and useful as a printed page. Mosaic quickly became the “killer app” that turned the Internet into a consumer medium. Following the browser’s release in February 1993, the Web exploded virtually overnight. Between June 1993 and June 1994, the number of sites on the Web grew by 2,000%. By the end of 1994, users had downloaded two million copies of Mosaic. The browser continued to proliferate at a rate of 100,000 copies per month.
Clark and Andreessen founded Netscape to capitalize on the explosive growth of the Web. Their long-term vision was to create a simple, universal interface that would allow users of any communications device (including personal computers, personal digital assistants such as the PalmPilot, or even cellular phones with displays) to access information all around the world. In the short term, they focused on two key products: a high-quality browser that would take up where the buggy, hacked-together Mosaic left off, and a Web server, the software that allows individuals to create sites on the Web.
Netscape Navigator 1.0, the company’s first browser, was a spectacular success. Less than two months after its release in December 1994, it had already captured more than 60% of the market. In 1995, Netscape reached $80 million in sales and launched a triumphant initial public offering. By December 1995—just 20 months after its inception—the company was worth more than $7 billion.
Netscape initially aimed its products at the Internet but soon became a pioneer in developing products that used Internet protocols as the basis for business applications. In 1996, Netscape was an early mover in intranet software, and the next year it extended its reach into extranets, which use the same underlying technology to connect multiple businesses together. These moves required Netscape to develop a broad portfolio of increasingly sophisticated products. They also transformed Netscape from a consumer-oriented browser company into a corporate software business.
By 1997, however, Netscape was moving into rough seas. After peaking at close to 90% in early 1996, Netscape’s share of the browser market had begun to decline steadily. The cause was, in a word, Microsoft. In the first half of 1995, Microsoft remained preoccupied with the challenges of bringing out Windows 95. The company seemed to have buried its head in the sand as far as the Internet was concerned. But by the end of the year, Bill Gates not only had recognized the Internet’s importance but also had mobilized Microsoft around a new, Internet-based vision. On Pearl Harbor Day 1995, he announced that Microsoft was “hard core” about the Internet and planned to “embrace and extend” the Internet across its entire product range.
Netscape’s stock promptly fell 28%, as analysts took positions on the coming battle with Microsoft. (By this time, Netscape had around 700 employees and $80 million in sales; Microsoft had approximately 17,000 employees and $6 billion in sales.) Netscape continued to grow in 1996 and most of 1997, but the contest with Microsoft took its toll. As Microsoft competed aggressively in the intranet and extranet markets, Netscape found it more difficult to make corporate sales. By the end of 1997, Netscape’s share of the browser market had fallen close to 50%, and it was forced to declare a loss in the last quarter of the year of more than $88 million.
Skilled judo players use rapid movement to avoid head-to-head confrontations with potentially superior opponents—moving the battle to terrain where they have an advantage or, at least, where their opponents do not.
The early battle for share of the browser market is a striking example of this principle in action. Netscape Navigator 1.0 was probably the best browser on the market in early 1994, but not by much. It took several judo-inspired moves to catapult Netscape to the top. Netscape moved the battle to unoccupied terrain on three key issues: defining its market; pricing; and testing and distribution.
Netscape’s first move was to target a market that competitors all but ignored. Most of the early browsers offered a complete stack of Internet tools, including dial-up Internet access, a browser, and electronic mail. Developers believed that the greatest demand would be for products that would, figuratively speaking, hold consumers’ hands as they took their first steps onto the Internet. By contrast, Netscape offered a simple, stand-alone browser initially available only over the Internet. This move allowed Netscape to target early adopters—relatively sophisticated computer users who already had experience with the Internet. At the same time, Netscape neatly sidestepped its inexperience in building a full set of Internet products.
