At the heart of the Netscape-Microsoftbattles are the three elements of judo-

rapid movement, flexibility, and leverage.

JUDOSTRATEGY

THE COMPETITIVE

DYNAMICS OFINTERNET TIMEby David B. Yoffie and Michael A. Cusumano

WITH THE RISE of Intemet-based competi-tion, David and Goliath battles between com-panies are becoming more and more common.

Fast, flexible entrants are taking on dominant in-cumbents, not only in high-tech sectors such as soft-ware and networking equipment, but also in tradi-tionally low-tech industries like retail. Well-knownexamples include the conflicts between booksellersAmazon.com and Barnes &. Noble; toy retailerseToys and Toys R Us; and, most notably, Netscape,an upstart Internet-software maker, and Microsoft,the most powerful software company in the world.

David B. Yoffie is the Max and Doris Starr Professor of Interna-tional Business Administration at the Harvard Business Schoolin Boston, Massachusetts. Michael A. Cusumano is the SloanDistinguished Professor of Management at the MIT SloanSchool of Management in Cambridge. This article is adaptedfrom their book, Competing on Internet Time: Lessons fromNetscape and Its Battle with Microsoft (Free Press, 1998J.

ARTWORK BY CURTIS PARKER 71

JUDO STRATEGY

Many of these companies use a competitiveapproach that we call judo strategy.' In the martialart of judo, a combatant uses the weight andstrength of his opponent to his own advantagerather than opposing blow directly to blov '̂. Simi-larly, smart Internet start-ups aim to turn their op-ponents' resources, strength, and size against them.Judo strategy is based on three elements-rapidmovement, flexibility, and leverage-each of whichtranslates into a competitive principle. The firstprinciple requires judo players to move rapidly tonew markets and uncontested ground, thus avoid-ing head-to-head combat. The second principle de-mands that players give way to superior force whensquarely attacked. Finally-andmost important-the third prin-ciple calls for players to use theweight and strength of opponentsagainst them.

What judo strategists try toavoid are sumo matches. In asumo match, combatants wrestleeach other directly; the goal is toforce the opponent either to theground or out of the ring. Agilityand brains matter, but weight andstrength matter far more. If asmall challenger gets into a sumomatch-in other words, if it goeshead-to-head against a large playerwith deep pockets - it is generallybound to lose.

Judo strategy is a useful mind-set for any small company com-peting with a large, better-estab-lished one, and it 's especially well suited toturbulent, technology-driven Internet competition.However, judo strategy can be a powerful tool forany 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 turnedout to be just as skilled a judo player as Netscape -and maybe a better one.

In the following pages, we will discuss the prin-ciples of judo strategy, as well as some of its limi-tations, using the battles between Netscape andMicrosoft as an illustration.

Setting the Stage:Netscape Versus MicrosoftNetscape Communicat ions Corporation wasformed in April 1994 by Jim Clark, the founder ofSilicon Graphics, and Marc Andreessen, then a re-cent graduate of the University of Illinois. While

What judostrategists

try to avoidare sumomatclies,in which

combatants gohead-to-head.

still in college, Andreessen had been the drivingforce behind the creation of Mosaic, the first mass-market browser for the World Wide Web. Mosaichad an easy-to-use, button-based interface, and itintegrated images with text; those elements madeinformation on the Internet as attractive and usefulas a printed page. Mosaic quickly became the"killer app" that turned the Internet into a con-sumer medium. Following the browser's release inFebruary 1993, the Web exploded virtually over-night. Between June 1993 and June 1994, the num-ber of sites on the Web grew by 2,000%. By the endof 1994, users had downloaded two million copiesof Mosaic. The browser continued to proliferate at a

rate of 100,000 copies per month.Clark and Ajidreessen founded

Netscape to capitalize on the ex-plosive growth of the Web. Theirlong-term vision was to create asimple, universal interface thatwould allow users of any commu-nications device (including per-sonal computers, personal digitalassistants such as the PalmPilot,or even cellular phones with dis-plays) to access information allaround the world. In the shortterm, they focused on two keyproducts: a high-quality browserthat would take up where thebuggy, hacked-together Mosaicleft off, and a Web server, the soft-ware that allows individuals tocreate sites on the Web.

Netscape Navigator 1.0, thecompany's first browser, was a spectacular success.Less than two months after its release in December1994, it had already captured more than 60% of themarket. In 1995, Netscape reached $80 million insales and launched a triumphant initial public of-fering. By December 1995 -just 20 months after itsinception - the company was worth more than $7billion.

Netscape initially aimed its products at the Inter-net but soon became a pioneer in developing prod-ucts that used Internet protocols as the basis forbusiness applications. In 1996, Netscape was anearly mover in intranet software, and the next yearit extended its reach into cxtranets, which use thesame underlying technology to connect multiplebusinesses together. These moves required Net-scape to develop a broad portfolio of increasinglysophisticated products. They also transformedNetscape from a consumer-oriented browser com-pany into a corporate software business.

