The Nature of Strategic Management

The Nature of Strategic
Management
Fred R. David
Forest R. David
Prepared by: Dewan Mahboob Hossain 1

What is Strategic Management?
• The art and science of formulating, implementing and evaluating cross-functional
decisions that enable the organization to achieve its objectives.
• Integration of management, marketing, finance, accounting,
operations/production, R&D and information systems.
• Formulation, implementation and evaluation of strategies.
• A strategic plan is, in essence, a company’s game plan.
• Depends on choices among ‘alternatives’ : more desirable vs. less desirable
alternatives.
Stages of Strategic Management
• Three stages: formulation, implementation and evaluation.
Stage 1: Formulation:
1. Developing a mission and vision;
2. Identifying S-W-O-T.
3. Establishing long term objectives,
4. Generating alternative strategies (that match limited resources and the benefit sought), and
5. Choosing particular strategies to pursue.
Example: deciding on what business to enter, what business to abandon, whether to expand the
current operation or diversify etc.
Stages of Strategic Management (contd..)
Stage 2: Implementation [Action Stage]
1. Establish annual objectives;
2. Devising policies;
3. Motivate employees;
4. Allocate resources;
5. Developing strategy supportive culture;
6. Creating effective organizational structure;
7. Redirecting marketing efforts;
8. Preparing budgets;
9. Developing and using information systems;
10. Linking employee compensation to organizational performance.
Stages of Strategic Management (contd..)
Stage 3: Strategy Evaluation
1. Reviewing external and internal factors that are the bases for current
strategies.
2. Measuring performance;
3. Taking corrective actions.

Intuition and analysis
• Intuition worked for may but analysis is important.
• Although some organizations today may survive and prosper because they
have intuitive geniuses managing them, most are not so fortunate.
• Intuition and analysis should be applied together.

Adapting to change
• Organizations should continually monitor internal and external events and trends
so that timely changes can be made as needed.
• Changes are sometimes ‘dramatic’ and organizations must be ‘adept at adapting’.
• Case: Washington Post Company. Mainly newspaper publisher but now got
involved in healthcare, TV channel and education businesses.
• In many cases, political environment changes dramatically.
• Technology is also changing the environment.

Key terms in Strategic Management
• Competitive advantage:
- Strategic management is all about gaining competitive advantage.
- Anything that a firm does especially well compared to rival firms.
- Case: Apple vs. Sony [Apple having less fixed asset]
- Normally sustaining competitive advantage for longer period is not easy as
rival firms may imitate or undermine that advantage.

Key terms in Strategic Management (contd..)
• Strategists:
- The individuals most responsible for the success or failure of an organization.
- Job titles: CEO, President, Owner, Director, Chancellor, Dean, the Board.
- Strategists help an organization gather, analyze and organize information.
- Track industry and competitive trends
- Developing forecasting models and scenario analyses
- Spotting emerging market opportunities;
- Evaluation of performance;
- Develop creative action plans.
• Vision and Mission Statements
Vision statement: “What do we want to become?”

Mission Statement: “What is our business?”

• External opportunities and threats: [benefit or harm] [also called environmental scanning/industry analysis]
Economic,
Social,
Cultural,
Demographic,
Environmental,
Political,
Legal,
Governmental,
Technological,
Competitive

• Internal strengths and weaknesses:

Management
Marketing
Finance/accounting
Production/operation
R&D
MIS
• Long-term objectives/goals: for more than one year.

Should be:
Challenging
Measurable,
Consistent,
Reasonable,
Clear.
• Strategies: Means by which long-term objectives will be achieved.
Examples:
Geographic expansion
Diversification
Acquisitions
Product development
Market penetration
Retrenchment
Divestiture
Liquidation
• Annual objectives:
- Short term milestones that organizations must achieve to reach long-term
objectives.
- Like ling term objectives, these should also be measurable, quantitative,
challenging, realistic, consistent and prioritized.
- They should be established at corporate, divisional and functional levels
in a large organization.

• Policies:
 Means by which annual objectives are achieved.
 Include guidelines, rules and procedures established to support efforts to
achieve stated objectives.
 Policies are guidelines to decision making and address repetitive or
recurring situations.

Strategic Management Model

Benefits of strategic management
• Helps the organization to be more proactive than reactive.
• Formulating better strategies through more systematic, logical and rational
approach.
• Ensures understanding and commitment from all managers and
employees.
• Both financial and non-financial benefits.

Why some firms do no strategic
planning?
• No formal training in strategic management.
• No understanding of the benefits of planning.
• No monetary rewards for doing planning.
• No punishment for not planning.
• To busy ‘firefighting’
• To view planning as a waste of time.
• Laziness.
• Content with current success.
• Overconfidence.
• Prior bad experience with strategic planning.
Guidelines for effective strategic
planning
• Keep the process simple, easy and understandable.
• Eliminate vague planning jargon.
• Keep the process non-routine [include variations].
• Welcome bad news and encourage devil’s advocate thinking.
• Do not allow technicians to monopolize the planning process.
• Involve managers from all other areas of the firm.

The Business Mission
and Vision
Fred R. David
Forest R. David

Mission and Vision Statement
• In the beginning, a business is simply a collection of ideas.
• Starting a new business rests on a set of beliefs that the new organization can offer some products
or services to some customers, in some geographic area, using some type of technology, at a
profitable price.
• When the set of beliefs/philosophy about a business at its inception is put into writing, the
resulting document mirrors the same basic ideas that underlie the vision and the mission
statements.
• Helps to create a favorable public image.
• As a business grows, the owners and managers may find it necessary to revise the founding set of
beliefs.
Mission and Vision Statement
• Can be found in:
• Annual reports;
• Premises;
• Loan requests;
• Supplier agreements;
• Labor relations contracts;
• Business plans;
• Customer service agreements.
Vision Statement
• A vision statement should answer the basic question: what do we want to
become?
• It is specially important for managers and executives in any organization to
agree on the basic vision that the firm strives to achieve in the long term.
• A clear vision provides the foundation for developing a comprehensive
mission statement.
• Many organizations have both a vision and mission statement, but the
vision statement should be established first and foremost.
Vision Statement (contd..)
• Characteristics:
• Short;
• Preferably one sentence;
• As many managers as possible should have input into developing the statement.

Vision Statement (contd..).. Examples
• To be the most admired and responsible Integrated Power Company with
international footprint, delivering sustainable value to all stakeholder.
[Reliance Industries Limited].
• To help our clients met their goals through our people, services and
solutions. [Infosys International].
• To be the first choice in the printed communication business. The first
choice is the best choice, and being the best is what Atlanta Web pledges
to work hard at being – every day ! [Atlanta Web ]
Vision Statement (contd..).. Examples
• The Bellevue Hospital is the LEADER in providing resources necessary to realize the
community’s best level of HEALTH throughout life. [The Bellevue Hospital].
• A national organization which represents its members in all aspects of poultry and
eggs on both a national and an international level [US Poultry and Egg Association].
• The vision of Manley Baptist Church is to be the people of God, on mission with
God, motivated by a love for God, and a love for others. [Manley Baptist Church ]

Mission Statement
• Mission statement is also called:
• Creed statement;
• A statement of purpose;
• A statement of philosophy;
• A statement of beliefs;
• A statement of business principles;
• A statement of ‘defining our business’.

Mission Statement (contd..)
• According to Peter Drucker, asking the question “what is our business?” is
synonymous with asking the question “what is our mission?”.
• Mission statement is a declaration of organization’s ‘reason for being’.
• A steel mill makes steel, a railroad runs trains to carry freight and passengers, an
insurance company underwrites risks, and a bank lends money.
• A clear mission statement is essential for effectively establishing objectives and
formulating strategies.
• A business mission is the foundation for priorities, strategies, plans and work
assignments.
Mission Statement (contd..)
• However, even now a day, many large organizations do not prepare mission and
vision statements.
• To some of the companies, mission statement is still a fashion and not a
commitment.
• However, some firms systematically revisit their mission and vision statements,
treat them as living documents. Example: Johnson & Johnson (J&J).
• J&J managers meet regularly with employees to review, reword, and reaffirm
the firm’s vision and mission.
How to prepare mission and vision
statements?
• Both employees and managers should shape the mission and vision
statement by a joint effort.
• Thus, employees will be highly motivated.
• Involve as many managers as possible in developing the statements.

How to prepare mission and vision
statements? (contd..)
• Steps:
1. Give some reading materials/articles as background information to the managers.
2. Ask the managers to prepare a mission/vision statement for the organization by
themselves.
3. Then a facilitator/committee of top managers should merge these statements into a
single statement.
4. Facilitators should communicate this statement to the managers for comments.
5. Adjusting the reasonable comments/modifications.
Importance of mission and vision
statements
• Ensure unanimity of purpose within the organization.
• Provide a basis, or standard for allocating the resources of the
organization.
• Serve as a focal point for individuals.
• Facilitate the translation of objectives into a work structure.
• Promote a sense of shared expectation.
• A resolution of divergent views.
A resolution of divergent views
• A mission statement can solve the problem of divergent views of several
managers.
• In multi-divisional organizations, each divisional manager should prepare
a mission statement for themselves and this statement should be consistent
to the organizational mission statement.

Characteristics of a Mission Statement
• A declaration of attitude and outlook.
• A customer orientation:
• Define what the organization is and what the organization aspires to be.
• Distinguish the given organization from others.
• Serve as a framework for evaluating both current and prospective activities.

