judo strategy: the competitive dynamics of internet time

Judo Strategy: The Competitive

Dynamics of Internet Time

by David B. Yoffie and Michael A. Cusumano

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JUDO STRATEGY: THE COMPETITIVE DYNAMICS OF INTERNET TIME

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At the heart of the Netscape-Microsoft battles are the three elements of judo– rapid movement, flexibility, and leverage.

Judo Strategy

The Competitive

Dynamics of

Internet Time by David B. Yoffie and Michael A. Cusumano

ith the rise of Internet-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-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.

David B. Yoffie is the Max and Doris Starr Professor of Interna- tional Business Administration at the Harvard Business School in Boston, Massachusetts. Michael A. Cusumano is the Sloan Distinguished Professor of Management at the MIT Sloan School of Management in Cambridge. This article is adapted from their book, Competing on Internet Time: Lessons from

Netscape and Its Battle with Microsoft (Free Press, 1998).

artwork by curtis parker Copyright © 1998 by David B. Yoffie and Michael A. Cusumano. All rights reserved.

judo strategy

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. 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 – 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 avoid-

ing head-to-head combat. The second principle de-

mands that players give way to superior force when

squarely attacked. Finally – and

most important – the third prin-

ciple calls for players to use the

weight and strength of opponents

against them.

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.

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 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.

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 and

Microsoft as an illustration.

Setting the Stage: Netscape Versus Microsoft

Netscape Communications Corporation was

formed in April 1994 by Jim Clark, the founder of

Silicon Graphics, and Marc Andreessen, then a re-

cent 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 con-

sumer medium. Following the browser‟s release in

February 1993, the Web exploded virtually over-

night. Between June 1993and June 1994, the num-

ber 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 100,000copies per month.

Clark and Andreessen founded

Netscape to capitalize on the ex-

plosive growth of the Web. Their

long-term vision was to create a

simple, universal interface that

would allow users of any commu-

nications device (including per-

sonal computers, personal digital

assistants such as the PalmPilot,

or even cellular phones with dis-

plays) 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 soft-

ware 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 $80million in

sales and launched a triumphant initial public of-

fering. By December 1995– just 20months after its

inception – the company was worth more than $7 billion.

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 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 Net-

scape to develop a broad portfolio of increasingly

sophisticated products. They also transformed

Netscape from a consumer-oriented browser com-

pany into a corporate software business.

72 harvard business review January–February 1999

What judo

strategists

try to avoid

are sumo

matches, in which

combatants go

head-to-head.

judo strategy

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 re-

mained 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 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 700employees

and $80million in sales; Microsoft had

approximately 17,000employees and

$6billion in sales.) Netscape continued

to grow in 1996and most of 1997, but

the contest with Microsoft took its toll.

As Microsoft competed aggressively in

the intranet and extranet markets, Net-

scape 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 quar-

ter of the year of more than $88million.

browsers offered a complete stack of Internet tools,

including dial-up Internet access, a browser, and

electronic mail. Developers believed that the great-

est demand would be for products that would, figu-

ratively speaking, hold consumers‟ hands as they

took their first steps onto the Internet. By contrast,

Netscape offered a simple, stand-alone browser ini-

tially available only over the Internet. This move

allowed Netscape to target early adopters – relatively

sophisticated computer users who already had ex-

Principle #1

Move rapidly to uncontested ground to

avoid head-to-head conflict. Skilled

judo players use rapid movement to

avoid head-to-head confrontations with

potentially superior opponents – mov-

ing the battle to terrain where they

have an advantage or, at least, where

their opponents do not.

A judo combatant uses the weight and strength of his opponent

to his own advantage rather than opposing blow directly to blow.

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 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.

Netscape‟s first move was to target a market that

competitors all but ignored. Most of the early

perience with the Internet. At the same time, Net-

scape neatly sidestepped its inexperience in build-

ing a full set of Internet products.