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JUDO STRATEGY

By i997y however, Netscape was moving intorough stas. After peaking at close to 90% in earlyiyy6, Netscape's share of the browser market hadbegun to decline steadily. The cause was, in a word,Microsoft. In the first half of 1995, Microsoft re-mained preoccupied with the challenges of bringingout Windows 95. The company seemed to havehnried its head in the sand as far as the Internetwas concerned. But by the end of the year, Bill Gatesnot only had recognized the Internet's importancebut also had inohilized Microsoftaround a new, Internet-based vision. OnPearl Harhor Day 1995, he announcedthat Microsoft was "hard core" aboutthe Internet and planned to "embraceand extend" the Internet across its en-tire product range.

Netscape's stock promptly fell 28%,as analysts took positions on the com-ing battle with Microsoft. (By this time,Netscape had around 700 employeesand $80 million in sales; Microsoft hadapproximately 17,000 employees and$6 billion in sales.) Netscape continuedto grow in r996 and most of 1997, butthe contest with Microsoft took its toll.As Microsoft competed aggressively inthe intranet and extranet markets, Net-scape found it more difficult to makecorporate sales. By the end of 1997,Netscape's share of the hrowser markethad fallen close to 50%, and it wasforced to declare a loss in the last quar-ter of the year of more than $88 million.

Principle #1Move rapidly to uncontested giound toavoid head-to-head conflict. Skilledjudo players use rapid movement toavoid head-to-head confrontations withpotentially superior opponents - mov-ing the battle to terrain where theyhave an advantage or, at least, wheretheir opponents do not.

The early battle for share of the browser marketis a striking example of this principle in action.Netscape Navigator 1.0 was probably the bestbrowser on the market in early 1994, hut not bymuch. It took several judo-inspired moves to cata-pult Netscape to the top. Netscape moved the bat-tle to unoccupied terrain on three key issues: defin-ing its market; pricing; and testing and distribution.

Netseape's first move was to target a market thatcompetitors all but ignored. Most of the early

HARVARD BUSINESS REVIEW laiiuary-February 1999

browsers offered a complete stack of Internet tools,including dial-up Internet access, a hrowser, andelectronic mail. Developers believed that the great-est demand would be for products that would, figu-ratively speaking, hold consumers' hands as theytook their first steps onto the Internet. By contrast,Netscape offered a simple, stand-alone hrowser ini-tially available only over the Internet. This moveallowed Netscape to target early adopters-relativelysophisticated computer users who already had ex-

A judo combatant uses the weight and strength of his opponentto his own advantage rather than opposing blow directly to blow.

perience with the Internet. At the same time, Net-scape neatly sidestepped its inexperience in huild-ing a full set of Internet products.

Netscape's second move was to create an innova-tive pricing model that Marc Andreessen laheled"free, but not free." Navigator 1.0 was officiallypriced at $39, but it was free for educational andnonprofit use, and anyone could download it for afree trial period of 90 days. Netscape's managementhad no illusions about this policy: some users

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THE DO'S AND DONTS OFJUDO STRATEGY

Principle #1Move rapidly to uncontested ground to avoidhead-to-head conflict.

Do...• move to new products that redefine the competi-tive space.• move to new pricing models that competitors areunable to emulate.• move to new testing and distribution modelsthat avoid competitors' strengths.

Don't...• suppose that constant movement is possible ordesirable.• allow excessive movement to destroy your focusand weaken your credibility.• treat rapid movement as a substitute for long-term vision.• assume that speed and time-to-market reducethe importance of quality to enterprise customers.

Principle #2Be flexible and give way when attacked directly hysuperior force.

Do...• avoid sumo matches unless you're bigger andstronger than your opponent.• embrace and extend rivals' smart moves.• mesb flexibility and tactical adjustments withlong-term strategic plans.

Don't...

»• escalate unwinnable wars.• be afraid to cannibalize your own products.

I

IPrinciple #3Exploit leverage that uses the weight and strengthof opponents against them.

Do...• turn your opponent's strategic commitments andinvestments to your advantage.• cooperate with others who are threatened byyour opponent's success.

Don't...• forget that the greater your success, the morelikely it is that leverage can be used against you.

would pay after the trial period, but most wouldnot. However, "free, but not free" would allow Net-scape to build market share fast and, the companyhoped, set the market standard. "Free, but not free"would also get Netscape's foot in the door at manycorporations, which would end up buying the soft-ware once they saw how well it worked. And inthe meantime, Netscape's Web servers, priced at$i,5ooand$5,ooo, would pay the bills.

Netscape's third judo ploy was to find new ap-proaches to product testing and distribution. As astart-up, Netscape lacked the resources to hire bat-talions of quality assurance engineers or to build abeta-testing pool one company or one site at a time.Without a large, experienced sales force and co-opmarketing funds, it was also handicapped in thebattle to secure conventional distribution chan-nels. Consequently, Netscape sought out new ter-rain by taking testing and distribution to the Web.