(contd..)
Customer orientation: Highlight the utility:
Do not offer me clothes. Offer me attractive looks.
Do not offer me shoes. Offer me comfort for my feet and the pleasure of
walking.
Do not offer me a house. Offer me security and comfort.
Offer the ideas, emotions, feelings and benefits.

(contd..)
• A declaration of social policy:
Highlight the responsibilities towards:
Consumers
Environment
Minorities
Communities and other groups.
Organization should conduct the business in socially responsible ways. The mission
statement is an effective tool to convey this message.
Components of a mission statement
• 9 components:
1. Customers: Who are the firm’s customers?
2. Products or services: What are the firm’s major products or services?
3. Markets: Geographically, where does the firm compete?
4. Technology: Is the firm technologically current?
5. Concern for survival, growth, and profitability: Is the form committed to growth and financial soundness?
6. Philosophy: What are the basic beliefs, values, aspirations, and ethical priorities of the firm?
7. Self-concept: What is the firm’s distinctive competence or major competitive advantage?
8. Concern for public image: Is the firm responsive to social, community and environmental concerns?
9. Concern for employees: Are employees a valuable asset of the firm?
Example of a mission statement
• Mission Statement of ABC University:
ABC University’s mission is to provide quality education to students of
Bangladesh so that they can achieve rigorous academic skills, learn necessary
analytical ability and develop virtuous characters that will assure them to have
full, rich and meaningful lives. Education will be provided through dedicated and
well-trained teachers, small class size, safe learning environment and newest
technology so that students would be stimulated with the excitement of learning,
which would satisfy their guardians. Therefore, through enhanced reputation this
university will expand, and create value to the society.
The External Assessment
Fred R David
Forest R David

The external assessment
• The purpose of external assessment is to develop a finite list of
opportunities that could benefit a firm and threats that should be
avoided.
• This assessment is not aimed at developing an exhaustive list of
every possible factor that could influence the business; rather, it
is aimed at identifying key variables that offer actionable
responses.
Key External Forces
• Events beyond the control of a single firm.
• Five broad categories:
1. Economic forces;
2. Social, cultural, demographic and environmental forces;
3. Political, governmental and legal forces;
4. Technological forces and
5. Competitive forces.

Key External Forces (contd..)
Economic forces Competitors,

Social, cultural, Suppliers, AN
Distributors,
demographic and
environmental
Creditors, Customers, ORGANIZ
Employees,
forces Community, ATION’S
Political, legal and Managers,
governmental Stakeholders, Labour OPPORTU
union, Governments,
forces
Technological
Trade Unions, Specific NITIES
interest groups,
forces Products, Services, AND
Competitive Markets, Natural
forces environment. THREATS

The process of performing an external
assessment
• Sources of information:
• Key magazines
• Trade journals
• Newspaper
• Internet
• Customers
• Distributors
• Suppliers
• Competitors
The process of performing an external
assessment (contd..)
Steps:
1. Individuals should be asked to monitor the various sources of information.
2. These persons should submit periodic scanning reports to the committee of
managers doing external assessment.
3. Gathered information should be evaluated.
4. In meetings, managers should collectively identify key opportunities and
threats;
5. Rank these factors in hierarchical order to make decisions.
Industrial Organization View
• I/O approach to competitive advantage advocates that external (industry) factors are
more important than internal factors in a firm achieving competitive advantage.
• Proponent of I/O view: Michael Porter: organizational performance will be
primarily determined by the industry forces.
• I/O highlights the followings:
• Striving to compete in attractive industries;
• Avoiding weak and faltering industries;
• Gaining full understanding of key external factor relationships within that attractive industry .

Economic Forces (Examples)
• Shift to a service economy in the USA
• Availability of credit
• Level of disposable income
• Propensity of people to spend
• Consumption pattern
• Unemployment trends
• Worker productivity level
• Export/import factors
• Price fluctuations
• Tax rates

Social, cultural, demographic and
environmental forces (examples)
• Asian Americans are now the best educated, highest earning, and fastest growing racial group in the US.
• The USA is getting older and less white.
• By 2075, the USA will not have any racial or ethnic majority.
• The population of the world recently surpassed 7 billion and the USA has slightly more than 310 million people.
That leaves billions of people outside the USA who may be interested in the products and services produced
through domestic firms.
• The trend toward an older USA is good news for restaurants, hotels, airlines, cruise lines, resorts, theme parks,
luxury products and services, recreational vehicles, home builders, travel services and pharmaceutical firms.
• Americans are becoming less interested in fitness and exercise. Fitness participants declined in the US by 3.5%
annually in the 1990s. Makers of fitness products, such as Nike, Reebok and CML group are experiencing
declining sales growth.

Social, cultural, demographic and
environmental forces (examples)
• Childbearing rates
• Number of births/deaths.
• Buying habits
• Lifestyles
• Social responsibility
• Value placed on leisure time
• Immigration rates
• Gender roles
• Average level of education
• Population changes by race, age, level of affluence.

Political, Governmental and Legal Forces
(Examples)
• Governmental regulations or deregulations
• Changes in tax laws
• Special tariffs
• Number of patents
• Environmental protection laws
• Lobbying activities
• Size of governmental budgets
• World oil, currency and labor market.
Technological Forces
• Technology management is one of the key responsibilities of the strategists.
• Technological changes represent major opportunities and threats that must be
considered in formulating strategies.
• Technological advancements can dramatically affect organization’s products,
services, markets, suppliers, distributors, competitors, customers, manufacturing
processes, marketing practices and competitive position.
• A number of organizations are establishing two new positions: Chief
Information Officer (CIO) and Chief Technology Officer (CTO).
Technological Forces (contd..)
• Technological advancements can:
• Create new markets;
• Result in a new/improved product;
• Change in relative competitive cost position in an industry;
• Create shortages in technical skills;
• Change values and expectations of employees, managers and customers.

Competitive Forces
• Collecting and evaluating information on competitors is essential for successful strategy
formulation.
• Identifying major competitors is not always easy because many firms have divisions that
compete in different industries.
• Most multidivisional firms generally do not provide sales and profit information on a
divisional basis for competitive reasons.
• Also privately held firms do not publish financial and marketing information.
• However, many businesses use the Internet to obtain most of their information on
competitors.
Prepared By: Dewan Mahboob Hossain 53
Competitive Forces (contd..)
• Competition in virtually all industries can be described as intense and sometimes as
cutthroat.
• Example: When Italian car maker Fiat Auto had financial trouble in 2003, Ford
Motor boosted advertising and marketing spending 10 to 20 percent in Italy, even
though Ford was slashing expenses everywhere. Other rivals of Fiat also boosted
consumer incentives in the Italian market.
• Fiat’s market share dropped from 40% to 27%.
• If a firm detects weakness in a competitor, no mercy at all is shown in capitalizing on
its problems.
Characteristics of the most competitive
companies in America
• Market share matters.
• Understand and remember precisely what business you are in.
• Whether it is broke or not, fix it – make it better.
• Innovate or evaporate.
• Acquisition is essential to growth.
• People make a difference.
• There is no substitute for quality and no greater threat than failing to be cost-competitive
on a global basis.
Competitive Intelligence (CI) Program
• A systematic and ethical process of gathering and analyzing information about the
competitor’s activities and general business trend for business’s own goal.
• Good CI in business is one of the keys to success.
• Case: According to Business Week, there are more than 5000 corporate spies now
actively engaged in intelligence activities, and nine out of 10 large companies have
employees dedicated solely to gathering competitive intelligence. Many large US
companies spend more than $1 million annually tracking their competitors.
• Evidences suggest that benefits of corporate spying include increased revenues,
lower costs, and better decision making.
Basic Mission of CIP
• Firms need an effective competitive intelligence program.
• Three basic missions of CI program are:
• To provide general understanding of an industry and its competitors;
• To identify areas in which competitors are vulnerable and to assess the impact
strategic actions would have on competitors;
• To identify the potential moves that a competitor might make that would endanger a
firm’s position in the market.

Misconceptions about CI Program
• Running an intelligence program requires lot of people, computers and
other resources.
• Business intelligence equals espionage and it is against law;
• Intelligence gathering is an unethical business practice.

CI Program and Ethics
• Unethical tactics such as bribery, wiretapping and computer break-ins
should never be used to obtain information.
• Case: Marriott and Motorola – two American companies that do a
particularly good job for gathering competitive intelligence – agree that all
information you could wish for can be collected without restoring to
unethical tactics. They keep their intelligence staffs small, usually under
five people, and spend less than $200,000 per year on gathering
competitive intelligence.
CI and unethical behaviour: Examples
• Case 1: Unilever sued P&G over that company’s corporate espionage
activities to obtain secrets of its Unilever hair-care business. After
spending $3 million to establish a team to find out about competitors
in the domestic hair care industry, P&G allegedly took roughly eighty
documents from garbage bins outside Unilever’s Chicago offices.
• Case 2: Oracle Corp. admitted that detectives it hired paid janitors to
go through Microsoft Corp.’s garbage, looking for evidence to use in
the court.
Cooperation among competitors
• Strategies that stress cooperation among competitors are being used more.
• Case: Lockheed teamed up with British Aerospace PLC to compete against Boeing
Company to develop to develop the next US fighter jet. Boeing and Lockheed are
working together to modernize the US overburdened air-traffic-control system.
• Cooperative agreements between competitors are even becoming popular.
• However, firms often give too much information to rival firms when operating
under cooperative agreements !! Thighter formal agreements are needed.