Netscape’s second move was to create an innovative pricing model that Marc Andreessen labeled “free, but not free.” Navigator 1.0 was officially priced at $39, but it was free for educational and nonprofit use, and anyone could download it for a free trial period of 90 days. Netscape’s management had no illusions about this policy: some users would pay after the trial period, but most would not. However, “free, but not free” would allow Netscape to build market share fast and, the company hoped, set the market standard. “Free, but not free” would also get Netscape’s foot in the door at many corporations, which would end up buying the software once they saw how well it worked. And in the meantime, Netscape’s Web servers, priced at $1,500 and $5,000, would pay the bills.
Move rapidly to uncontested ground to avoid head-to-head conflict.
Be flexible and give way when attacked directly by superior force.
Exploit leverage that uses the weight and strength of opponents against them.
Netscape’s third judo ploy was to find new approaches to product testing and distribution. As a start-up, Netscape lacked the resources to hire battalions of quality assurance engineers or to build a beta-testing pool one company or one site at a time. Without a large, experienced sales force and co-op marketing funds, it was also handicapped in the battle to secure conventional distribution channels. Consequently, Netscape sought out new terrain by taking testing and distribution to the Web.
In October 1994, Netscape posted a beta version of Navigator on its home page. By downloading the beta, trying it out, and filing their complaints, customers served—sometimes unwittingly—as Netscape’s virtual quality-assurance team. By the middle of November, users had downloaded 1.5 million copies of Navigator from Netscape’s site. Moreover, once the final version of Navigator 1.0 was ready to ship, Netscape continued to use the Web as a major vehicle for distribution. By March 1998, users had downloaded 94 million copies of Navigator over the Web. Web-based testing and distribution are now commonplace, but Netscape was the first company to take full advantage of the Web in this way.
Netscape’s competitors found it difficult to match these moves. Many companies had business models that relied heavily on revenue from browsers. These businesses believed that they could only justify high retail prices by bundling their browsers into multiproduct suites. These products required larger upfront investments, which made it even less likely that they would be free, or even “free, but not free.” In addition, most of Netscape’s competitors were paying a licensing fee to use the Mosaic code in every browser they shipped. Netscape, by contrast, had pushed its marginal cost down to zero by writing its browser from scratch.
A handful of companies tried to match Netscape by offering free browsers over the Web. But due to fears over conflict with the retail chain, these efforts were halfhearted at best. By the time most competitors recognized the power of Netscape’s approach, it was too late to stall Netscape’s meteoric rise. As one former competitor recalls: “[We were] smart enough to see the browser as an incredible tool, get on board very early, and figure out a very leveraged way to get into the market. But we could not conceive of giving it away, making it a free download on the Net. In hindsight, I chastise myself for not having the vision to say, ’We really have to break the model here.’”
Netscape’s judo approach successfully immobilized most of the company’s competition in the first round of the browser wars. However, the next round, which began in late 1995, pitted Netscape against a much tougher opponent: Microsoft. Microsoft was able to match each of Netscape’s key moves. Internet Explorer (IE), the browser Microsoft released in August 1995, was a free product that was bundled with Windows 95 and could be downloaded over the Web. In fact, Microsoft saw and raised Netscape’s bet by making IE free for all users, including corporations.
Microsoft’s aggressive response intensified a problem Netscape already faced: the policy of “free, but not free” meant that Netscape could expect little revenue on the consumer front. Netscape needed to move aggressively into the corporate market. Its approach, once again, was to move the battle to weakly defended terrain where the adversary’s advantage seemed relatively small. Netscape believed that Microsoft’s real strengths were in the consumer and corporate desktop markets: the corporate back office, however, was vulnerable, so Netscape tried to build its corporate base there. Netscape began by targeting the intranet market and later expanded its focus to encompass extranets and electronic commerce products and services. Most recently, the company has sought to bolster its e-commerce strategy by building the Netcenter site into one of the leading destinations on the World Wide Web. (This strategy has put Netscape into competition with other major Web “portals,” or traffic-aggregating sites, such as Yahoo!)
Moving to uncontested markets allowed Netscape to define the terms of competition.
