Competitive Strategy II

BMGT30300
Business Strategy
Dr Ciaran Heavey
ciaran.heavey@ucd.ie
WWW.SMURFITSCHOOL.IE/EXECUTIVEDEVELOPMENT
A Reminder…Strategic Positioning

Broad
Broad Broad
(i.e., market
low-cost differentiation
wide)
leadership
Scope
(Arenas)

Narrow
Focused cost Focused
(i.e., particular
leadership differentiation
segment only)

Low-cost Differentiation
Strategic Positioning
2
Strategic Positioning:
Differentiation
BMGT30300
Business Strategy
Dr Ciaran Heavey
ciaran.heavey@ucd.ie
WWW.SMURFITSCHOOL.IE/EXECUTIVEDEVELOPMENT
Competitive Positioning: Differentiation

• A firm seeks to be unique in its industry on

some dimension(s) that are widely valued
by buyers, and is rewarded for that
uniqueness with a premium price;
• A firm that differentiates will be an above
average performer if its price premium
exceeds the cost of being unique;
– Thus, it must aim at cost parity or proximity,
relative to its competitors by reducing cost in all
areas that do not affect differentiation.

4
Elements of Value (Almquist, Senior & Bloch, 2016)

• Almquist and colleagues (2016), partners at

Bain & Company, identified 30 ”elements of
value” representing fundamental attributes of
value in their most essential and discrete forms
– These values address four types of needs –
functional, emotional, life changing, and social impact
• When somebody says their bank is “convenient”
value is likely created from a combination of
functional elements – saves time, avoids hassle,
simplifies, and reduces effort.

5
Elements of Value (Almquist, Senior & Bloch, 2016)

6
Elements of Value (Almquist, Senior & Bloch, 2016)

• Study of 10,000+ US consumers and their

perceptions of 50 US-based companies finds:
– Companies that performed well on multiple elements
of value have more loyal customers than the rest.
• Companies scoring highly on 4+ elements have 3x the
NPS of companies scoring well on one elements.
– Companies doing well on multiple elements grow
revenue at a faster rate than others
– Perceived quality affects customers advocacy more
than other element
• Products and services must attain a minimum threshold
on quality, otherwise the other elements are irrelevant.

7
Source: Almquist, Senior & Bloch (2016)
Measurement– Net Promoter Score (Bain)

8
Measurement– Net Promoter Score (Bain)

9
Measurement– Net Promoter Score (Bain)

10
B2B Elements of Value (Almquist, Cleghorn, & Sherer 2018)

11
Source: Bain
 B2B Elements of Value (Almquist, Cleghorn, & Sherer 2018)

• Study of 2,300 corporate

decision-makers in two
industries finds:
– Firms excelling on six or
more elements enjoyed
higher NPS scores (approx
60%) compared to
companies excelling on
one to five elements.
– Product quality, vendor
expertise, and
responsiveness drove
customer loyalty far more
than table stakes attributes
such as cost reduction.

12
Dual Positioning

BMGT30300
Business Strategy
Dr Ciaran Heavey
ciaran.heavey@ucd.ie
WWW.SMURFITSCHOOL.IE/EXECUTIVEDEVELOPMENT
Pursuing Dual Strategies
• “The firm stuck in the middle is
almost guaranteed low profitability. It
either loses the high-volume
customers who demand low prices or
must bid away its profits to get this
business away from low-cost firms.
Yet it also loses high-margin
businesses — the cream — to the
firms who are focused on high-
margin targets or have achieved
differentiation overall. The firm stuck
in the middle also probably suffers
from a blurred corporate culture and
a conflicting set of organizational
arrangements and motivation
system.” (Michael Porter,
Competitive Strategy, p. 41-42) 14
Pursuing Dual Strategies

Product
Return on Investment

differentiators

Low cost
firms

Stuck in the middle

Low share of Large share of

market/high price market/low price

15
Pursuing Dual Strategies
Cost Leadership
Key Strategy • Scale-efficient plants
Elements • Design for manufacture
• Control of overheads and
R&D
• Outsourcing
Resources and • Access to capital
Capabilities • Process engineering skills
• Efficient process technologies • R&D capabilities
Organizational • Flat structure with simple
Arrangements reporting relationships
• Tight cost control
• Close supervision
• Incentives linked with
productivity
Differentiation
• Emphasis on branding,
advertising, design,
service, quality, and new
product development
• Marketing abilities
• Product engineering skills
• Cross-divisional/cross-
functional development
teams
• Employee autonomy and
policy of experimentation
• Rewards for risk-taking
and creative flair.
16
Pursuing Dual Strategies