Competitive Analysis: Porter’s Five Forces
Model
• Widely used approach for developing strategies in many industries.
• The intensity of competition among firms varies widely across industries.
• Intensity of competition is the highest in the lower-return industries.
• For example: In the electrical and electronic industry, collective impact of
competitive forces is so brutal that the industry is clearly “unattractive” from
a profit making standpoint. Rivalry among existing firms is severe, new rivals
can enter the industry with relative ease, and both suppliers and customers
can exercise considerable bargaining leverage.
Potential entry of new competitors
• Whenever new firms can easily enter into a particular industry, the intensity of competitiveness among firms increases.
• Barriers to entry: Examples:
• The need to get economies of scale quickly
• The need to gain technology and specialized know-how;
• Strong customer loyalty
• Strong brand preferences
• Large capital requirements
• Lack of adequate distribution channels
• Government regulatory policies
• Lack of access to raw materials
• Possession of patents
• Counterattack by entrenched (protected/established) firms
• Potential saturation of the market.
Barriers to Entry

Bargaining Power of Suppliers
• The bargaining power of suppliers affect the intensity of competition in
the industry.
• When there are few suppliers
• When there are few substitute raw materials
• When the cost of switching raw materials is specially high.
It is often in the best interest of both suppliers and producers to assist each other
with reasonable prices, improved quality, development of new services, just in
time deliveries and enhancing long-term profit.

Bargaining Power of Consumers
• When consumers are concentrated or large, or buy in volume, their bargaining power represents a
major force affecting the intensity of competition in an industry.
• Rival firms may offer extended warranties or special services to gain customer loyalty whenever
the bargaining power of consumers is substantial.
• Bargaining power of the consumers is also higher when the products being purchased are standard
or undifferentiated.
• When this is the case, consumers often negotiate selling price, warranty coverage, and accessory
packages to a greater extent.
• Even for a huge company such as Wal-Mart, the drastic increase in bargaining power of consumers
caused by Internet usage is a major external threat.
Bargaining Power of Consumers (contd.)
• Consumers gain increasing bargaining power under the following
circumstances:
1. If they can inexpensively switch to competing brands or substitutes.
2. If they are particularly important to the seller.
3. If sellers are struggling in the face of falling consumer demand.
4. If they are informed about sellers’ products, prices and costs.
5. If they have discretion in whether and when they purchase the product.

Potential Development of Substitute
Product
• In many industries, firms are in close competition with producers of substitute products in other industries.
• For example:
• Plastic container producers competing with glass, paperboard and aluminium can producers.
• Producers of eyeglasses and contact lenses face increasing competitive pressure from laser eye industry.
• With the growing popularity of free and more timely news on the web, the circulation of US newspapers is decreasing.
• Newspapers and magazines face substitute product competitive pressure from the Internet and 24-hour cable
television.
• The presence of substitute products puts a ceiling on the price that can be charged before consumers will
switch to the substitute product.
• Price ceiling equates to profit ceiling and more intense competition among the rivals.
Rivalry among competing firms
• This is the most powerful among the five competitive forces.
• The strategies pursued by one firm can be successful only to the
extent that they provide competitive advantage over strategies
pursued by rival firms.

Rivalry among competing firms (contd..)
• Conditions that cause high rivalry among competing firms:
1. High number of competing firms
2. Similar size of firms competing
3. Similar capability of firms competing
4. Falling demand for the industry's product
5. Falling product or service price in the industry.
6. When consumers can switch brands easily
7. When barriers to leaving market are high
8. When barriers to entering market are low.
9. When fixed costs are high among the firms competing.
10. When rivals have excessive capacity.
Forecasting …. Difficult Issue !!!
• The following issues make the forecasting difficult:
• Technological innovation
• Cultural changes
• New products
• Improved services
• Stronger competitors
• Shifts in governmental priorities
• Changing social values
• Unstable economic conditions
• Unforeseen events

Challenges of Multinational Corporations
• Expropriation (the action by the state or an authority of taking property

from its owner for public use or benefit) of assets.
• Currency loss through exchange rate fluctuation
• Unfavorable foreign court activities
• Social and political disturbances
• Import/export restrictions
• Tariffs and trade barriers.
Industry Analysis: The External Factor
Evaluation Matrix
• Steps:
1. List key external factors (generally 10 to 20) as identified in the external audit process.
2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important).
[through group consensus] [Total Score = 1]
3. Assign a 1 to 4 rating to each key external factor to indicate how effectively the firm’s current
strategies respond to that factor. [4= superior; 3= above average; 2= average; 1= poor].
4. Multiply each factor’s weight by its rating to determine a weighted score.
5. Sum the weighted scores for each variable to determine the total weighted score for the
organization.

EFE Scores
• The highest possible total weighted score is 4.0 and the lowest is 1.0.
• Average 2.5. So, less than 2.5 is below average.

EFE: Apple

The Competitive Profile Matrix (CPM)
• CPM identifies a firm’s major competitors and its particular strengths and
weaknesses in relation to a sample firm’s strategic position.
• The weights and total scores in both a CPM and EFE have the same
meaning.
• However, CPM includes Critical Success Factors [both internal and
external].
• Ratings refer to strengths and weaknesses [4= major strength; 3= minor
strength; 2 = minor weakness; 1 = major weakness].
The Competitive Profile Matrix (CPM)

The Internal Assessment
Fred R David
Forest R David

The Internal Assessment
• All businesses have strengths and weaknesses in the functional areas of
business.
• No organization is equally strong or weak in all areas.
• For example:
• Maytag [kitchen and laundry appliances] is known for excellent production and
product design.
• P&G is known for superb marketing.

Key Internal Forces
• Marketing
• Finance
• Accounting
• Human Resource Management
• Management Information Systems
• Production/operations
Functional areas differ among different types of organizations.
Distinctive Advantage
• A firm’s strengths that cannot be easily matched or imitated by
competitors are called distinctive competence.
• For example: 3M exploits its distinctive competence in research and
development by producing a wide range of innovative products.
• Strategies are designed in part to improve a firm’s weaknesses, turning
them into strengths – and maybe into distinctive competencies.

Resource Based View (RBV)
• RBV approach to competitive advantage contends that internal resources are
important for a firm than external factors in achieving and sustaining competitive
advantage.
• Organizational performance will primarily be determined by internal resources
which can be grouped into three all encompassing categories:
1. Physical: all plant an equipment, location, technology, raw materials, machines.
2. Human: employees, training, experience, intelligence, knowledge, skills, abilities.
3. Organizational: firm structures, planning processes, information systems, patents,
trademarks, copyrights, databases and so on.
RBV (contd..)
• The basic premise of the RBV is that the mix, type, amount, and nature of a firm’s
internal resources should be considered first and foremost in devising strategies
that can lead to sustainable competitive advantage.
• In order for a resource to be valuable, it must be either:
1. Rare: Resources that other competing firms do not possess.
2. Hard to imitate: Even if a firm employs resources that are rare, a sustainable competitive
advantage may be achieved only if other firms cannot easily obtain these resources.
3. Not easily substitutable: to the degree that there are not visible substitutes, a firm will be
able to sustain its competitive advantage.
Organizational culture
• A pattern of behaviour developed by an organization as it learns to cope with its problem of
external adaptation and internal integration, that has worked well enough to be considered valid
and to be taught to new members as the correct way to perceive, think and feel.
• Organizational culture captures the subtle, elusive, and largely unconscious forces that shape a
workplace.
• It can be an underlying reason for strengths and weaknesses in any of the major business functions.
• Dimensions of organizational culture permeate all the functional areas of business.
• It is something of an art to uncover the basic values and beliefs that are deeply buried in an
organization’s rich collection of stories, language, heroes, and rituals.

Organizational culture (contd..)
• Cultural products can represent both important strengths and weaknesses.
• Strategic management process takes place largely within a particular
organization’s culture.
• Organizational culture significantly affects business decisions and thus
must be evaluated during and internal strategic management audit.

Management
• Planning  strategy formulation
• Organizing  strategy implementation
• Motivating  strategy implementation
• Staffing  strategy implementation
• Controlling  strategy evaluation

Management: Audit checklist
1. Does the firm use strategic management concepts?
2. Are company objectives and goals measurable and well communicated?
3. Do managers at all hierarchical levels plan effectively?
4. Do managers delegate authority well?
5. Is the organizational structure appropriate?
6. Is employee morale high?
7. Are employee turnover and absenteeism low?
8. Are organizational reward and control mechanisms effective?
Marketing
• Consists of seven basic functions:
1. Customer analysis: The examination and evaluation of customer needs, desires, and wants – involves
administering customer surveys, analysing consumer information, evaluating market positioning strategies,
developing customer profiles, and determining optimal market segmentation strategies.
2. Selling products/services.
3. Product and service planning: test marketing, product and brand positioning, devising warranties, determining
product options, product features, product style, packaging, deleting old products, customer service.
4. Pricing.
5. Distribution.
6. Market research.
7. Opportunity analysis: costs, benefits and risks associated with a marketing decision.
Marketing Audit Checklist
1. Are markets segmented effectively?
2. Is the organization positioned well among competitors?
3. Has the firm’s market share been increasing?
4. Are present channels of distribution reliable and cost-effective?
5. Does the firm has an effective sales organization?
6. Does the firm conduct market research?
7. Are product quality and customer service good?
8. Are firm’s products and services priced appropriately?
Finance/Accounting
• Financial condition is often considered the single best measure of a firm’s
competitive position and overall attractiveness to investors.
• Determining an organization’s financial strengths and weaknesses is
essential to formulating strategies effectively.
• Financial factors often alter existing strategies and change implementation
plans.