By repeatedly shifting to new ground, Netscape sought to avoid direct confrontations. Andy Grove, the chairman of Intel, likens Netscape to a guerrilla force fighting an occupying army: “Their advantage comes from their ability to live in the forest, live off the land, be very mobile, and do things that the professional army would never dream of doing. In this regard, Netscape has mounted a very substantial challenge to Microsoft… The problem is, they’re running out of space, munitions, and food.” As Grove points out, rapid movement can take a startup only so far. Eventually, most armies—and companies—are forced to stop and take a stand. However, for almost three years, moving to new, uncontested markets allowed Netscape to define the terms of competition.
A judo combatant must be prepared to respond to surprise moves. However, that’s only one aspect of flexibility. The real challenge is learning how to give way to an attack before fatal injuries occur. Judo players should never escalate unwinnable wars, and they must understand when to carry out a tactical retreat. By yielding to superior force rather than resisting it, a company in a relatively weak position can enhance its chances for survival.
Netscape managers became skilled at making small, tactical adjustments in response to market changes and competitors’ moves. As an example Netscape executives like to cite their response to Microsoft’s announcement that Internet content providers, such as the Wall Street Journal, would offer special access to users of IE 3.0. Within a week of the announcement, Netscape’s marketing chief had signed up dozens of content providers for a new Navigator service called Inbox Direct. Inbox Direct delivered interactive Web pages directly to users’ e-mail addresses by leveraging a feature in Navigator that Microsoft had yet to match. This move allowed Netscape to compete in the content arena and deflect Microsoft’s attack.
Netscape didn’t measure up quite so well when it came to larger adjustments and strategic flexibility—the capacity to bend rather than break in the face of superior force. Netscape suffered a body blow in December 1995 when Bill Gates announced that Microsoft would “embrace and extend” competitors’ Internet successes. The smaller company, however, was remarkably slow to recognize the seriousness of the blow. Initially, Netscape reacted not by retreating but by countering each Microsoft attack. Rather than look for creative opportunities to exploit Microsoft’s weaknesses, Netscape executives threw their resources into going head-to-head with Microsoft. (One senior executive at Netscape even admitted later to “an obsession with beating Microsoft.”) As the two companies went after common distribution channels such as Internet service providers and on-line services, Netscape lost deal after deal. Netscape had numerous opportunities to craft deep partnerships that Microsoft would avoid. For example, America Online (AOL) offered to take Netscape’s “spaghetti code” and build a customized version of Navigator for AOL’s millions of subscribers—a proposal Netscape rebuffed. If Netscape had been more flexible in dealing with potential allies, it could have built a much stronger defense against Microsoft’s assault. Instead, Netscape got into contests where it had no leverage and where Microsoft simply outbid Netscape with more money, more support, and more promises.
On November 24, 1998, America Online announced that it would acquire Netscape for $4.2 billion and that Sun Microsystems would be a partner in the deal as a reseller of Netscape’s software. This acquisition marked a significant milestone for the Internet. Judo strategy helped Netscape popularize the World Wide Web and provide Bill Gates with the most serious challenge in Microsoft’s history. But Netscape violated the core principles of judo strategy and, in doing so, contributed to its demise as an independent company.
The first principle of judo strategy is to move rapidly to uncontested markets. While Netscape was indeed an early mover in building an all-purpose Web site, it failed to recognize and exploit the site’s value for three years. As Marc Andreessen told us, he thought the Web site was “a distraction.” By the time Netscape managers realized what they had, Netscape had dropped from first to third in Web traffic and continued to lose share.
The second principle of judo strategy is flexibility. One of the ironies of this merger is that AOL had twice sought to partner with Netscape and Netscape spurned AOL’s offers both times. In the end, Microsoft won the AOL account, cutting deeply into Netscape’s market share for browsers. During the early discussion of a possible partnership, Netscape was worth ten times as much as AOL. At the time of the purchase, AOL was worth ten times as much as Netscape.