Netscape‟s second move was to create an innova-

tive 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 90days. Netscape‟s management

had no illusions about this policy: some users

harvard business review January–February 1999 73

judo strategy

The Do’ s and Don’ ts of

Judo Strategy

Principle #1

Move rapidly to uncontested ground to avoid

head-to-head conflict.

Do… ■ move to new products that redefine the competi-

tive space. ■ move to new pricing models that competitors are

unable to emulate. ■ move to new testing and distribution models

that avoid competitors‟ strengths.

Don’t… ■ suppose that constant movement is possible or

desirable. ■ allow excessive movement to destroy your focus

and weaken your credibility. ■ treat rapid movement as a substitute for long-

term vision. ■ assume that speed and time-to-market reduce

the importance of quality to enterprise customers.

Principle #2

Be flexible and give way when attacked directly by

superior force.

Do… ■ avoid sumo matches unless you‟re bigger and

stronger than your opponent. ■ embrace and extend rivals‟ smart moves. ■ mesh flexibility and tactical adjustments with

long-term strategic plans.

Don’t… ■ escalate unwinnable wars. ■ be afraid to cannibalize your own products.

Principle #3

Exploit leverage that uses the weight and strength

of opponents against them.

Do… ■ turn your opponent‟s strategic commitments and

investments to your advantage. ■ cooperate with others who are threatened by

your opponent‟s success.

Don’t… ■ forget that the greater your success, the more

likely it is that leverage can be used against you.

would pay after the trial period, but most would

not. However, “free, but not free” would allow Net-

scape 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 soft-

ware once they saw how well it worked. And in

the meantime, Netscape‟s Web servers, priced at

$1,500and $5,000, would pay the bills.

Netscape‟s third judo ploy was to find new ap-

proaches to product testing and distribution. As a

start-up, Netscape lacked the resources to hire bat-

talions 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 chan-

nels. Consequently, Netscape sought out new ter-

rain 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, cus-

tomers served – sometimes unwittingly – as Net-

scape‟s virtual quality-assurance team. By the mid-

dle of November, users had downloaded 1.5million

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 94million 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 mod-

els that relied heavily on revenue from browsers.

These businesses believed that they could only jus-

tify 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 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 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 ef-

forts were halfhearted at best. By the time most

competitors recognized the power of Netscape‟s ap-

proach, 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


judo strategy

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 my-

self for not having the vision to say, „We really have

to break the model here.‟”

Netscape‟s judo approach successfully immobi-

lized 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. Inter-

net 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 Net-

scape‟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 Net-

scape could expect little revenue

on the consumer front. Netscape

needed to move aggressively into

the corporate market. Its ap-

proach, once again, was to move

the battle to weakly defended ter-

rain where the adversary‟s advan-

tage seemed relatively small.

Netscape believed that Micro-

soft‟s real strengths were in the

consumer and corporate desktop

markets: the corporate back of-

fice, however, was vulnerable, so

Netscape tried to build its corpo-

rate 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-aggregat-

ing sites, such as Yahoo!)

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 pro-

fessional 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 start-

up only so far. Eventually, most armies – and compa-

nies – 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.

Principle #2

Be flexible and give way when attacked directly by superior force. A judo combatant must be prepared

to respond to surprise moves. However, that‟s only

one aspect of flexibility. The real challenge is learn-

ing how to give way to an attack before fatal in-

juries occur. Judo players should never escalate

unwinnable wars, and they must

understand when to carry out a

tactical retreat. By yielding to su-

perior 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 mar-

ket changes and competitors‟

moves. As an example Netscape

executives like to cite their re-

sponse to Microsoft‟s announce-

ment that Internet content pro-

viders, 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 flexi-

bility – the capacity to bend rather than break in the

face of superior force. Netscape suffered a body blow

in December 1995when Bill Gates announced that

Microsoft would “embrace and extend” compet-

itors‟ 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 execu-

tives threw their resources into going head-to-head


Moving to

uncontested

markets

allowed

Netscape

to define

the terms of

competition.

judo strategy

with Microsoft. (One senior executive at Netscape

even admitted later to “an obsession with beating

Microsoft.”) As the two companies went after com-

mon 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 custom-

ized version of Navigator for AOL‟s millions of sub-

scribers – 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 le-

verage and where Microsoft sim-

ply outbid Netscape with more

money, more support, and more

promises.