Finance/Accounting Audit Checklist
1. Where is the firm financially strong and weak as indicated by financial ratio
analyses?
2. Can the firm raise needed short term capital?
3. Can the firm raise needed long term capital through debt and/or equity?
4. Does the firm have sufficient working capital?
5. Are dividend payout policies reasonable?
6. Does the firm have good relations with its investors and stockholders?
7. Are the firm’s financial managers experienced and well trained?
Production/ Operations
• All those activities that transform inputs into goods and services.
• Inputs, transformation, outputs.
• Vary across industry and markets.
• Basic Functions of Production Management:
1. Process
2. Capacity
3. Inventory
4. Workforce
5. Quality
Productions/operations checklists
• Are suppliers of raw materials, parts, and subassemblies reliable and
reasonable?
• Are facilities, equipment, machinery, and offices in good condition?
• Are inventory control policies and procedures effective?
• Are quality control policies and procedures effective?
• Are facilities, resources, and markets strategically located?
• Does the firm have technological competencies?
Research and Development
• Two basic forms:
• Internal R&D: An organization operates in its own R&D department.
• Contract/external R&D: A firm hires independent researchers/agencies to develop
specific products.

R&D Audit Checklist
• Does the firm have R&D facilities? Are they adequate?
• If outside R&D firms are used, are they cost effective?
• Are the organization’s R&D personnel well qualified?
• Are R&D resources allocated effectively?
• Are management information and computer systems adequate?
• Is communication between R&D and other organizational units effective?
• Are present products technologically competitive?
Management Information Systems
1. Do all managers in the firm use the information system to make the decisions?
2. Is there a chief information officer or director of information system position in the firm?
3. Are data in the information systems updated regularly?
4. Do managers from all functional areas of the firm contribute input to the information
system?
5. Are there effective passwords for entry into the firm’s information systems?
6. Are strategists of the firm familiar with the information systems of the rival firms?
7. Is the information system user-friendly?
Value chain analysis
• Value chain analysis is a strategy tool used to analyze internal firm activities. Its
goal is to recognize, which activities are the most valuable (i.e. are the source of cost
or differentiation advantage) to the firm and which ones could be improved to
provide competitive advantage.
• Michael Porter discussed this in his influential 1985 book "Competitive Advantage,"
in which he first introduced the concept of the value chain. A value chain is a set of
activities that an organization carries out to create value for its customers.
• Value chain management (VCM) is a strategic business analysis tool used for the
seamless integration and collaboration of value chain components and resources.
Porter’s Generic Value Chain

Primary Activities
1. Inbound Logistics: Activities associated with receiving, storing, and
disseminating inputs to the product, such as material handling,
warehousing, inventory control, vehicle scheduling, and returns to
suppliers.
2. Operations: Activities associated with transforming inputs into the final
product form, such as machining, packaging, assembly, equipment
maintenance, testing and facility operations.

Primary Activities (contd..)
3. Outbound Logistics: Activities associated with collecting, storing, and physically
distributing the product to buyers, such as finished goods warehousing, material
handling, delivery vehicle operation, order processing, and scheduling.
4. Marketing and Sales: Activities associated with providing a means by which
buyers can purchase the product and inducing them to do so, such as advertising,
promotion, sales force, quoting, channel selection, channel relations, and pricing.
5. Service: Activities associated with providing service to enhance or maintain the
value of the product, such as installation, repair, training, parts supply, and
product adjustment.
Supporting Activities
1. Procurement: Procurement refers to the function of purchasing inputs
used in the firm’s value chain, not to the purchased inputs themselves.
Purchased inputs include raw materials, supplies, and other consumable
items as well as assets such as machinery, laboratory equipment, office
equipment, and buildings.
2. Technology Development: Every value activity embodies technology, be
it know-how, procedures, or technology embodied in process equipment.

Supporting Activities (contd..)
3. Human Resource Management: Human resource management consists
of activities involved in the recruiting, hiring, training, development, and
compensation of all types of personnel. Human resource management
supports both individual primary and support activities (e.g., hiring of
engineers) and the entire value chain (e.g., labor negotiations).
4. Firm Infrastructure: Firm infrastructure consists of a number of
activities including general management, planning, finance, accounting,
legal, government affairs, and quality management.
Benchmarking
• Benchmarking is comparing one's business processes and performance to industry bests and best
practices from other companies.
• It is an analytical tool to determine whether a firm’s VCA are competitive compared to rivals and thus
conducive to winning in the marketplace.
• Benchmarking entails measuring costs of value chain activities across an industry to determine “best
practices” among competing firms for the purpose of duplicating or improving on those best practices.
• Benchmarking enables a firm to take action to improve its competitiveness by identifying (and improving
on) value chain activities where rival firms have competitive advantages in cost, service, reputation, or
operation.

Internal Factor Evaluation (IFE) Matrix

Strategies in Action
Fred R David
Forest R David
Pepared By: Dewan Mahboob Hossain 106

Types of Strategies
• Integration
• Intensive
• Diversification
• Defensive

Integration
• 3 types:
1. Forward integration
2. Backward integration
3. Horizontal integration

Forward integration
• Gaining ownership or increased control over distributors and retailers
• Example: Doll maker and mail order firm, Pleasant Co., opened a retail
store in Manhattan.

When needed?
• When an organization’s present distributors are specially expensive, or unreliable, or incapable of meeting the
firm’s distribution need.
• When the availability of quality distributors is so limited as to offer a competitive advantage to those firms
that integrate forward.
• When an organization competes in an industry that is growing and is expected to continue to grow markedly.
• When an organization has both the capital and human resources needed to manage the new business of
distributing its own product.
• When advantages of stable production is particularly high; this is a consideration because an organization can
increase the predictability of the demand for its output through forward integration.
• When present distributors or retailers have high profit margin.
Backward integration
• Seeking ownership or increased control of a firm’s suppliers.
• Example: McDonald’s acquired a paper cup producer.

When needed?
• When an organization’s present suppliers are specially expensive, or unreliable, or incapable of
meeting the firm’s distribution need.
• When the number of suppliers is small and the number of competitors is large.
• When an organization competes in an industry that is growing rapidly.
• When an organization has both the capital and human resources needed to manage the new
business of supplying its own raw materials.
• When advantages of stable price is particularly important.
• When present suppliers have high profit margin.
• When the organization needs to acquire the needed resource quickly.
Horizontal integration
• Seeking ownership or increased control over competitors.
• Example: Callway Golf acquired Top Flite Golf Company.

When needed?
• When an organization wants monopolistic characteristics.
• When an organization competes in a growing industry.
• When increased economies of scale provide major competitive advantage.
• When an organization has both the capital and human resources needed to
manage an expanded organization.
• When competitors are faltering due to lack of managerial expertise or a
need for particular resources that an organization possesses.
Intensive strategies
• 3 types:
1. Market penetration
2. Market development
3. Product development

Market penetration
• Seeking increased market share for present products or services in present
markets through greater marketing efforts.
• Example: SABMiller Plc spent $500 million in 2003 on marketing its
Miller brands of beer.

When needed?
• When current markets are not saturated with a particular product or service.
• When the usage rate of present customers could be increased significantly.
• When the market shares of major competitors have been declining while
total industry sales have been increasing.
• When increased economies of scale provide major competitive advantage.
• When the correlation between dollar sales and dollar marketing
expenditures historically has been high.
Market development
• Introducing present products or services into new geographic area.
• Example: JetBlue added several new routes.

When needed?
• When new channels of distribution are available that are reliable, inexpensive and
of good quality.
• When an organization is very successful in what it does.
• When new untapped or unsaturated markets exist.
• When an organization has both the capital and human resources needed to manage
expanded operations.
• When organization has excess production capacity.
• When an organization’s basic industry is being rapidly global in scope.
Product development
• Seeking increased sales by improving present products or services or
developing new ones.
• Example: Pfizer developed a new antismoking pill. GM developing
hydrogen powered automobiles.

When needed?
• When an organization has successful products that are in the maturity
stage of the product life cycle.
• When an organization competes in an industry that is characterized by
rapid technological developments.
• When major competitors offer better quality products at comparable
prices.
• When an organization competes in high growth industry.
• When an organization has especially strong R&D capabilities.
Diversification Strategies
• 2 types:
1. Related/concentric diversification
2. Unrelated/conglomerate diversification

Related diversification
• Adding new but related products or services.
• Example: Microsoft launched personal computers.

When needed?
• When an organization competes in a no-growth or a slow growth industry.
• When adding new but related products would significantly enhance the sales of
current products.
• When new, but related products could be offered at a highly competitive prices.
• When new, but related products have seasonal sales levels that counterbalance an
organization’s existing peaks and valleys.
• When an organization’s current products are currently in a declining stage of the
product life cycle.
Unrelated Diversification
• Adding new, unrelated products or services.
• In 2003, the huge battery company Energizer Holdings, acquired the
Schick-Wilkinson Sword razor business from Pfizer fro $930 million.

When Needed?
• When an organization’s basic industry is experiencing declining annual sales
and profits.
• When organization the capital and managerial talent needed to compete
successfully in a new industry.
• When an organization has the opportunity to purchase an unrelated business
that is an attractive investment opportunity.
• When the existing markets for an organization’s present products are saturated.

Defensive Strategies
• 3 types:
1. Retrenchment;
2. Divestiture;
3. Liquidation.

Retrenchment
• Cost and asset reduction to reverse declining sales and profits.
• Example: America West Airlines laid off 390 employees.