The third principle of judo strategy is leverage. Netscape’s greatest leverage in late 1998 was its cross-platform promise and its potential power from making its source code free. But time was not on Netscape’s side. The earlier tactical errors, plus Microsoft’s use of sumo tactics, left Netscape with a viable but barely profitable business. Netscape’s choice was to face several years with an anemic stock price while trying to build scale, or to sell to AOL, ensure the survival of Netscape’s brand, and try to return to a leading position on the Internet.
The anticipated benefits of the merger with AOL may never materialize. More than half of all mergers fail for a variety of reasons—including cultural and strategic clashes—which certainly exist between Netscape, AOL, and Sun Microsystems.
Netscape executives were also slow to concede that Microsoft’s market dominance meant that they could not ignore its standards. Netscape could have demonstrated flexibility by taking a page from Microsoft’s book and “embracing and extending” Microsoft’s Internet technologies and tools. Instead, it initially promoted a development platform that was the antithesis of Microsoft’s Windows-based approach; but the Microsoft juggernaut was too powerful to withstand. In October of 1996, Netscape announced that it would “embrace and integrate” Microsoft’s technologies and products. Sixteen months later, the company moved to make its servers work as efficiently with Microsoft (and IBM) client software as with its own. Flexibility prevailed, but it was begrudging and late.
By contrast, Microsoft responded with surprising agility to its own near-fatal error. Bill Gates had made a critical mistake in 1994: he failed to grasp the Internet’s importance. But by May 1995, he had seen the light. As he wrote in an internal memo, “Now I assign the Internet the highest level of importance. The Internet is the most important single development to come along since the IBM PC was introduced in 1981… The Internet is a tidal wave. It changes the rules. It is an incredible opportunity, as well as an incredible challenge.”
At an earlier stage in the game, Microsoft might have been able to redirect the Internet tide by creating—and controlling—the standards on which it was based. However, by mid-1995, the Internet’s pull had become too strong. In the new realm of the World Wide Web, Netscape was king. Netscape held at least two-thirds of the browser market, and growing numbers of Web sites were built around the standards Netscape had helped define.
Gates realized that it was too late to replace the Internet’s standards with a Microsoft-owned platform. Instead, he demonstrated strategic flexibility by endorsing the Internet and the work that Netscape had done. As he explained in the briefing on December 7, 1995, “Anything [all popular Internet protocols] that a significant number of publishers are using and taking advantage of, we will support.” In addition, Microsoft would extend those protocols, taking them to the next level to give their own products an extra edge. Over the following months, Microsoft adopted numerous Internet technologies, including Java, and many of the innovations Netscape had pioneered, even when they conflicted with Windows-based technologies.
Microsoft adopted numerous Internet technologies and innovations that Netscape had pioneered.
Perhaps Microsoft’s most startling demonstration of flexibility was its willingness to undercut Microsoft Network (MSN) only months after launching the service. Designed as a proprietary on-line service that would compete with AOL and CompuServe, MSN had one huge advantage over the competition: it was the only on-line service that came bundled with Windows 95 and as such it shipped with 90% of the new computers sold in the world. While AOL and CompuServe spent $40 to $80 to acquire each new customer, MSN could hook them virtually for free. However, in March 1996, Bill Gates decided that promoting IE was simply more important than protecting MSN’s biggest competitive advantage. He needed to entice Steve Case, the CEO of AOL, to make IE the preferred browser on AOL. To do so, he offered to put an AOL icon on the Windows 95 desktop, perhaps the most expensive real estate in the world. Until then, Microsoft had reserved this position exclusively for MSN. In announcing this deal on March 12, 1996, Microsoft dealt a crushing blow to Netscape—and very nearly as crushing a blow to MSN, its own product. Gates later extended his offer to the other on-line services and major Internet service providers, further diluting the advantage enjoyed by MSN. Ultimately, this display of flexibility was responsible for building approximately 16 market share points, or more than one-third, of IE’s customer base.