In October 1994, Netscape posted a beta versionof Navigator on its home page. By downloading thebeta, trying it out, and filing their complaints, cus-tomers served-sometimes unwittingly-as Net-scape's virtual quality-assurance team. By the mid-dle of November, users had downloaded 1.5 millioncopies of Navigator from Netscape's site. Moreover,once the final version of Navigator 1.0 was ready toship, Netscape continued to use the Web as a majorvehicle for distribution. By March 1998, users haddownloaded 94 million copies of Navigator over theWeb. Web-based testing and distribution are nowcommonplace, but Netscape was the first companyto take full advantage of the Web in this way.

Netscape's competitors found it difficult to matchthese moves. Many companies had business mod-els that relied heavily on revenue from browsers.These businesses believed that they could only jus-tify high retail prices by bundling their browsersinto multiproduct suites. These products requiredlarger upfront investments, which made it evenless likely that they would be free, or even "free/but not free." In addition, most of Netscape's com-petitors were paying a licensing fee to use the Mo-saic code in every browser they shipped. Netscape,by contrast, had pushed its marginal cost down tozero by writing its browser from scratch.

A handful of companies tried to match Netscapeby offering free browsers over the Web. But due tofears over conflict with the retail chain, these ef-forts were halfhearted at best. By the time mostcompetitors recognized the power of Netscape's ap-proach, it was too late to stall Netscape's meteoricrise. As one former competitor recalls: "[We were]smart enough to see the browser as an incredibletool, get on hoard very early, and figure out a very

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JUDO STRATEGY

leveraged way to get into the market. But we conldnot conceive of giving it away, making it a freedownload on the Net. In hindsight, I chastise my-self for not having the vision to say, 'We really haveto break the model here."'

Netscape's judo approach successfully immobi-lized most of the company's competition in the firstround of the browser wars. However, the next round,which began in late 1995, pitted Netscape against amucb tougber opponent: Microsoft. Microsoft wasable to match each of Netscape's key moves. Inter-net Explorer (IE), the browser Microsoft released inAugust 1995, was a free product that was bundledwith Windows 95 and could be downloaded overtbe Web. In fact, Microsoft saw and raised Net-scape's bet by making IE free forall users, including corporations.

Microsoft's aggressive responseintensified a problem Netscapealready faced: the policy of "free,but not free" meant that Net-scape could expect little revenueon tbe consumer front. Netscapeneeded to move aggressively intotbe corporate market. Its ap-proach, once again, was to movetbe battle to weakly defended ter-rain wbere the adversary's advan-tage seemed relatively small.Netscape believed that Micro-soft's real strengtbs were in tbeconsumer and corporate desktopmarkets: tbe corporate back of-fice, however, was vulnerable, soNetscape tried to build its corpo-rate base tbere. Netscape beganby targeting tbe intranet market and later expandedits focus to encompass extranets and electroniccommerce products and services. Most recently,the company has sougbt to bolster its e-commercestrategy by building the Netcenter site into one ofthe leading destinations on tbe World Wide Web.(This strategy has put Netscape into competitionwitb other major Web "portals," or traffic-aggregat-ing sites, sucb as Yaboo!)

By repeatedly shifting to new ground, Netscapesougbt to avoid direct confrontations. Andy Grove,tbe chairman of Intel, likens Netscape to a guerrillaforce fighting an occupying army: "Their advantagecomes from their ability to live in tbe forest, live offtbe land, be very mobile, and do things tbat tbe pro-fessional army would never dream of doing. In tbisregard, Netscape bas mounted a very substantialchallenge to Microsoft....The problem is, they'rerunning out of space, munitions, and food." As

HARVARD BUSINESS REVIEW [anuary-Febmary 1999

Moving touncontested

marketsallowedNetscapeto define

the terms ofcompetition.

Grove points out, rapid movement can take a start-up only so far. Eventually, most armies - and compa-nies-are forced to stop and take a stand. However,for almost tbree years, moving to new, uncontestedmarkets allowed Netscape to define the terms ofcompetition.

Principle #2Be flexible and give way when attacked directly bysuperior force. A judo combatant must be preparedto respond to surprise moves. However, that's onlyone aspect of flexibility. The real challenge is learn-ing bow to give way to an attack before fatal in-juries occur. Judo players should never escalate

unwirmable wars, and tbey mustunderstand wben to carry out atactical retreat. By yielding to su-perior force ratber than resistingit, a company in a relatively weakposition can enbance its cbancesfor survival.

Netscape managers becameskilled at making small, tacticaladjustments in response to mar-ket changes and competitors'moves. As an example Netscapeexecutives like to cite their re-sponse to Microsoft's announce-ment tbat Internet content pro-viders, such as the Wall StreetJournal, would offer special accessto users of IE 3.0. Within a weekof the announcement, Netscape'smarketing chief bad signed updozens of content providers for a

new Navigator service called Inbox Direct. InboxDirect delivered interactive Web pages directly tousers' e-mail addresses by leveraging a feature inNavigator tbat Microsoft bad yet to matcb. Thismove allowed Netscape to compete in the contentarena and deflect Microsoft's attack.