When needed?
• When an organization has a clearly distinctive competence but has failed
to meet its objectives and goals consistently over time.
• When an organization is one of the weaker competitors in a given
industry.
• When an organization is suffering from inefficiency, low profitability,
poor employee morale, and pressure from stockholders to improve
performance.
• When an organization has grown so large so quickly that major internal
reorganization is needed.
Divestiture
• Selling a division or part of an organization.
• Example: Walt Disney Company divested its Anaheim Angel baseball
team, which ended Disney’s financially disappointing ownership of the
team.

When needed?
• When an organization has pursued a retrenchment strategy and failed to accomplish
needed improvements.
• When a division needs more resources to be competitive than the company can provide.
• When a division is responsible for an organization’s overall poor performance.
• When a division is a misfit with the rest of an organization; this can result from radically
different markets, customers, managers and employees.
• When large amount of cash is needed quickly and cannot be obtained reasonably from
other sources.

Liquidation
• Selling all of company’s assets.
• Example: National Century Financial Enterprises Inc. liquidated in 2003
after operating under bankruptcy for less than a year.

When needed?
• When an organization has pursued both a retrenchment strategy and a
divestiture strategy and neither has been successful.
• When an organization’s only alternative is bankruptcy.
• When the stockholders of a firm can minimize their losses by selling the
organizational assets.

Michael Porter’s Generic Strategies
• Most widely read books by Michael Porter:
1. Competitive Strategy (1980)
2. Competitive Advantage (1985)
3. Competitive Advantage of nations (1989)
3 bases
• Cost leadership
• Differentiation
• Focus
Cost Leadership
• Producing standardized products at a low per-unit cost for consumers who
are price sensitive.
• A low cost provider’s basis for competitive advantage is lower overall
costs than competitors.
• Successful low-cost leaders, who have the lowest industry costs, are
exceptionally good at finding ways to drive costs out of their businesses
and still provide a product or service that buyers find acceptable.
When needed?
• When price competition among rival sellers is especially vigorous.
• When the products of rival sellers are essentially identical and supplies are readily available
from any of several eager sellers.
• Where there are few ways to achieve product differentiation that have value to buyers.
• When most buyers use the products in the same ways.
• When buyers incur low costs in switching their purchases from one seller to another.
• When buyers are large and have significant power to bargain down prices.
• When industry newcomers use introductory low pieces to attract buyers and build a customer
base.
Differentiation
• Aimed at producing products and services considered unique industry-
wide and directed at consumers who are relatively price-insensitive.
• The aim of a broad differentiation strategy is to offer unique product
attributes that a wide range of buyers find appealing and worth paying for.
When followed?
• When there are many ways to differentiate the product or service and
many buyers perceive these differences as having value.
• When few rival firms are following a similar differentiation approach.
• When technological change is fast paced and competition revolves around
rapidly evolving product features.
Focus
• Producing products and services that fulfill the needs of small groups of
consumers.
• Target a small market.
• Community Coffee, the largest family-owned specialty coffee retailer in
the US, has geographic focus on the state of Louisiana and communities
across the Gulf of Mexico.
When followed?
• When the target market niche is large, profitable and growing.
• When industry leaders do not consider the niche to be crucial to their own success.
• When the industry leaders consider it too costly or difficult to meet the specialized needs
of the target market niche while taking care of their mainstream customers.
• When the industry has many different niches and segments, thereby allowing a focuser to
pick a competitively attractive niche suited to its own resources.
• When few, if any, other rivals are attempting to specialize in the same target segment.
Strategy Analysis and
Choice
Fred R David
Forest R David

The Strategy Formulation Analytical
Framework
●
EFE Matrix
Stage 1
The input stage
●
CPM Matrix
●
IFE Matrix
●
Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix
●
Strategic Position and Action Evaluation (SPACE) Matrix
Stage 2 ●
Boston Consulting Group (BCG) Matrix
The matching stage ●
Internal-External (IE) Matrix
●
Gran Strategy Matrix (GSM)
Stage 3
●
Quantitative Strategic Planning Matrix
Decision Stage
(QSPM)
The Matching Stage

SWOT Matrix: Steps
1. List the firm’s key external opportunities [O].
2. List the firm’s key external threats [T].
3. List the firm’s key internal strengths [S].
4. List the firm’s key internal weaknesses [W].
5. Match S and O and record the resultant SO strategies in the appropriate cell.
6. Match W and O and record the resultant WO strategies in the appropriate cell.
7. Match S and T and record the resultant ST strategies in the appropriate cell.
8. Match W and T and record the resultant WT strategies in the appropriate cell.

Always leave blank List Strengths List weaknesses
SO: Use strengths to take WO: Overcome weaknesses

List opportunities the advantage of the by taking advantage of
opportunities opportunities
List threats ST: Use strength to avoid WT: Minimize weaknesses

threat and avoid threats

Strengths (S) Weaknesses (W)
Business: Cinema 1. Located in large population areas. 1. Poor labor relations
2. Positive cash flow over three years running 2. Current ratio of 0.25
3. Double the industry concession sales rate 3. Flat operating costs through falling revenues.
4. Many cost cutting measures in place 4. Triple the general and administrative expenses.
5. Upgraded audio in many places 5. Significant losses in the US
6. Profitable in Canada. 6. Management concentrating on market share.
7. Restrictive covenants set by buyers.
Opportunities (O) SO strategies (market penetration) WO Strategies (Integration)

1. Approached by most major chains for potential
mergers. 1. Open theaters in Eastern Europe. 1. Pursue mergers with American cinemas.
2. Opening economies in Eastern Europe
3. Rebounding attendance up 6.4%
4. Videotape industry worth estimated $13 billion
vs. $6.4 billion for movie theatres.
5. Foreign per capital income growth outpacing the
US
Threats (T) ST strategies (diversification) WT strategies (Defensive)

1. 80% of all the households own VCRs.
2. Aging population. 1. Open 50 video rental stores in 10 markets. 1. Reduce corporate overhead.
3. Dependence on successful movies. 2. Construct 20 multidimensional entertainment 2. Divest US operation.
4. Seasonality for movie releases. places.
5. Increased competition in exhibition.

Strengths (S) Weaknesses (W)
Business: Carnival
1. Holds 34% market share
2. Largest fleet of ships
1. Major loss in affiliated operations
2. Increased debt from building new ships
Cruise Lines 3. Innovator in cruise travel industry
4. Largest variety of ships
3. Not serving Asian market
5. Building largest cruise ship
6. High brand recognition
7. Six different cruise lines
8. Headquartered in Miami
9. Internet friendly with online booking
Opportunities (O) SO strategies WO Strategies

1. Air travel has decreased (9/11)
2. Asian market not being served. 1. Increase capacity of ships to obtain travelers from air 1. Begin serving Japan and Pacific Islands [W3, O2,
3. Possible acquisition of Princess Cruise Lines. industry. [S6, O1, O3] O3, O4]
4. New weather forecasting systems available. 2. Display the weather of vacation locations on Website 2. Use weather forecasting to alert customers for
5. Rising demand for all inclusive vacation 3. Offer Trans-Atlantic cruises [S9, O4] potential storm during their vacation [W1, O4]
packages 4. Acquire P&O Princess [S1, O3
6. Families have increased disposable income
Threats (T) ST strategies WT strategies

1. Decrease in travel since 9/11
2. Terrorism 1. Advertise carnival ship’s variety, brand recognition, and 1. Lower prices of cruises during the hurricane season.
3. Competition within the industry
4. Competition among other types of vacations
safety policies. [S3, S7, T1, T2, T5] [W1, T6]
5. Economic recession 2. Advertise alternate vacations that are not affected by 2. Research viability of entering other foreign markets.
6. Chance of natural disasters hurricane seasons. [S3, T5, T7] [W2, W3, T8, S9]
7. Increasing fuel prices 3. Offer discounts on Carnival website. [S9, T6]
8. Changing government regulations

The Boston Consulting Group (BCG)
Matrix
• When a firm’s divisions compete in different industries, a separate strategy must be developed for
each business.
• BCG is designed specifically to enhance a multidivisional firm’s efforts to formulate strategies.
• The BCG matrix graphically portrays differences among divisions in terms of relative market
share position and industry growth rate.
• It allows a multidivisional organization to manage its portfolio of businesses by examining the
relative market share position and the industry growth rate of each division relative to all other
divisions in the organization.
• Relative market position is defined as the ratio of division’s own market share in a particular
industry to the market share held by the largest rival firm in that industry.

BCG Matrix
• Relative market share position is given on the x axis of the BCG matrix.
• The mid point of the x axis is set at 0.50, corresponding to a division that has half
the market share of the leading firm in the industry.
• The y axis represents the industry growth rate in sales, measured in % terms.
• The growth rate percentages on the y axis could range from -20% to +20% (with
0.0 at the mid point).
• These numerical ranges on the x and y axes are often used. But other numerical
values could be established as deemed appropriate for the particular organization.
BCG matrix
• Divisions located in quadrant I are called question marks.
• Quadrant II  stars
• Quadrant III  Cash cows
• Quadrant IV  dogs

Question marks [?]
• Divisions in quadrant I have a low relative market share position, yet they
compete in a high growth industry.
• Generally these firms’ cash needs are high and their cash generation is
low.
• These businesses are called question marks as the organization must
decide whether to strengthen them by pursuing an intensive strategy
(market penetration, market development, product development) or
to sell them.
Stars
• Quadrant II businesses, often called stars, represent the organization’s best
long run opportunities for growth and profitability.
• Divisions with a high relative market share and a high industry growth
rate should receive substantial investment to maintain or strengthen their
dominant position.
• Appropriate strategies: forward, backward, horizontal integration;
market penetration, market development, product development.