Movement and flexibility are prerequisites for judo strategy. They’re crucial to keeping the competition off balance, and they prevent large competitors from dominating smaller, more vulnerable opponents. But speed and agility only buy you time, giving you the opportunity to create early-mover advantages before your opponent responds. If you want to do more than just survive an initial confrontation, you need to immobilize your opponent and, ultimately, knock him down. This requires leverage, or finding ways to use your opponent’s weight and strength against him.
In analyzing Microsoft’s position and strengths, Netscape executives tried to exploit three potential points of leverage. The first was the installed base of older Microsoft products, such as Windows 3.1 and DOS, which Microsoft sought to upgrade to its new operating system. The second was the persistence of heterogeneous computing environments, which Microsoft was trying to eliminate. And the third was Microsoft’s use of proprietary technology in an ever-more-open technology world.
Essentially, Netscape sought to take Microsoft’s greatest asset—its dominance in PC operating systems—and turn it into a liability. By bundling IE with Windows, Microsoft was offering something Netscape could never hope to match: a free browser delivered on virtually every new personal computer sold in the world. Microsoft’s strategy was to make the operating system, the interface, and the browser inseparable, turning Netscape’s Navigator into a superfluous add-on. However, this strategy had one potential flaw: Because operating-system upgrades were a primary engine of growth for Microsoft, initially the latest version of IE worked only with Microsoft’s most recent operating system. That left users of older Microsoft systems—many of whom were corporate customers—out in the cold.
Netscape tried to take Microsoft’s dominance in PC operating systems and turn it into a liability.
Netscape was quick to recognize the scale of this opportunity: “There are 300 million PC units out there in the world today. About a third of them are running Windows 95; two-thirds of them are running something else. As they [Microsoft] continue to develop more…operating systems…they continue to leave more and more of a trail.” Microsoft’s business model discouraged it from extending the useful life of its older products. Consequently, in the early days of the browser wars, Netscape was able to position itself as the only company that supported the entire installed base of Windows PCs.
Netscape also leveraged Microsoft’s goal of converting the entire world to Windows or Windows NT. Microsoft had no incentive to support existing UNIX systems, but those systems continued to play an important role in the corporate world. UNIX was much more effective in handling high-speed, high-volume operations. High-end Web servers and e-commerce servers tended to be UNIX machines. Most large companies, whose networks had evolved over time, relied on a mixture of UNIX systems, Windows, and Windows NT. Until early 1998, Netscape Navigator was the only browser that could be deployed companywide. In early 1998, Microsoft released the first UNIX version of IE. But even so, it did not match Netscape’s cross-platform support.
“Cross-platform” became a central theme of Netscape’s message early on. Andreessen was a particularly vocal advocate. In 1996, he argued, “The long-term vision is, it doesn’t matter what the operating system is. The operating system should be a plug-in that fits beneath Navigator.” Netscape executives recognized that, over time, Windows NT would penetrate the market further. However, in the short and medium term, the fragmentation of most corporate computing environments gave Netscape a chance to get in the door and lock in customers. In the long term, the proliferation of alternative computing devices would continue to drive the cross-platform message home even if NT’s penetration continued to increase. As one senior executive explained, “We think that the Net will bring more diversity in devices…laptops, PCs, workstations, servers, NCs [network computers], and ultimately PalmPilots, Segas, Nintendos, and Web TVs.” Consequently, he argued, Microsoft’s “field of dreams” operating-system strategy—“build it and they will come”—was bound to fail.
Netscape’s third leverage point grew out of a different aspect of Microsoft’s operating-system strategy: its reliance on proprietary technology. Through Windows, Microsoft maintains a firm grip on the pressure points of the PC world. Microsoft controls both the device drivers (software that connects hardware and software) and application programming interfaces (or APIs—software that connects applications to the operating system) on which other hardware and software companies rely. No one can copy Windows device drivers or APIs, and Microsoft can change them, eliminate them, or upgrade them whenever it sees fit.