Netscape didn't measure up quite so well wben itcame to larger adjustments and strategic flexi-bility - tbe capacity to bend rather tban break in theface of superior force. Netscape suffered a body blowin December 1995 wben Bill Gates announced tbatMicrosoft would "embrace and extend" compet-itors' Internet successes. The smaller company,however, was remarkably slow to recognize tbeseriousness of the blow. Initially, Netscape reactednot by retreating but by countering eacb Microsoftattack. Ratber tban look for creative opportunitiesto exploit Microsoft's weaknesses, Netscape execu-tives tbrew tbeir resources into going bead-to-head

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with Microsoft. (One senior executive at Netscapeeven admitted later to "an obsession with beatingMicrosoft.") As the two companies went after com-mon distribution channels such as Internet serviceproviders and on-line services, Netscape lost dealafter deal. Netscape had numerous opportunities tocraft deep partnerships that Mierosoft would avoid.For example, America Online (AOL) offered to takeNetscape's "spaghetti code" and build a custom-ized version of Navigator for AOL's millions of sub-scribers-a proposal Netscape rebuffed. If Netscapehad been more flexible in dealing with potentialallies, it eould have built a much stronger defenseagainst Microsoft's assault. Instead, Netscape gotinto contests where it had no le-verage and where Microsoft sim-ply outbid Netscape with moremoney, more support, and morepromises.

Netscape executives were alsoslow to concede that Microsoft'smarket dominance meant thatthey could not ignore its stan-dards. Netscape could have dem-onstrated flexibility by taking apage from Microsoft's hook and"embracing and extending" Mi-crosoft's Internet technologiesand tools. Instead, it initially pro-moted a development platformthat was the antithesis of Micro-soft's Windows-based approach;but the Microsoft juggernautwas too powerful to withstand.In October of 1996, Netscapeannounced that it would "embrace and integrate"Microsoft's technologies and products. Sixteenmonths later, the company moved to make itsservers work as efficiently with Microsoft (andIBM) client software as with its own, Flexibilityprevailed, but it was begrudging and late.

By contrast, Microsoft responded with surprisingagility to its own near-fatal error. Bill Gates hadmade a critical mistake in 1994: he failed to graspthe Internet's importance. But by May 1995, he hadseen the light. As he wrote in an internal memo,"Now I assign the Internet the highest level of im-portance. The Internet is the most important singledevelopment to come along since the IBM PC wasintroduced in i98i....TheInternetisa tidal wave. Itchanges the rules. It is an incredible opportunity, aswell as an incredible challenge."

At an earlier stage in the game, Microsoft mighthave heen able to redirect the Internet tide by ereat-ing-and controlling - the standards on which it

Nicrosoftadopted

Internettechnologies and

innovationsthat Netscape

had pioneered.

was based. However, by mid-i995, the Internet'spull had become too strong. In the new realm of theWorld Wide Web, Netscape was king. Netscapeheld at least two-thirds of the browser market, andgrowing numbers of Web sites were built aroundthe standards Netscape had helped define.

Gates realized that it was too late to replace theInternet's standards with a Microsoft-owned plat-form. Instead, he demonstrated strategic flexibilityby endorsing the Internet and the work that Net-scape had done. As he explained in the briefing onDecember 7, 1995, "Anything |all popular Internetprotocols] that a significant number of publishersare using and taking advantage of, we will support."

In addition, Microsoft would ex-tend those protocols, taking themto the next level to give their ownproducts an extra edge. Over thefollowing months, Microsoftadopted numerous Internet tech-nologies, ineluding lava, andmany of the innovations Net-scape had pioneered, even whenthey conflicted with Windows-based technologies.

Perhaps Microsoft's most star-tling demonstration of flexibilitywas its willingness to undercutMicrosoft Network (MSN) onlymonths after launehing the ser-vice. Designed as a proprietaryon-line service that would com-pete with AOL and CompuServe,MSN had one huge advantageover the competition: it was the

only on-line service that eame bundled with Win-dows 95 and as such it shipped with yo% of the newcomputers sold in the world. While AOL and Com-puServe spent $40 to $80 to acquire each new cus-tomer, MSN eould hook them virtually for free.However, in March 1996, Bill Gates decided thatpromoting IE was simply more important than pro-tecting MSN's biggest competitive advantage. Heneeded to entice Steve Case, the CEO of AOL, tomake IE the preferred browser on AOL. To do so, heoffered to put an AOL icon on the Windows 95 desk-top, perhaps the most expensive real estate in theworld. Until then, Microsoft had reserved this posi-tion exclusively for MSN. In announcing this dealon March 12, 1996, Microsoft dealt a crushing blowto Netscape-and very nearly as crushing a blow toMSN, its own product. Gates later extended his of-fer to the other on-line services and major Internetservice providers, further diluting the advantageenjoyed by MSN. Ultimately, this display of flexi-

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JUDO STRATEGY

bility was responsible for building approximately16 market share points, or more than one-third, ofIE's customer base.