Netscape executives were also

slow to concede that Microsoft‟s

market dominance meant that

they could not ignore its stan-

dards. Netscape could have dem-

onstrated flexibility by taking a

page from Microsoft‟s book and

“embracing and extending” Mi-

crosoft‟s Internet technologies

and tools. Instead, it initially pro-

moted a development platform

that was the antithesis of Micro-

soft‟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 im-

portance. 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 creat-

ing – 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 plat-

form. Instead, he demonstrated strategic flexibility

by endorsing the Internet and the work that Net-

scape 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 ex-

tend those protocols, taking them

to the next level to give their own

products an extra edge. Over the

following months, Microsoft

adopted numerous Internet tech-

nologies, including Java, and

many of the innovations Net-

scape had pioneered, even when

they conflicted with Windows-

based technologies.

Perhaps Microsoft‟s most star-

tling demonstration of flexibility

was its willingness to undercut

Microsoft Network (MSN) only

months after launching the ser-

vice. Designed as a proprietary

on-line service that would com-

pete with AOL and CompuServe,

MSN had one huge advantage

over the competition: it was the

only on-line service that came bundled with Win-

dows 95 and as such it shipped with 90% of the new

computers sold in the world. While AOL and Com-

puServe spent $40to $80to acquire each new cus-

tomer, MSN could hook them virtually for free.

However, in March 1996, Bill Gates decided that

promoting IE was simply more important than pro-

tecting 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 desk-

top, perhaps the most expensive real estate in the

world. Until then, Microsoft had reserved this posi-

tion 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 of-

fer to the other on-line services and major Internet

service providers, further diluting the advantage

enjoyed by MSN. Ultimately, this display of flexi-


Microsoft

adopted

numerous

Internet

technologies and

innovations that Netscape

had pioneered.

judo strategy

bility was responsible for building approximately

16market share points, or more than one-third, of

IE‟s customer base.

Principle #3:

Exploit leverage that uses the weight and strategy

of opponents against them. Movement and flexibil-

ity are prerequisites for judo strategy. They‟re cru-

cial 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 opportu-

nity 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 po-

sition 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 het-

erogeneous computing environ-

ments, which Microsoft was try-

ing 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 sys-

tems – 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, ini-

tially 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 was quick to recognize the scale of this

opportunity: “There are 300million PC units out

there in the world today. About a third of them are

running Windows 95; two-thirds of them are run-

ning something else. As they [Microsoft] continue

to develop more…operating systems…they con-

tinue 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 sup-

ported the entire installed base of Windows PCs.

Netscape also leveraged Microsoft‟s goal of con-

verting 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 cor-

porate world. UNIX was much

more effective in handling high-

speed, high-volume operations.

High-end Web servers and e-com-

merce 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-plat-

form support.

“Cross-platform” became a

central 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 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 se-

nior 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

tried to take

Microsoft’s

dominance in

PC operating

systems and

turn it into a

liability.