The Internet, which began as a set of truly open industry standards, was the first technology since the dawn of the PC that could threaten Microsoft’s hegemony over future device drivers and APIs. All the Internet’s relevant technologies were in the public domain. Anyone could copy protocols and integrate them into their own software products. Such access was an essential part of the appeal of intranets—and, later, extranets. Open standards made it easier for customers to mix and match products within their companies and to switch vendors. Open protocols also leveled the playing field for suppliers, to some degree, by reducing the customer’s fear of becoming locked in to one product for years to come.
Microsoft’s proprietary history offered Netscape a powerful lever. Unlike Netscape, Microsoft could not afford to put its existing technology into the public domain. Opening up its device drivers and APIs would destroy Microsoft’s business model. Moreover, prior to 1996, Microsoft had little experience in dealing with the open-standards community, which regarded the company with suspicion and fear. Netscape tried to harness this leverage by becoming the guardian of greater openness. It hoped to shift the rules of the game through two strategies, which we call “open, but not open” and “leverage the Internet.”
The goal of Netscape’s “open, but not open” strategy was to put Microsoft on the defensive by promoting the open standards that Netscape helped create. This would make it more difficult for Microsoft to return to using proprietary technology in order to get a competitive edge. Under the banner of openness, Netscape made virtually all of its innovations available to other developers. Yet Netscape was not always as open as it appeared. By subtly incorporating proprietary features into its products, Netscape was able to claim the “open” label while preventing its software from becoming a commodity.
Despite the “not open” aspects of its approach, Netscape initially had an advantage in the standards arena because Microsoft was the company everyone loved to hate. As Netscape’s former standards strategist recalls, “I have been told on several occasions in standardization committees, ’We don’t like you very much. But we hate Microsoft more’—which is not exactly what I had wanted. But at this point in time, it is acceptable to work from that point of view. It gives us a minor lead.” Over time, however, as Netscape’s own practices came under more fire, the company’s influence declined.
In early 1998, Netscape sought further leverage with a dramatic move: On March 31, it posted the source code of Communicator 5.0, its next-generation flagship product, on the Web. Source code is the core of any software product; it is the instruction set that defines how the program actually works. For a software company, publishing source code is the competitive equivalent of revealing the recipe for Coca-Cola. Others could now build, distribute, and even sell products based on Netscape’s work. Netscape’s giveaway had only one major condition: Anyone who modified the code was required to make his or her changes available to Netscape and the world. Netscape developers could then decide which changes to include in the next Communicator release.
Giving away the source code was classic judo strategy. Without the strength to fight Microsoft directly, Netscape had to find a creative way to compete. Hoping to offset Microsoft’s size and financial strength, Netscape executives tried to find external resources through the Net. If their strategy worked, tens of thousands of programmers on the Internet would form the largest virtual research and development organization in the world. Moreover, Microsoft’s decision to tie IE more tightly to the Windows operating system in 1998 would make it virtually impossible for Microsoft to respond. If Microsoft revealed its source code for IE, it would risk undermining its proprietary Windows technology.
Netscape’s strategy also had risks. By allowing developers from all over the world to contribute to the Communicator code, Netscape turned the task of maintaining tight coordination and quality control into a forbiddingly complex one. More important, the participation of outside developers made it even more difficult for Netscape managers to convince corporate customers—ever wary of foreign bugs and viruses—that they had quality control well in hand. In addition, the giveaway created the possibility that a competitor would use Netscape’s code to build something “insanely great” that Netscape itself would be unable to match. On the other hand, by harnessing the spark and creative energy of the Internet community, Netscape had an opportunity to regain the initiative in the browser wars. Only time will tell how effective this last judo strategy ploy will be for Netscape—although some 250,000 users downloaded the Netscape browser code in the first month, and the company has already received some potentially powerful new technologies as well as a number of useful bug fixes and suggestions for new features.
Although both Netscape and Microsoft have benefited from thinking in judo terms, judo strategy is not a surefire recipe for success. The performance of both companies presents a number of judo strategy “don’ts.”