17
Pursuing Dual Strategies (Wirtz, 2010)

Providing service
excellence cost
effectively

Innovating in a
centralised and
decentralised manner

Technological leader
and follower

Achieving
standardisation and
personalisation
18
Providing Service Excellence Cost Effectively
Planes
• Young fleet – 74 months
versus 160 months
– Fewer cancellations and
delays due to m-failures
– Greater fuel efficiency
– Lower maintenance costs –
repairs < 4% of total costs
– Less time in hangar à
greater utilisation
– Customers prefer newer
planes à WTP
People
• Heavy investment in training to
promote service
– Training focuses on
differentiation (service)
AND cost (efficiency).
– No cost is too small to
reduce (champagne,
overnight meals, jam).
• Anything that touches the
customer must reinforce
premium positioning, whereas
everything behind the scenes
is subject to cost control (HQ)
Centralised and Decentralised Innovation

• 4-3-3 rule on spending: training, processes, and

innovation
• Sustains innovation by having a structured, rigorous, and
centralised process along with an emergent, distributed,
and local process.
– Product Innovation Department (PID) – major innovations
– Distributed innovation approach for efficiency
• Every function is responsible for improving its services
• Cabin crew serves as key feedback channel
• Incremental innovation – focused on customer
experience
Technological Leader and Follower

• SIA is the first to innovation to improve the customer

experience:
– Introducing the A380
– Telephones and fax machines
– Customer website for online booking
• SIA is happy to be a back-office laggard
– Use of off-the-shelf revenue management systems
– Outsourcing IT systems to focus on core business
• Constant innovation on multiple fronts is risky.
Achieving Standardisation and Personalisation

• SIA services processes are highly standardised

– Leads to predictability, safety, and lower costs
• Institutionalises personalisation through a service culture
sustained by recruitment, training, and rewards.
• SIA creates personalisation by stressing the “small stuff”
• By simplifying processes, crew members have the
mental space to pay closer attention to customers’
needs.
New Market Creation

BMGT30300
Business Strategy
Dr Ciaran Heavey
ciaran.heavey@ucd.ie
WWW.SMURFITSCHOOL.IE/EXECUTIVEDEVELOPMENT
The Nature of Competition

• Most competition focuses on:

– Providing the same features at lower price, or…
– Providing an additional set of features at higher price
– …Targeting the same set of jaded consumers
• Most firms get stuck in this cost-value trade-off
– Improving value means increasing costs and prices
– Lowering costs means removing features and cutting
price.
• What if there was another way?
The Nature of Competition

25
A Classic Example…the US Wine Industry

• 3rd largest in world: worth $20 billion

• Californian makes 66% - the rest is from Italy,

France, Spain, Chile, Argentina, Australia

• Exploding number of new wines – new vineyards

in Oregon, Washington, New York

• Customer base stagnant

• 31st in the world in per capita consumption!

Source: Kim & Mauborgne (2004)

 Segmentation in the Wine Industry

Premium Wines Budget Wines

Two Polarized
Segments

Massive Choice

Source: Kim & Mauborgne (2004)

 Level of Each Dimension
Us
ter e of

Low
Normal
dis mino spec

Very high

Very low

existent
High

Non-
co tinct logy ialize
mm io a d
un ns in nd
ica
tio wine
n
Ab
ma ove-
rke the
tin -lin
g e

Ag
ing
qu
Vin ali
an eya ty
d l rd
eg pr
acy est
ige
Wi
ne
co
mp
lex
i ty
Wi
ne
ran
ge

Pri
Source: Kim & Mauborgne (2004)

ce
Value Proposition (Curve): Premium Wines
 Level of Each Dimension
Us
ter e of e

Low
Normal
dis mino nolo

Very high

Very low

existent
High

Non-
co tinct logy gica
mm io a l
un ns in nd
ica
tio wine
n
Ab
ma ove-
rke the
tin -lin
g e-

Ag
ing
qu
Vin ali
an eya ty
d l rd
eg pr
acy est
ige
Wi
ne
co
mp
lex
i ty

Wi
ne
ran
ge

Pri
Source: Kim & Mauborgne (2004)
Value Proposition (Curve): Budget Wines

ce
…Some Value Engineering Choices
Raise
What factors
should be raised
well beyond the
industry
standard?

Eliminate Create
A new
What factors What factors
should be value should be
eliminated that proposition created that the
the industry has industry has
taken for never offered?
granted?