Principle #3:Exploit leverage that uses the weight and strategyof opponents against them. Movement and flexibil-ity are prerequisites for judo strategy. Tbey're cru-cial to keeping tbe competition off balance, andthey prevent large competitors from dominatingsmaller, more vulnerable opponents. But speed andagility only buy you time, giving you tbe opportu-nity to create early-mover advantages before youropponent responds. If you wantto do more tban just survive aninitial confrontation, you need toimmobilize your opponent and,ultimately, knock bim down. Thisrequires leverage, or finding waysto use your opponent's weight andstrength against him.

In analyzing Microsoft's po-sition and strengths, Netscapeexecutives tried to exploit threepotential points of leverage. Thefirst was tbe installed base ofolder Microsoft products, such asWindows 3.1 and DOS, whichMicrosoft sought to upgrade toits new operating system. Thesecond was tbe persistence of bet-erogeneous computing environ-ments, which Microsoft was try-ing to eliminate. And the thirdwas Microsoft's use of proprietary technology inan ever-more-open technology world.

Essentially, Netscape sought to take Microsoft'sgreatest asset-its dominance in PC operating sys-tems-and turn it into a liability. By bundling IEwith Windows, Microsoft was offering somethingNetscape could never hope to match: a free browserdelivered on virtually every new personal computersold in the world. Microsoft's strategy was to makethe operating system, the interface, and tbe browserinseparable, turning Netscape's Navigator into asuperfluous add-on. However, this strategy bad onepotential flaw: Because operating-system upgradeswere a primary engine of growth for Microsoft, ini-tially the latest version of IE worked only withMicrosoft's most recent operating system. Tbat leftusers of older Microsoft systems-many of whomwere corporate customers-out in the cold.

Netscape was quick to recognize the scale of thisopportunity: "There are 300 million PC units out

HARVARD BUSINESS REVIEW January-February 1999

Netscapetried to takeMicrosoft's

dominance inPC operatingsystems andturn it into a

liability.

there in the world today. About a third of them arerunning Windows 95; two-thirds of them are run-ning something else. As they [Microsoft] continueto develop more...operating systems...they con-tinue to leave more and more of a trail." Microsoft'sbusiness model discouraged it from extending theuseful life of its older products. Consequently, inthe early days of the browser wars, Netscape wasable to position itself as the only company that sup-ported the entire installed base of Windows PCs.

Netscape also leveraged Microsoft's goal of con-verting the entire world to Windows or WindowsNT. Microsoft had no incentive to support existingUNIX systems, but those systems continued to

play an important role in the cor-porate world. UNIX was muchmore effective in handling high-speed, high-volume operations.High-end Web servers and e-com-merce servers tended to be UNIXmachines. Most large companies,whose networks had evolvedover time, relied on a mixture ofUNIX systems, Windows, andWindows NT. Until early r998,Netscape Navigator was the onlybrowser tbat could be deployedcompanywide. In early 1998,Microsoft released the first UNIXversion of IE. But even so, it didnot match Netscape's cross-plat-form support.

"Cross-platform" became acentral theme of Netscape's mes-sage early on. Andreessen was a

particularly vocal advocate. In 1996, he argued,"The long-term vision is, it doesn't matter what theoperating system is. The operating system shouldbe a plug-in that fits beneath Navigator." Netscapeexecutives recognized tbat, over time, WindowsNT would penetrate the market furtber. However,in the short and medium term, the fragmentationof most corporate computing environments gaveNetscape a chance to get in the door and lock incustomers. In the long term, the proliferation ofalternative computing devices would continue todrive the cross-platform message home even ifNT's penetration continued to increase. As one se-nior executive explained, "We think that the Netwill bring more diversity in devices...laptops, PCs,workstations, servers, NCs [network computers],and ultimately PalmPilots, Segas, Nintendos, andWeb TVs." Consequently, be argued, Microsoft's"field of dreams" operating-system strategy-"build it and they will come"-was bound to fail.

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JUDO STRATEGY

Netscape's third leverage point grew out of a dif-ferent aspect of Microsoft's operating-system strat-egy: its reliance on proprietary technology. ThroughWindows, Microsoft maintains a firm grip on thepressure points of the PC world. Microsoft controlsboth the device drivers (software that connectshardware and software) and application program-ming interfaces (or APIs - software that eonnectsapplications to the operating system) on which otherhardware and software companies rely. No one cancopy Windows device drivers or APIs, and Micro-soft can change them, eliminate them, or upgradethem whenever it sees fit.