Constantly hunting for unoccupied ground and giving way in the face of attack can confuse customers and undermine a company’s strategic credibility. Consumers addicted to using the Internet may thrive on a diet of constant change, making several software upgrades each year. However, customers investing millions of dollars in Netscape systems were less pleased to hear a Netscape spokesperson blithely declare, “It’s the Internet. We have a new business plan every six months.” From the perspective of Netscape’s corporate customers, constant movement not only obscured the company’s future strategic plans but also raised questions about Netscape’s ability to focus and execute in the short term. One former Netscape manager suggests that those fears had some basis in fact. He recalls, “There was a reliance, which always scares the hell out of me when I hear it, [on the idea that] somehow we have to be more innovative, we have to change the rules. I’m going to strangle the next person who says to me, ’We have to change the rules—that’s the only way we are going to beat these guys.’ Because that is a very valuable tool, but you cannot use it as a crutch, as a replacement, as a surrogate for execution.”
When companies carefully design strategies based on leverage, they put opponents in a position where it’s hard to react. Yet they often pose a potential threat to a powerful player’s core business. How can you reinforce your opponent’s incentives not to respond with force? In the words of one former Netscape executive, don’t “moon the giant.” Taunting your rival or exaggerating the threat you pose will only provoke a lethal response.
This is a lesson that Netscape executives were slow to learn. Russell Siegelman, then general manager of Microsoft Network (MSN), remembers sharing the stage with Jim Clark at an industry event in the spring of 1995. During their joint session, Clark told the audience that Microsoft was the “Death Star” and that Netscape was developing a full-fledged network operating system that would make Windows unnecessary and outdated. Throughout the summer and fall of that year, Marc Andreessen was often quoted as saying that Netscape’s technology would relegate Microsoft’s operating system to nothing more than “a mundane collection of not entirely debugged device drivers.” No approach could have been better calculated to awaken Bill Gates’s wrath.
Microsoft’s past success provided Netscape with a number of valuable points of leverage. But as Netscape grew and thrived, it found that leverage could cut both ways. Netscape came into the world with very little baggage. Its history, revenues, and installed base were too meager to give its competitors enough of a handhold to bring Netscape down. By the end of 1997, it had more than $500 million in annual sales and a multi-billion-dollar market capitalization. This “weight” gave agile competitors like Microsoft an opportunity to turn the tables and use leverage against Netscape.
Microsoft focused its attack on one of Netscape’s smartest initiatives—that of making browsers “free, but not free.” In 1995, “free, but not free” worked because Netscape was battling against companies that needed revenues to survive. By 1997, it was Netscape that needed every dollar in sight. Corporate browser purchases had fueled a spectacular rise in Netscape’s share price, and senior executives believed that any cut in revenues would have a devastating impact on the company’s ability to grow. Microsoft understood this perfectly: Netscape’s own strategy had weighed it down. By offering browser and Web server software that were free to all, Microsoft trapped Netscape with a classic judo attack. Netscape’s need for revenues made it hard to match Microsoft’s move. Only in January 1998, after losing some 30 points of market share, did Netscape bow to the inevitable and make both Navigator and Communicator free of charge.
The only way to fight such an attack successfully is to take your losses before the outside world forces them on you. Bill Gates seems to have understood this lesson in dealing with MSN. When he made the success of IE his first priority, Gates did more than give MSN’s rivals a boost. He reduced the value of the entire proprietary on-line service world by strengthening the force of the Web. He recognized that cannibalization was inevitable in this case and, rather than allow someone else to do this, he chose to cannibalize his business himself. Despite the large investments Microsoft had made in MSN, Gates had no doubt that, over the long run, the prize was worth the price.
Judo strategy, like judo the martial art, does not advocate killing the competition. Rather, judo strategy uses movement and flexibility to avoid a fight whenever possible and leverage to get the upper hand. Netscape and Microsoft were both guilty of being too greedy and going for the kill. In Netscape’s case, its greed for cash reduced its flexibility. Within months of launching Navigator, Netscape managers took every opportunity to raise revenues and profits. They also raised revenue and profit expectations among investors. In the rush to go public and demonstrate their success, they were willing to lose market share, delay important decisions (such as reducing the price of the browser), and threaten potentially valuable long-term relationships (with companies like AOL) in order to satisfy Wall Street.