Reduce
What factors
should be
reduced well
below the 30
industry
standard? Source: Kim & Mauborgne (2004)
Yellow Tail Creates a “Blue Ocean”

ELIMINATE RAISE
• Specialized wine • Price versus budget wines
terminology and • Retail store environment
distinctions
• Aging quality
• Above-the-line marketing

REDUCE CREATE
• Wine complexity • Easy drinking
• Wine range • Ease of selection
• Vineyard prestige • Fun and adventure

Source: Kim & Mauborgne (2004)

 Us
ter e of e

Low
Normal
dis mino nolo

Very high

Very low

existent
High

Non-
co tinct logy gica
mm io a l
un ns in nd
ica
tio wine
n
Ab
ma ove-
rke the
tin -lin
g e-

Ag
ing
qu
Vin ali
an eya ty
d l rd
eg pr
acy est
ige
Wi
ne
co
mp
lex
i ty

Wi
ne
ran
ge
Ea
sy
dri
nk
ing
Ea
se
of
sel
ect
ion
Fu
ad n an
ve d
Value Proposition (Curve): Yellow-Tail

ntu
rou
s
Source: Kim & Mauborgne (2004)

Pri
ce
Most Firms Compete in “Red Oceans”

Red Oceans Blue Oceans

• Compete in existing market • Create uncontested market

space space

• Beat the competition • Make the competition irrelevant

• Exploit existing demand • Create and capture new demand

• Optimise the value/cost trade-off • Break the cost/value trade-off

33
Blue Ocean Strategy – Core Principles

Principle 1: Blue ocean strategy converts non-

consumers into consumers (and less engaged
consumers into much more engaged consumers).

Principle 2: Blue ocean strategy breaks the cost-

value trade-off.

34
Converting Non-Consumers to Consumers

35
Converting Non-Consumers to Consumers

Current TIER 1 TIER 2 TIER 3

Market “Soon-to-be” “Refusing” “Unexplored”

36
Source: Kim and Mauborgne (2017)
 M

0
1
2
3
4
5
6
7
8
9
an
ne
ris
m Pr
& ice
co
de
of
co
nd
uc
St t
ar
co
nd
uc
to
Su rs
Le pe
ng rs
ELIMINATE

th ta
an rs
d ol
oi
co st
m s
pl
ex
ity
of
m
us
Siz ic
e
of
or
REDUCE

ch
Us es
e tra

Traditional Orchestras
of
fa
m
ilia
rm
us
ic
Ve
nu
e
ca
RAISE

Andre Rieu
pa
cit
Fu y
n
an
d
Au hu
di m
en ou
ce r
pa
Vi rti
su cip
al at
an io
d n
fe
st
ive
CREATE
How Andre Rieu Created a Blue Ocean

gr
an
de
ur
37
 Three Tiers of Non-Consumers
First Tier of Non- Second Tier of Third Tier of Non-
Customers Non-Customers Customers
The Credit Small and midsize New business, Individuals needing
Card/Debit Card merchants that microbusiness and to make payments
Industry reluctantly accept self-employed to other individuals
credit and debit individuals who do
cards for payment not accept credit or
debit cards
The UK Charity Older wealthy Young professionals Children and low-
Fund-Raising individuals who feel who choose not to income individuals
Industry frustrated with year- donate, due to the who never thought
round solicitations lack of transparency of donating
for funds in percentage of
funds that go to the
cause
The Orchestra Individuals who Individuals who can Individuals who
Industry attend concerts afford to attend but never considered
once a season or choose not to, as going to the
every few years as they find the orchestra as they
it’s seen more as experience boring, have no real
something they outdated or too knowledge of
should do rather pretentious classical music
than something they
want to do 38
… and Breaks the Cost-Value Trade-Off…

High i ft
S h
1
e an
c
Consumer

O
l ue
Value

Low
High Low
Relative Cost

39
… and Breaks the Cost-Value Trade-Off…

40
Nintendo Shift

BMGT30300
Business Strategy
Dr Ciaran Heavey
ciaran.heavey@ucd.ie
WWW.SMURFITSCHOOL.IE/EXECUTIVEDEVELOPMENT
Nintendo Shift

• Okay, let’s shift our focus to the case study

• Quick reflections
– What did you see as the key pattern emerging across
Nintendo’s 132 year-long history?
– What were your main conclusions?
• Discuss this question in dyads.
• I will be warm-calling some participants to share
their reflections with the class.

42
Explaining Nintendo’s Strategic History
“If you do the same thing as others,
it will wear you out. Nintendo is not
good at competing, so we always
have to challenge the status quo by
making something new, rather than
competing in an existing market.”

“It’s often called the ‘Blue Ocean

Strategy’ looking for something that
nobody else is working on…When
we created the DS, people said it
was strange to have a dual display,
and people said elderly people don’t
play games. But they did.”
- Saturo Iwata

43
Explaining Nintendo’s Strategic History
Focus on Competing & Focus on Creating &
Technology Innovation Value Innovation

44
Explaining Nintendo’s Strategic History
The N26 touted a 64-but microprocessor
but did not relay the value the technology
offered to gamers.

Few gamers saw the value of the 3D

screen in the 3Ds, which only added
manufacturing cost and complexity.