The Internet, which hegan as a set of truly openindustry standards, was the first technology sincethe dawn of the PC that could threaten Microsoft'shegemony over future device drivers and APIs. Allthe Internet's relevant technologies were in thepublic domain. Anyone could copy protocols andintegrate them into their own software products.Such access was an essential part of the appeal ofintranets-and, later, extranets. Open standardsmade it easier for customers to mix and matchproducts within their companies and to switch ven-dors. Open protocols also leveled the playing fieldfor suppliers, to some degree, by reducing the cus-tomer's fear of becoming locked in to one productfor years to come.

Microsoft's proprietary history offered Netscapea powerful lever. Unlike Netscape, Microsoft couldnot afford to put its existing technology into thepuhlic domain. Opening up its device drivers andAPIs would destroy Microsoft's business model.Moreover, prior to 1996, Microsoft had little expe-rience in dealing with the open-standards commu-nity, which regarded the company with suspicionand fear. Netscape tried to harness this leveragehy becoming the guardian of greater openness. Ithoped to shift the rules of the game through twostrategies, 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 bypromoting the open standards that Netscape helpedcreate. This would make it more difficult for Mi-crosoft to return to using proprietary technology inorder to get a competitive edge. Under the banner ofopenness, Netscape made virtually all of its innova-tions available to other developers. Yet Netscapewas not always as open as it appeared. By subtly in-corporating proprietary features into its products,Netscape was able to claim the "open" label whilepreventing its software from becoming a commodity.

Despite the "not open" aspects of its approach,Netscape initially had an advantage in the stan-

dards arena because Microsoft was the companyeveryone loved to hate. As Netscape's former stan-dards strategist recalls, "I have been told on severaloccasions in standardization committees, 'We don'tlike you very much. But we hate Microsoft more'-which is not exactly what I had wanted. But at thispoint in time, it is acceptahle to work from thatpoint of view. It gives us a minor lead." Over time,however, as Netscape's own practices came undermore fire, the company's influence declined.

In early 1998, Netscape sought further leveragewith a dramatic move: On March 31, it posted thesource code of Commnnicator 5.0, its next-genera-tion flagship product, on the Weh. Source code isthe core of any software product; it is the instruc-tion set that defines how the program actuallyworks. For a software company, publishing sourcecode is the competitive equivalent of revealing therecipe for Coca-Cola. Others could now build, dis-tribute, and even sell products based on Netscape'swork. Netscape's giveaway had only one major con-dition: Anyone who modified the code was requiredto make his or her changes available to Netscapeand the world. Netscape developers could then de-cide which changes to include in the next Commu-nicator release.

Giving away the source code was classic judostrategy. Without the strength to fight Microsoft di-rectly, Netscape had to find a creative way to com-pete. Hoping to offset Microsoft's size and financialstrength, Netscape executives tried to find externalrcsourees through the Net. If their strategy worked,tens of thousands of programmers on the Internetwould form the largest virtual research and devel-opment organization in the world. Moreover, Mi-crosoft's decision to tic IE more tightly to the Win-dows operating system in 1998 would make itvirtually impossihle for Microsoft to respond. If Mi-crosoft revealed its source code for IE, it would riskundermining its proprietary Windows technology.

Netscape's strategy also had risks. By allowingdevelopers from all over the world to contribute tothe Communicator code, Netscape turned the taskof maintaining tight coordination and quality con-trol into a forbiddingly complex one. More impor-tant, the participation of outside developers made iteven more difficult for Netscape managers to con-vince corporate customers - ever wary of foreignbugs and viruses-that they had quality controlwell in hand. In addition, the giveaway created thepossibility that a competitor would use Netscape'scode to build something "insanely great" thatNetscape itself would be unable to match. On theother hand, by harnessing the spark and creativeenergy of the Internet community, Netscape had an

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Judo Strategy is especially useful for any small company competing with a large, better-established one.

opportunity to regain the initiative in the browserwars. Only time will tell bow effective this lastjudo strategy ploy will be for Netscape-altboughsome 250,000 users downloaded the Netscapebrowser code in the first month, and the companyhas already received some potentially powerfulnew technologies as well as a number of useful bugfixes and suggestions for new features.

Judo Strategy Don'tsAlthough both Netscape and Microsoft have bene-fited from thinking in judo terms, judo strategy isnot a surefire recipe for success. The performanceof both companies presents a number of judo strat-egy "don'ts."

Don't let movement and flexibility become endsin themselves. Constantly hunting for unoccupiedground and giving way in the face of attack can con-fuse customers and undermine a company's strate-gic credibility. Consumers addicted to using theInternet may thrive on a diet of constant change,making several software upgrades each year. How-ever, customers investing millions of dollars inNetscape systems were less pleased to hear a Net-scape spokesperson blithely declare, "It's the Inter-net. We have a new business plan every six months."From the perspective of Netscape's corporate cus-tomers, constant movement not only obscured thecompany's future strategic plans but also raisedquestions about Netscape's ability to focus and exe-cute in the sbort term. One former Netscape man-ager suggests tbat those fears had some basis in fact.He recalls, "Tbere was a reliance, which always

scares the hell out of me when I hear it, [on the ideathat] somehow we have to be more innovative, wehave to change the rules. I'm going to strangle thenext person who says to me, 'We have to changethe rules-that's the only way we are going to beatthese guys.' Because that is a very valuable tool, butyou cannot use it as a crutch, as a replacement, asa surrogate for execution."