Cash cows
• Positioned in Quadrant III.
• High relative market share but competing in a low growth industry.
• Called cash cows because they generate cash in excess of their needs, they are often
milked.
• These divisions should be managed to maintain their strong position as long as possible.
• Appropriate strategies: Product Development, Related diversification.
• However, as a cash cow division becomes weak, retrenchment or divestiture can
become more appropriate.

Dogs
• Quadrant IV
• Divisions of the organization having a low relative market share position and compete
in a slow or no market growth industry.
• Because of their weak internal and external position, they are dogs in firm’s portfolio.
• Appropriate strategies: retrenchment, divestiture, liquidation.
• When a division first becomes a dog, retrenchment can be the best strategy as many
dogs have bounced back. After strenuous asset and cost reduction, become profitable
and viable divisions.

Copyright © 2011 Pearson Education, Inc. Ch 6 -
Publishing as Prentice Hall 161
Blue Ocean Strategy
How to Create Uncontested Market Space and
Make the Competition Irrelevant
W. Chan Kim
Renée Mauborgne
Case: Cirque du Soleil
• A ONE TIME ACCORDION PLAYER, stilt-walker, and fireeater, Guy
Laliberté is now CEO of Cirque du Soleil, one of Canada’s largest cultural
exports. Created in 1984 by a group of street performers, Cirque’s productions
have been seen by almost forty million people in ninety cities around the world.
• In less than twenty years Cirque du Soleil has achieved a level of revenues that
took Ringling Bros. and Barnum & Bailey—the global champion of the circus
industry—more than one hundred years to attain.

• What makes this rapid growth all the more remarkable is that it was not achieved in an
attractive industry but rather in a declining industry in which traditional strategic analysis
pointed to limited potential for growth.
• Supplier power on the part of star performers was strong. So was buyer power.
• Alternative forms of entertainment— ranging from various kinds of urban live
entertainment to sporting events to home entertainment—cast an increasingly long shadow.
• Children cried out for PlayStations rather than a visit to the traveling circus. Partially as a
result, the industry was suffering from steadily decreasing audiences and, in turn, declining
revenue and profits.

• There was also increasing sentiment against the use of animals in circuses by animal rights groups.
• From the perspective of competition-based strategy, then, the circus industry appeared unattractive.
• Another compelling aspect of Cirque du Soleil’s success is that it did not win by taking customers
from the already shrinking circus industry, which historically catered to children.
• Cirque du Soleil did not compete with Ringling Bros. and Barnum & Bailey.
• Instead it created uncontested new market space that made the competition irrelevant.
• It appealed to a whole new group of customers: adults and corporate clients prepared to pay a price
several times as great as traditional circuses for an unprecedented entertainment experience.
• Significantly, one of the first Cirque productions was titled “We Reinvent the Circus.”
New Market Space
• Cirque du Soleil succeeded because it realized that to win in the future, companies must
stop competing with each other.
• The only way to beat the competition is to stop trying to beat the competition.
• To understand what Cirque du Soleil has achieved, imagine a market universe composed
of two sorts of oceans: red oceans and blue oceans.
• Red oceans represent all the industries in existence today. This is the known market
space.
• Blue oceans denote all the industries not in existence today. This is the unknown market
space.
New Market Space (contd..)
• In the red oceans, industry boundaries are defined and accepted, and the
competitive rules of the game are known.
• Here, companies try to outperform their rivals to grab a greater share of
existing demand.
• As the market space gets crowded, prospects for profits and growth are
reduced.
• Products become commodities, and cutthroat competition turns the red ocean
bloody.
• Blue oceans, in contrast, are defined by untapped market space, demand
creation, and the opportunity for highly profitable growth.
• Although some blue oceans are created well beyond existing industry
boundaries, most are created from within red oceans by expanding
existing industry boundaries, as Cirque du Soleil did.
• In blue oceans, competition is irrelevant because the rules of the game are
waiting to be set.

• It will always be important to swim successfully in the red ocean by
outcompeting rivals.
• Red oceans will always matter and will always be a fact of business life.
But with supply exceeding demand in more industries, competing for a
share of contracting markets, while necessary, will not be sufficient to
sustain high performance.
• Companies need to go beyond competing. To seize new profit and growth
opportunities, they also need to create blue oceans.
The Impact of Creating Blue Oceans
• Although the term blue oceans is new, their existence is not. They are a feature of business life,
past and present.
• We set out to quantify the impact of creating blue oceans on a company’s growth in both revenues
and profits in a study of the business launches of 108 companies.
• We found that 86 percent of the launches were line extensions, that is, incremental improvements
within the red ocean of existing market space. Yet they accounted for only 62 percent of total
revenues and a mere 39 percent of total profits.
• The remaining 14 percent of the launches were aimed at creating blue oceans. They generated 38
percent of total revenues and 61 percent of total profits.
• The performance benefits of creating blue waters are evident.
The Impact of Creating Blue Oceans
(contd..)

The Rising Imperative of Creating Blue
Oceans
• There are several driving forces behind a rising imperative to create blue
oceans.
• Accelerated technological advances have substantially improved industrial
productivity and have allowed suppliers to produce an unprecedented
array of products and services.
• The result is that in increasing numbers of industries, supply exceeds
demand.

The Rising Imperative of Creating Blue
Oceans (contd..)
• They reveal that for major product and service categories, brands are generally
becoming more similar, and as they are becoming more similar people increasingly
select based on price. No perpetually excellent company or industry is found.
• People no longer insist, as in the past, that their laundry detergent be Tide. Nor will
they necessarily stick to Colgate when Crest is on sale, and vice versa. In
overcrowded industries, differentiating brands becomes harder in both economic
upturns and downturns.
• As red oceans become increasingly bloody, management will need to be more
concerned with blue oceans than the current cohort of managers is accustomed to.
From Company and Industry to Strategic
Move: How to Analyze?
• If there is no perpetually high-performing company and if the same company can be brilliant at
one moment and wrongheaded at another, it appears that the company is not the appropriate
unit of analysis in exploring the roots of high performance and blue oceans.
• History also shows that industries are constantly being created and expanded over time and
that industry conditions and boundaries are not given; individual actors can shape them.
Companies need not compete head-on in a given industry space; Cirque du Soleil created a
new market space in the entertainment sector, generating strong, profitable growth as a result.
• It appears, then, that neither the company nor the industry is the best unit of analysis in
studying the roots of profitable growth.

Move: How to Analyze? (contd..)
• The strategic move, and not the company or the industry, is the right unit of analysis for
explaining the creation of blue oceans and sustained high performance. A strategic move
is the set of managerial actions and decisions involved in making a major market-
creating business offering.
• Compaq, for example, was acquired by Hewlett-Packard in 2001 and ceased to be an
independent company. As a result, many people might judge the company as
unsuccessful. This does not, however, invalidate the blue ocean strategic moves that
Compaq made in creating the server industry. These strategic moves not only were a
part of the company’s powerful comeback in the mid-1990s but also unlocked a new
multibillion-dollar market space in computing.
Move: How to Analyze? (contd..)
• We studied more than one hundred fifty strategic moves made from 1880
to 2000 in more than thirty industries.
• In assessing industry, organizational, and strategic variables we found that
the creation and capturing of blue oceans were achieved by small and
large companies, by young and old managers, by companies in attractive
and unattractive industries, by new entrants and established incumbents,
by private and public companies, by companies in low- and high-tech
industries, and by companies of diverse national origins.
Value Innovation: The Cornerstone
of Blue Ocean Strategy
• The companies caught in the red ocean followed a conventional approach,
racing to beat the competition by building a defensible position within the
existing industry order.
• The creators of blue oceans, surprisingly, didn’t use the competition as
their benchmark.
• Instead, they followed a different strategic logic that we call value
innovation.

of Blue Ocean Strategy (contd..)
• Value innovation places equal emphasis on value and innovation.
• Value without innovation tends to focus on value creation on an
incremental scale, something that improves value but is not sufficient to
make you stand out in the marketplace.
• Innovation without value tends to be technology-driven, market
pioneering, or futuristic, often shooting beyond what buyers are ready to
accept and pay for.

of Blue Ocean Strategy (contd..)
• Value innovation occurs only when companies align innovation with utility, price, and
cost positions. If they fail to anchor innovation with value in this way, technology
innovators and market pioneers often lay the eggs that other companies hatch.
• Importantly, value innovation defies one of the most commonly accepted dogmas of
competition-based strategy: the value-cost trade-off.
• It is conventionally believed that companies can either create greater value to
customers at a higher cost or create reasonable value at a lower cost. Here strategy is
seen as making a choice between differentiation and low cost. In contrast, those that
seek to create blue oceans pursue differentiation and low cost simultaneously.
Revisit Cirque du Soleil
• Pursuing differentiation and low cost simultaneously lies at the heart of the entertainment
experience it created.
• At the time of its debut, other circuses focused on benchmarking one another and maximizing
their share of already shrinking demand by tweaking traditional circus acts. This included
trying to secure more famous clowns and lion tamers, a strategy that raised circuses’ cost
structure without substantially altering the circus experience. The result was rising costs
without rising revenues, and a downward spiral of overall circus demand.
• These efforts were made irrelevant when Cirque du Soleil appeared. Neither an ordinary
circus nor a classic theater production, Cirque du Soleil paid no heed to what the competition
did.
Revisit Cirque du Soleil (contd..)
• It sought to offer people the fun and thrill of the circus and the intellectual
sophistication and artistic richness of the theater at the same time; hence,
it redefined the problem itself. By breaking the market boundaries of
theater and circus, Cirque du Soleil gained a new understanding not only
of circus customers but also of circus noncustomers: adult theater
customers.