The Wii U featured a me-too iPad knock-off

but with low quality touchscreen, sub-par
display, and a requirement that tablet was
within 5m of console to function.

45
Explaining Nintendo’s Strategic History

Wii and Switch didn’t copy existing

consoles and instead were marketed
on the value they offered, not
technology.

Nintendo performed well when it

understood that customers focus on the
value technology delivers – a superior
gaming experience – not the technology
which enables the experience.

46
Value not Technology Innovation

• Value innovation places equal emphasis on value and

innovation
– Value without innovation leads to a focus on value
creation on an incremental scale.
– Innovation without value tends to be technology-
driven, market pioneering, or futuristic, often shooting
beyond what buyers are ready to accept and pay for.
• Nota bene. Value innovation occurs only when
companies align innovation with utility, price, and cost
positions. Otherwise, innovators lay the eggs that fast
followers will hatch!!!

47
Value Innovation is at the Kernel of BOS

COSTS

VALUE
INNOVATION

BUYER VALUE

Source: Kim & Mauborgne (2007)

Let’s Go Back to 2006.

• Working in dyads, answer the following questions:

– In 2006, what were the key factors the video gaming

industry competed on?

– How did the Nintendo Wii seek to create a blue ocean?

– Draw a value curve comparing i) traditional video game

consoles and ii) the Nintendo Wii?

– What conclusions do you reach?

49
More buttons, futuristic console

50
High resolution graphics, processing etc,

51
Action-Oriented Game Titles

52
What are the Pain Points for Non-Consumers

• Most games designed for teenagers – very

unappealing to (most) adults.
• Controllers are very complex and difficult to use.
• Games take a long time to understand and
advance levels.
• Expensive.
• The console is not stylish and doesn’t look good
in a family living room.

53
Who are the Non-Consumers?

Current TIER 1 TIER 2 TIER 3

Market Marginal Tried but Never considered
Gamers refused

54
What did Non-Consumers do Instead?

55
Unlocking Demand from Non-Customers

56
Nintendo Wii Value Curve

57
Unlocked New Demand from Non-Customers

58
Created an Uncontested Market Space

59
…so what is the pattern over time?

Pioneers
Value Innovation

Migrators
Value Improvement

Settlers
Value Imitation

Today Tomorrow

60
Source: Kim and Mauborgne (2015)
…so what is the pattern over time?

61
 …so what is the pattern over time?

Wii Switch Pokémon

Pioneers Go
DS
Value Innovation

Nintendo
Mobile
Migrators 3DS Games
Value Improvement Wii
U Amiibo

Game
boy
Settlers Nintendo Nintendo Nintendo
Value Imitation Character Character Character
IP IP IP
Game
cube

Wii Era 3DS/Wii U Era Switch Era

62
…so what is the pattern over time?

• Nintendo tends to thrive when it value innovates, ceases

to worry about competitors or technology, and invents a
new offering.
• When competitors eventually imitate it, the firm’s first
instinct is to compete, putting Nintendo at a
disadvantage.
• After losing market share, it returns to value innovation
and thrives once again.
• One area that remains a constant is the exploitation of
Nintendo’s core asset – character-based intellectual
property.

63
 Choosing the Right Strategic Approach
Structural Conditions and
Organizational Resources and Capabilities

Red
Ocean
Structural conditions are attractive, and the
firm possess the resources necessary to Approach
carve out a distinctive & defensible position

Structural conditions are attractive, but

incumbents are well-entrenched and the Blue
firm lacks the resources to outperform them Ocean
Approach

64
 Choosing the Right Strategic Approach
Structural Conditions and
Organizational Resources and Capabilities

Red
Ocean
Structural conditions are less than
attractive, but the firm has the resources to Approach
outmaneuver competitors

Structural conditions are unattractive and

they work against the firm irrespective of its Blue
resources. Ocean
Approach

65
Applying Blue Ocean Strategy

• Draw your company’s “as-is” strategy profile

– Identify no fewer than 5 and no more than 12 key competing
factors for constructing your profile
– Using these factors, construct the profile of your organisation
and its key competitors
• Draw your company’s “to be” strategy profile
– What factors are to be eliminated, reduced, raised, and created?
• Summarize the benefits for buyers
– E.G., Citizen M Hotels: “a five-star experience for a three star
price”
• Outline the economic benefits to the organisation
– E.G., Kimberly Clarke Brazil – flattening toilet rolls reduced
transportation costs by 15% + increased gross margins by 20%

66
Applying Blue Ocean Strategy

• Key questions to ask:

– Should any factors on the strategy canvas be
modified or revised?
– Are there any missing components, which, if included,
would multiply the offering’s appeal to buyers?
– Is there a lower cost way to deliver any of the factors
proposed to be raised or created that could
strengthen the offering’s economic benefits?
– What capability gaps would need to be closed to
execute this option?

67