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. 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 program-

ming 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 Micro-

soft 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 ven-

dors. Open protocols also leveled the playing field

for suppliers, to some degree, by reducing the cus-

tomer‟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 expe-

rience in dealing with the open-standards commu-

nity, 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 Mi-

crosoft to return to using proprietary technology in

order to get a competitive edge. Under the banner of

openness, Netscape made virtually all of its innova-

tions available to other developers. Yet Netscape

was not always as open as it appeared. By subtly in-

corporating 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 stan-

dards arena because Microsoft was the company

everyone loved to hate. As Netscape‟s former stan-

dards 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-genera-

tion flagship product, on the Web. Source code is

the core of any software product; it is the instruc-

tion 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, dis-

tribute, and even sell products based on Netscape‟s

work. Netscape‟s giveaway had only one major con-

dition: Anyone who modified the code was required

to make his or her changes available to Netscape

and 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 judo

strategy. 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 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 devel-

opment organization in the world. Moreover, Mi-

crosoft‟s decision to tie IE more tightly to the Win-

dows operating system in 1998would make it

virtually impossible for Microsoft to respond. If Mi-

crosoft 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 con-

trol into a forbiddingly complex one. More impor-

tant, the participation of outside developers made it

even more difficult for Netscape managers to con-

vince 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


judo strategy

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

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 250,000users 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.

Judo Strategy Don’ts

Although both Netscape and Microsoft have bene-

fited from thinking in judo terms, judo strategy is

not a surefire recipe for success. The performance

of both companies presents a number of judo strat-

egy “don‟ts.”

Don’t let movement and flexibility become ends

in themselves. Constantly hunting for unoccupied

ground and giving way in the face of attack can con-

fuse customers and undermine a company‟s strate-

gic credibility. Consumers addicted to using the

Internet may thrive on a diet of constant change,

making several software upgrades each year. How-

ever, customers investing millions of dollars in

Netscape 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 the

company‟s future strategic plans but also raised

questions about Netscape‟s ability to focus and exe-

cute in the short term. One former Netscape man-

ager 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.”

Don’t taunt your rival when using leverage. 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.” Taunt-

ing 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 man-

ager of Microsoft Network (MSN), remembers shar-

ing 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 technol-

ogy 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.


judo strategy

Never forget that judo strategy can be used

against you. Microsoft‟s past success provided

Netscape with a number of valuable points of lever-

age. 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, rev-

enues, 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 $500million 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 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 Net-

scape was battling against com-

panies 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 Net-

scape‟s share price, and senior ex-

ecutives believed that any cut in

revenues would have a devastat-

ing impact on the company‟s abil-

ity 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 30points 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 under-

stood 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.

Don’t be too greedy. Judo strategy, like judo the

martial 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 Microsoft

were both guilty of being too greedy and going for

the kill. In Netscape‟s case, its greed for cash re-

duced its flexibility. Within months of launching

Navigator, Netscape managers took every opportu-

nity to raise revenues and profits. They also raised

revenue and profit expectations among investors.

In the rush to go public and demonstrate their suc-

cess, 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 Net-

scape‟s and Microsoft‟s behavior

before 1998is startling. Micro-

soft‟s near-monopoly position in

operating systems gave it luxu-

ries that few companies could af-

ford. Microsoft was rarely greedy

for cash. In fact, Microsoft usually

tried to reduce Wall Street expec-

tations 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 com-

petitor in another market. Exclusive bundling

deals, leveraging your monopoly into related prod-

ucts, 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.

Competing on Internet Time

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


The key to

judo strategy

is finding

leverage that

will make a

dominant company hesitate

to strike back.

judo strategy

Internet, and some traditional forms of business

practice have become much less useful.

For companies competing in the new informa-

tion economy, the Internet forces managers and

employees to change their ideas, experiment, in-

vent, and plan constantly, while they try to build

complex new products and technologies. The Inter-

net 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 1994and, 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 strate-

gic 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 addi-

tion, 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 flexibil-

ity, 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 top-

ple giants.

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.

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On November 24, 1998, America Online an-

nounced 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 soft-

ware. This acquisition marked a significant mile-

stone for the Internet. Judo strategy helped Net-

scape 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, con-

tributed 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-pur-

pose 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 distrac-

tion.” 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 flexi-

bility. 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 partner-

ship, 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 cul-

tural and strategic clashes – which certainly exist

between Netscape, AOL, and Sun Microsystems.

Epilogue: AOL Buys Netscape

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