• The lasting allure of the traditional circus came down to only three key factors: the tent, the clowns, and the
classic acrobatic acts such as the wheelman and short stunts.
• So Cirque du Soleil kept the clowns but shifted their humor from slapstick to a more enchanting, sophisticated
style.
• It glamorized the tent.
• also offered new non-circus factors, such as a story line and, with it, intellectual richness, artistic music and
dance, and multiple productions. These factors, entirely new creations for the circus industry, are drawn from
the alternative live entertainment industry of theater.
• Creation has a theme and story line, somewhat resembling a theater performance.
• Moreover, by injecting the concept of multiple productions and by giving people a reason to come to the circus
more frequently, Cirque du Soleil has dramatically increased demand.
By offering unprecedented utility, Cirque du Soleil has created a blue ocean
and has invented a new form of live entertainment, one that is markedly
different from both traditional circus and theater. At the same time, by
eliminating many of the most costly elements of the circus, it has
dramatically reduced its cost structure, achieving both differentiation and
low cost.

Value Innovation
• The creation of blue oceans is about driving costs down while
simultaneously driving value up for buyers.
• This is how a leap in value for both the company and its buyers is
achieved. Because buyer value comes from the utility and price that the
company offers to buyers and because the value to the company is
generated from price and its cost structure, value innovation is achieved
only when the whole system of the company’s utility, price, and cost
activities is properly aligned.
Production Innovation Vs. Value
Innovation
• Production innovations can be achieved at the subsystem level without
impacting the company’s overall strategy.
• An innovation in the production process, for example, may lower a
company’s cost structure to reinforce its existing cost leadership strategy
without changing the utility proposition of its offering.
• Although innovations of this sort may help to secure and even lift a
company’s position in the existing market space, such a subsystem
approach will rarely create a blue ocean of new market space.
Production Innovation Vs. Value
Innovation (contd..)
• In this sense, value innovation is more than innovation.
• It is about strategy that embraces the entire system of a company’s
activities.
• Value innovation requires companies to orient the whole system toward
achieving a leap in value for both buyers and themselves.
• Absent such an integral approach, innovation will remain divided from the
core of strategy.

Red Ocean Vs. Blue Ocean

Red Ocean Vs. Blue Ocean (contd..)
• Competition-based red ocean strategy assumes that an industry’s structural conditions are given
and that firms are forced to compete within them, an assumption based on what the academics
call the structuralist view, or environmental determinism.
• In contrast, value innovation is based on the view that market boundaries and industry structure
are not given and can be reconstructed by the actions and beliefs of industry players. We call this
the reconstructionist view.
• In the red ocean, differentiation costs because firms compete with the same best-practice rule.
Here, the strategic choices for firms are to pursue either differentiation or low cost.
• In the reconstructionist world, however, the strategic aim is to create new best-practice rules by
breaking the existing value cost trade-off and thereby creating a blue ocean.
Blue Ocean Strategy:
Analytical Tools and Frameworks
W. Chan Kim
Renee Mauborgne

Case: US wine industry
• Effective blue ocean strategy should be about risk minimization and not
risk taking.
• The United States has the third largest aggregate consumption of wine
worldwide. Yet the $20 billion industry is intensely competitive.
California wines dominate the domestic market, capturing two-thirds of
all U.S. wine sales. These wines compete head-to-head with imported
wines from France, Italy, and Spain and New World wines from countries
such as Chile, Australia, and Argentina, which have increasingly targeted
the U.S. market.
US Wine Industry
• The intense competition has fueled ongoing industry consolidation. The top
eight companies produce more than 75 percent of the wine in the United States,
and the estimated one thousand six hundred other wineries produce the
remaining 25 percent.
• There is a simultaneous consolidation of retailers and distributors across the
United States, something that raises their bargaining power against the plethora
of wine makers. Titanic battles are being fought for retail and distribution space.
It is no surprise that weak, poorly run companies are increasingly being swept
aside. Downward pressure on wine prices has set in.
US Wine Industry
• In short, the U.S. wine industry faces intense competition, mounting price
pressure, increasing bargaining power on the part of retail and distribution
channels, and flat demand despite overwhelming choice. Following
conventional strategic thinking, the industry is hardly attractive.

The Strategy Canvas
• The strategy canvas is both a diagnostic and an action framework for building
a compelling blue ocean strategy.
• It captures the current state of play in the known market space. This allows
you to understand where the competition is currently investing, the factors the
industry currently competes on in products, service, and delivery, and what
customers receive from the existing competitive offerings on the market.
• The horizontal axis of the strategy canvas captures the range of factors the
industry competes on and invests in.
The Value Curves
• Now let’s turn to the vertical axis of the strategy canvas, which captures the
offering level that buyers receive across all these key competing factors.
• A high score means that a company offers buyers more, and hence invests more, in
that factor. In the case of price, a higher score indicates a higher price.
• We can now plot the current offering of wineries across all these factors to
understand wineries’ strategic profiles, or value curves.
• The value curve, the basic component of the strategy canvas, is a graphic depiction
of a company’s relative performance across its industry’s factors of competition.

The Value Curves: The US Wine Industry
• Although more than one thousand six hundred wineries participate in the U.S.
wine industry, from the buyer’s point of view there is enormous convergence in
their value curves. Despite the plethora of competitors, when premium brand
wines are plotted on the strategy canvas we discover that from the market point
of view all of them essentially have the same strategic profile. They offer a high
price and present a high level of offering across all the key competing factors.
• On the other hand, budget wines also have the same essential strategic profile.
Their price is low, as is their offering across all the key competing factors.

The Value Curves: The US Wine Industry
(contd..)
• To set a company on a strong, profitable growth trajectory in the face of
these industry conditions, it won’t work to benchmark competitors and try
to outcompete them by offering a little more for a little less. Such a
strategy may nudge sales up but will hardly drive a company to open up
uncontested market space.
• To fundamentally shift the strategy canvas of an industry, you must begin
by reorienting your strategic focus from competitors to alternatives, and
from customers to noncustomers of the industry.
Principal factors of the US wine industry
• Price per bottle of wine
• An elite, refined image in packaging, including labels announcing the wine medals won and the use of esoteric
enological terminology to stress the art and science of wine making
• Above-the-line marketing to raise consumer awareness in a crowded market and to encourage distributors and
retailers to give prominence to a particular wine house
• Aging quality of wine
• The prestige of a wine’s vineyard and its legacy (hence the appellations of estates and chateaux and references
to the historic age of the establishment)
• The complexity and sophistication of a wine’s taste, including such things as tannins and oak
•A diverse range of wines to cover all varieties of grapes and consumer preferences from Chardonnay to Merlot,
and so on

The Strategy Map (revisited) : The Value
Curve
The vertical axis:
• Captures the offering level that buyers receive across all these key competing factors.
• A high score means that a company offers buyers more, and hence invests more, in that
factor.
• In the case of price, a higher score indicates a higher price.
• We can now plot the current offering of wineries across all these factors to understand
wineries’ strategic profiles, or value curves.
• The value curve, the basic component of the strategy canvas, is a graphic depiction of a
company’s relative performance across its industry’s factors of competition.
Curve (contd..)
• Although more than one thousand six hundred wineries participate in the U.S. wine industry,
from the buyer’s point of view there is enormous convergence in their value curves.
• Despite the plethora of competitors, when premium brand wines are plotted on the strategy
canvas we discover that from the market point of view all of them essentially have the same
strategic profile.
• They offer a high price and present a high level of offering across all the key competing
factors.
• On the other hand, budget wines also have the same essential strategic profile. Their price is
low, as is their offering across all the key competing factors. These are classic low-cost
players.
Curve (contd..)
• To set a company on a strong, profitable growth trajectory in the face of
these industry conditions, it won’t work to benchmark competitors and try
to outcompete them by offering a little more for a little less.
• Such a strategy may nudge sales up but will hardly drive a company to
open up uncontested market space.

Curve (contd..)
• To fundamentally shift the strategy canvas of an industry, you must begin by reorienting your strategic
focus from competitors to alternatives, and from customers to noncustomers of the industry.
• To pursue both value and cost, you should resist the old logic of benchmarking competitors in the
existing field and choosing between differentiation and cost leadership.
• As you shift your strategic focus from current competition to alternatives and noncustomers, you gain
insight into how to redefine the problem the industry focuses on and thereby reconstruct buyer value
elements that reside across industry boundaries.
• Conventional strategic logic, by contrast, drives you to offer better solutions than your rivals to
existing problems defined by your industry.
• In the case of the U.S. wine industry, conventional wisdom caused wineries to focus on over-
delivering on prestige and the quality of wine at its price point.
Case: Casella Wines
• Casella Wines, an Australian winery, redefined the problem of the wine industry to a new one: how to make
a fun and nontraditional wine that’s easy to drink for everyone.
• Why? In looking at the demand side of the alternatives of beer, spirits, and ready-to-drink cocktails, which
captured three times as many U.S. consumer alcohol sales as wine, Casella Wines found that the mass of
American adults saw wine as a turnoff.
• It was intimidating and pretentious, and the complexity of wine’s taste created flavor challenges for the
average person even though it was the basis on which the industry fought to excel.
• With this insight, Casella Wines was ready to explore how to redraw the strategic profile of the U.S.
wine industry to create a blue ocean.
• To achieve this, it turned to the second basic analytic underlying blue oceans: the four actions
framework.
The Four Actions Framework
To reconstruct buyer value elements in crafting a new value curve, we have
developed the four actions framework:
1. Which of the factors that the industry takes for granted should be eliminated?
2. Which factors should be reduced well below the industry’s standard?
3. Which factors should be raised well above the industry’s standard?
4. Which factors should be created that the industry has never offered?