The contrast between Netscape’s and Microsoft’s behavior before 1998 is startling. Microsoft’s near-monopoly position in operating systems gave it luxuries that few companies could afford. Microsoft was rarely greedy for cash. In fact, Microsoft usually tried to reduce Wall Street expectations and spend its cash. P&L considerations never seemed to dominate Microsoft’s decision making. But Gates and company were too greedy when it came to winning market share in the browser wars.
It is perfectly legal to win a near-monopoly through good business practices. But, once you have a dominant position, special rules apply. You can be a tough competitor, but you cannot use your monopoly power to hurt a competitor in another market. Exclusive bundling deals, leveraging your monopoly into related products, or threatening to cut off your largest customer from Windows if it uses a competitor’s product goes over the line. Bill Gates’s take-no-prisoners strategy might have been fine if it had been any company but Microsoft.
The conventional wisdom about competition in the age of the Internet is that the business world has become incredibly fast and unpredictable, and we need to throw out the old rules of the game. Our research on Netscape and Microsoft found that some things really have changed because of the Internet, and some traditional forms of business practice have become much less useful.
For companies competing in the new information economy, the Internet forces managers and employees to change their ideas, experiment, invent, and plan constantly, while they try to build complex new products and technologies. The Internet also requires companies to face the reality that competitive advantage can appear and disappear overnight. This is true because the Internet makes it possible to organize your business in new ways, to offer new products and services, and to distribute those products and services to tens of millions of people almost instantaneously. It was the electronic distribution capability of the Internet that allowed Netscape to burst onto the scene in 1994 and, in only a few months, turned the company into one of the most serious threats Microsoft has ever faced. This sudden rise to prominence of new companies can and will happen again.
We also found, however, that some of the strategic precepts of the pre-Internet world continue to ring true. Several core elements of competitive advantage—vision, leadership, innovation, quality, barriers to entry, customer lock-in, switching costs, and partner relationships—remain critical to the overall equation for creating a successful company, even in the most turbulent of environments. The bewildering pace of the Internet may even put a premium on these old-fashioned virtues. In addition, the Internet compels managers to speed up some activities, such as product development and launches; others, like strategic planning processes, can operate on more normal timescales. Microsoft, for example, found that its customary three-year planning cycles worked just fine, as long as it could, in the words of Microsoft president Steve Ballmer, “pulse”—that is, pause, reassess the environment, and implement course corrections rapidly.
Judo strategy is the perfect complement for this “new, but not new” world. A good judo strategist will move quickly to exploit new markets and be prepared for the inevitable retaliation by more-established companies. Without speed and flexibility, very few companies can compete successfully on Internet time. The key to great judo strategy, though, is finding sources of leverage that will make a dominant company hesitate to strike back. With leverage, even the smallest company can topple giants.
The key to judo strategy is finding leverage that will make a dominant company hesitate to strike back.
1. In the early 1980s, two economists, Judith Gelman and Steven Salop, coined the term judo economics to describe a strategy that would induce a large incumbent to accommodate the entry of a new player. They argued that by making a credible commitment to remain small, a new entrant could persuade the incumbent that retaliation was not worthwhile. Judo strategy goes a step further: the judo strategist clearly threatens the incumbent but also offers incentives for the incumbent not to respond. See J.R. Gelman and S.C. Salop, “Judo Economics: Capacity Limitation and Coupon Competition,” Rand Journal of Economics (Autumn 1983), pp. 315–325.
David B. Yoffie is the Max and Doris Starr Professor of International Business Administration at Harvard Business School. He is co-author of The Business of Platforms: Strategy in the Age of Digital Competition, Innovation and Power (2019).
Michael A. Cusumano is the Sloan Distinguished Professor of Management at the MIT Sloan School of Management in Cambridge. He is co-author of The Business of Platforms: Strategy in the Age of Digital Competition, Innovation and Power (2019).
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