Don't taunt your rival when using leverage. Whencompanies carefully design strategies based onleverage, they put opponents in a position whereit's bard to react. Yet they often pose a potentialthreat to a powerful player's core business. Howcan you reinforce your opponent's incentives notto respond with force? In the words of one formerNetscape executive, don't "moon the giant." Taunt-ing your rival or exaggerating the threat you posewill only provoke a lethal response.

This is a lesson that Netscape executives wereslow to learn. Russell Siegelman, then general man-ager of Microsoft Network (MSN), remembers shar-ing the stage with Jim Clark at an industry event inthe spring of 199 5. During their joint session, Clarktold the audience that Microsoft was the "DeathStar" and that Netscape was developing a full-fledged network operating system that would makeWindows unnecessary and outdated. Throughoutthe summer and fall of that year. Marc Andreessenwas often quoted as saying that Netscape's technol-ogy would relegate Microsoft's operating systemto nothing more than "a mundane collection of notentirely debugged device drivers." No approachcould have been better calculated to awaken BillGates's wrath.

HARVARD BUSINESS REVIEW (anuary-Ftbruary 1999 79

TUDO STRATEGY

Never forget that judo strategy can be usedagainst you. Microsoft's past suecess providedNetscape with a number of valuable points of lever-age. But as Netscape grew and thrived, it found thatleverage could cut both ways. Netscape came intothe world with very little baggage. Its history, rev-enues, and installed base were too meager to giveits competitors enough of a handhold to bringNetscape down. By the end of 1997, it had morethan $500 million in annual sales and a multi-billion-dollar market capitalization. This "weight"gave agile competitors like Microsoft an opportu-nity to turn the tables and use leverage againstNetscape.

Mierosoft focused its attack on one of Netscape'ssmartest initiatives - that of making browsers " free,but not free." In 1995, "free, butnot free" worked because Net-scape was battling against com-panies that needed revenues tosurvive. By 1997, it was Netscapethat needed every dollar in sight.Corporate browser purchases hadfueled a spectacular rise in Net-scape's share price, and senior ex-ecutives believed that any cut inrevenues would have a devastat-ing impact on the company's abil-ity to grow. Microsoft understoodthis perfectly: Netscape's ownstrategy had weighed it down. Byoffering browser and Web serversoftware that were free to all,Microsoft trapped Netscape witha classic judo attack. Netscape'sneed for revenues made it hardto match Microsoft's move. Onlyin January 1998, after losing some 30 points ofmarket share, did Netscape bow to the inevitableand make both Navigator and Communicator freeof charge.

The only way to fight such an attack successfullyis to take your losses before the outside worldforces them on you. Bill Gates seems to have under-stood this lesson in dealing with MSN. When hemade the success of IE his first priority. Gates didmore than give MSN's rivals a boost. He reducedthe value of the entire proprietary on-line serviceworld by strengthening the force of the Web. Herecognized that cannibalization was inevitable inthis case and, rather than allow someone else to dothis, he chose to cannibalize his business himself.Despite the large investments Microsoft had madein MSN, Gates had no doubt that, over the long run,the prize was worth the price.

The key tojudo strategy

is findingleverage thatwill make a

dominantcompany hesitate

to strike back.

Don't be too greedy. Judo strategy, like judo themartial art, does not advocate killing the competi-tion. Rather, judo strategy uses movement and flex-ibility to avoid a fight whenever possible and lever-age to get the upper hand. Netscape and Microsoftwere hoth guilty of being too greedy and going forthe kill. In Netscape's case, its greed for cash re-duced its flexibility. Within months of launchingNavigator, Netscape managers took every opportu-nity to raise revenues and profits. They also raisedrevenue and profit expeetations among investors.In the rush to go public and demonstrate their suc-cess, they were willing to lose market share, delayimportant decisions (such as reducing the price ofthe browser), and threaten potentially valuablelong-term relationships [with companies like AOL)

in order to satisfy Wall Street.The contrast between Net-

scape's and Microsoft's behaviorbefore 1998 is startling. Micro-soft's near-monopoly position inoperating systems gave it luxu-ries that few companies could af-ford. Microsoft was rarely greedyfor cash. In fact, Microsoft usuallytried to reduce Wall Street expec-tations and spend its eash. P&Lconsiderations never seemed todominate Microsoft's decisionmaking. But Gates and companywere too greedy when it came towinning market share in thebrowser wars.

It is perfectly legal to win anear-monopoly through goodbusiness practices. But, once youhave a dominant position, special

rules apply. You can be a tough competitor, but youcannot use your monopoly power to hurt a com-petitor in another market. Exclusive bundlingdeals, leveraging your monopoly into related prod-ucts, or threatening to cut off your largest customerfrom Windows if it uses a competitor's product goesover the line. Bill Gates's take-no-prisoners strategymight have been fine if it had been any companybut Microsoft.

Competing on Internet TimeThe conventional wisdom about competition inthe age of the Internet is that the business worldhas become incredibly fast and unpredictable, andwe need to throw out the old rules of the game. Ourresearch on Netscape and Microsoft found thatsome things really have changed because of the

80 HARVARD BUSINESS REVIEW January-February 1999

JUDO STRATEGY

Internet, and some traditional forms of businesspractice have become much less useful.

For companies competing in the new informa-tion economy, the Internet forces managers andemployees to change their ideas, experiment, in-

EPILOGUE: AOL BUYS NETSCAPE

On November 24, 1998, America Online an-nounced that it would acquire Netscape for $4.2biUion and that Sun Microsystems would be apartner in the deal as a reseller of Netscape's soft-ware. This acquisition marked a significant mile-stone for the Internet. Judo strategy helped Net-scape popularize the World Wide Web and provideBill Gates with the most serious challenge inMicrosoft's history. But Netscape violated the coreprinciples of judo strategy and, in doing so, con-tributed to its demise as an independent company.

The first principle of judo strategy is to moverapidly to uncontested markets. While Netscapewas indeed an early mover in building an all-pur-pose Web site, it failed to recognize and exploit thesite's value for three years. As Marc Andreessentold us, he thought the Web site was "a distrac-tion." By the time Netscape managers realizedwhat they had, Netscape had dropped from first tothird in Web traffic and continued to lose share.

The second principle of judo strategy is flexi-bility. One of the ironies of this merger is thatAOL had twice sought to partner with Netscapeand Netscape spurned AOL's offers both times, Inthe end, Microsoft won the AOL account, cuttingdeeply into Netscape's market share for browsers.During the early discussion of a possible partner-ship, Netscape was worth ten times as much asAOL. At the time of the purchase, AOL was worthten times as much as Netscape.

The third principle of judo strategy is leverage.Netscape's greatest leverage in late 1998 was itscross-platform promise and its potential powerfrom making its source code free. But time was noton Netscape's side. The earlier tactical errors, plusMicrosoft's use of sumo tactics, left Netscape witha viable but barely profitable business. Netscape'schoice was to face several years with an anemicstock price while trying to build scale, or to sell toAOL, ensure the survival of Netscape's brand, andtry to return to a leading position on the Internet.

The anticipated benefits of the merger withAOL may never materialize. More than half of allmergers fail for a variety of reasons - including cul-tural and strategic clashes - which certainly existbetween Netscape, AOL, and Sun Microsystems.

vent, and plan constantly, while they try to buildcomplex new products and technologies. The Inter-net also requires companies to faee the reality thatcompetitive advantage can appear and disappearovernight. This is true because the Internet makesit possible to organize your business in new ways,to offer new products and services, and to distributethose products and services to tens of millions ofpeople almost instantaneously. It was the electronicdistribution capability of the Internet that allowedNetscape to burst onto the scene in 1994 and, inonly a few months, turned the company into one ofthe most serious threats Microsoft has ever faced.This sudden rise to prominence of new companiescan and will happen again.

We also found, however, that some of the strate-gic precepts of the pre-Internet world continue toring true. Several core elements of competitiveadvantage-vision, leadership, innovation, quality,barriers to entry, customer lock-in, switching costs,and partner relationships-remain critical to theoverall equation for creating a successful company,even in the most turbulent of environments. Thebewildering pace of the Internet may even put apremium on these old-fashioned virtues. In addi-tion, the Internet compels managers to speed upsome activities, such as product development andlaunches; others, like strategic planning processes,can operate on more normal timescales. Microsoft,for example, found that its customary three-yearplanning 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 strategistwill move quickly to exploit new markets and beprepared for the inevitable retaliation by more-established companies. Without speed and flexibil-ity, very few companies can compete successfullyon Internet time. The key to great judo strategy,though, is finding sources of leverage that willmake a dominant company hesitate to strike back.With leverage, even the smallest company can top-ple giants.

1. In the early 1980s, two economists, |udith Celman and Steven Salop,coined the term judo economics to describe a strategy that would inducea targe incumbent to accommodate the entry of a new player. They arguedthat by making a credible commitment to remain small, a new entrantcould persuade the incumbent that retaliation was not worthwhile, (udostrategy goes a step further: the judo strategist clearly threatens theincumbent but also offers incentives for the incumbent not to respond.See J.R. Gelman and S.C. Salop, "]\ido Economics: Capacity Limitationand Coupon Competition," Rand fouinal of Economics (Autumn 1983),pp.JIS-31S-

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