The Four Actions Framework (contd..)
Which of the factors that the industry takes for granted should be eliminated?
The first question forces you to consider eliminating factors that companies in
your industry have long competed on.
Often those factors are taken for granted even though they no longer have
value or may even detract from value.
Sometimes there is a fundamental change in what buyers value, but companies
that are focused on benchmarking one another do not act on, or even perceive,
the change.
Which factors should be reduced well below the industry’s standard?
The second question forces you to determine whether products or services
have been overdesigned in the race to match and beat the competition.
Here, companies over-serve customers, increasing their cost structure for no
gain.

Which factors should be raised well above the industry’s standard?
The third question pushes you to uncover and eliminate the compromises
your industry forces customers to make.

Which factors should be created that the industry has never offered?
The fourth question helps you to discover entirely new sources of value for
buyers and to create new demand and shift the strategic pricing of the
industry.

• It is by pursuing the first two questions (of eliminating and reducing) that you gain
insight into how to drop your cost structure vis-à-vis competitors. Our research has
found that rarely do managers systematically set out to eliminate and reduce their
investments in factors that an industry competes on. The result is mounting cost
structures and complex business models.
• The second two factors, by contrast, provide you with insight into how to lift buyer
value and create new demand. Collectively, they allow you to systematically explore
how you can reconstruct buyer value elements across alternative industries to offer
buyers an entirely new experience, while simultaneously keeping your cost structure
low.
Case: Casella Wines (revisit)
• Casella Wines created [yellow tail], a wine whose strategic profile broke from the
competition and created a blue ocean.
• Instead of offering wine as wine, Casella created a social drink accessible to
everyone: beer drinkers, cocktail drinkers, and other drinkers of non-wine
beverages.
• In the space of two years, the fun, social drink [yellow tail] emerged as the fastest
growing brand in the histories of both the Australian and the U.S. wine industries
and the number one imported wine into the United States, surpassing the wines of
France and Italy.
Case: Casella Wines (revisit) .. Contd..
• [yellow tail] leapfrogged tall competitors with no promotional campaign,
mass media, or consumer advertising.
• It didn’t simply steal sales from competitors; it grew the market. [yellow
tail] brought non-wine drinkers— beer and ready-to-drink cocktail
consumers—into the wine market.
• Moreover, novice table wine drinkers started to drink wine more
frequently, jug wine drinkers moved up, and drinkers of more expensive
wines moved down to become consumers of [yellow tail].
• Casella Wines acted on all four actions—eliminate, reduce, raise, and
create—to unlock uncontested market space that changed the face of the
U.S. wine industry in a span of two years.
• By looking at the alternatives of beer and ready-to-drink cocktails and
thinking in terms of noncustomers, Casella Wines created three new
factors in the U.S. wine industry—easy drinking, easy to select, and fun
and adventure—and eliminated or reduced everything else.

• Accordingly, [yellow tail] was a completely new combination of wine characteristics
that produced an uncomplicated wine structure that was instantly appealing to the mass
of alcohol drinkers.
• The wine was soft in taste and approachable like ready-to-drink cocktails and beer, and
had up-front, primary flavors and pronounced fruit flavors.
• The sweet fruitiness of the wine also kept people’s palate fresher, allowing them to
enjoy another glass of wine without thinking about it.
• The result was an easy-drinking wine that did not require years to develop an
appreciation for.
• In line with this simple fruity sweetness, [yellow tail] dramatically reduced or eliminated all
the factors the wine industry had long competed on.
• Wine retailers in the United States offered buyers aisles of wine varieties, but to the general
consumer the choice was overwhelming and intimidating.
• The bottles looked the same, labels were complicated with terminology understandable only to
the wine hobbyist, and the choice was so extensive that salesclerks at retail shops were at an
equal disadvantage in understanding or recommending wine to bewildered potential buyers.
• Moreover, the rows of wine choice fatigued and demotivated customers, making selection a
difficult process that left the average wine purchaser insecure with the choice.

[yellow tail] changed all that by creating ease of selection. It dramatically reduced
the range of wines offered, creating only two: Chardonnay, the most popular white in
the United States, and a red, Shiraz.
It removed all technical jargon from the bottles and created instead a striking, simple,
and nontraditional label featuring a kangaroo in bright, vibrant colors of orange and
yellow on a black background.
The wine boxes [yellow tail] came in were also of the same vibrant colors, with the
name [yellow tail] printed boldly on the sides; the boxes served the dual purpose of
acting as eye-catching, unintimidating displays for the wine.
• The wine industry worldwide was proud to promote wine as a refined beverage with a long
history and tradition. This is reflected in the target market for the United States: educated
professionals in the upper income brackets.
• However, [yellow tail] found that this elite image did not resonate with the general public,
which found it intimidating. So [yellow tail] broke with tradition and created a personality
that embodied the characteristics of the Australian culture: bold, laid back, fun, and
adventurous.
• There was no traditional winery image. The lowercase spelling of the name [yellow tail],
coupled with the vibrant colors and the kangaroo motif, echoed Australia. And indeed no
reference to the vineyard was made on the bottle.
The Eliminate-Reduce-Raise-Create Grid: Benefits
The grid gives companies four immediate benefits:

• It pushes them to simultaneously pursue differentiation and low costs to break the value-cost trade-off.
• It immediately flags companies that are focused only on raising and creating and thereby lifting their
cost structure and often over-engineering products and services—a common plight in many companies.
• It is easily understood by managers at any level, creating a high level of engagement in its application.
• Because completing the grid is a challenging task, it drives companies to robustly scrutinize every
factor the industry competes on, making them discover the range of implicit assumptions they make
unconsciously in competing.

Three Characteristics of a Good Strategy
• Focus
• Divergence
• Compelling tagline

Case of Southwest Airlines

The case of Southwest Airlines
• Southwest Airlines created a blue ocean by breaking the trade-offs customers had to
make between the speed of airplanes and the economy and flexibility of car transport.
• To achieve this, Southwest offered high-speed transport with frequent and flexible
departures at prices attractive to the mass of buyers.
• By eliminating and reducing certain factors of competition and raising others in the
traditional airline industry, as well as by creating new factors drawn from the
alternative industry of car transport, Southwest Airlines was able to offer
unprecedented utility for air travelers and achieve a leap in value with a low-cost
business model.

Focus
• Looking at Southwest’s profile, we can see at once that the company
emphasizes only three factors: friendly service, speed, and frequent point-
to-point departures.

Divergence
• When a company’s strategy is formed reactively as it tries to keep up with the
competition, it loses its uniqueness.
• Consider the similarities in most airlines’ meals and business-class lounges. On the
strategy canvas, therefore, reactive strategists tend to share the same strategic profile.
• Indeed, in the case of Southwest, the value curves of the company’s competitors are
virtually identical and therefore can be summarized on the strategy canvas with a
single value curve.
• Southwest went for divergence.

Compelling tagline
• A good strategy has a clear-cut and compelling tagline.
• “The speed of a plane at the price of a car—whenever you need it.”

Formulating Blue Ocean Strategy
Reconstruct Market Boundaries

Reconstruct Market Boundaries
• We found clear patterns for creating blue oceans. Specifically, we found
six basic approaches to remaking market boundaries. We call this the six
paths framework.
• These paths challenge the six fundamental assumptions underlying many
companies’ strategies. These six assumptions, on which most companies
hypnotically build their strategies, keep companies trapped competing in
red oceans.

Six assumptions followed by the companies
trapped in red ocean
• Define their industry similarly and focus on being the best within it.
• Look at their industries through the lens of generally accepted strategic groups (such as luxury
automobiles, economy cars, and family vehicles), and strive to stand out in the strategic group they
play in.
•Focus on the same buyer group, be it the purchaser (as in the office equipment industry), the user (as
in the clothing industry), or the influencer (as in the pharmaceutical industry).
• Define the scope of the products and services offered by their industry similarly.
• Accept their industry’s functional or emotional orientation.
•Focus on the same point in time—and often on current competitive threats—in formulating strategy.

Path 1: Look Across Alternative Industries
• In the broadest sense, a company competes not only with the other firms in its own industry but also with
companies in those other industries that produce alternative products or services.
• Alternatives are broader than substitutes. Products or services that have different forms but offer the
same functionality or core utility are often substitutes for each other.
• On the other hand, alternatives include products or services that have different functions and forms but
the same purpose.
• For example, to sort out their personal finances, people can buy and install a financial software package,
hire a CPA, or simply use pencil and paper. The software, the CPA, and the pencil are largely substitutes
for each other. They have very different forms but serve the same function: helping people manage their
financial affairs.
• Examples: NetJets, DoCoMo.
Path 2: Look Across Strategic Groups
Within Industries
• Strategic Group: Just as blue oceans can often be created by looking across alternative industries, so can
they be unlocked by looking across strategic groups. The term refers to a group of companies within an
industry that pursue a similar strategy.
• Strategic groups can generally be ranked in a rough hierarchical order built on two dimensions: price and
performance. Each jump in price tends to bring a corresponding jump in some dimensions of performance.
• Most companies focus on improving their competitive position within a strategic group. Mercedes, BMW,
and Jaguar, for example, focus on outcompeting one another in the luxury car segment as economy car
makers focus on excelling over one another in their strategic group.
• However, it is important to look across the strategic groups within industries. It can be created by
keeping the decisive advantages of two strategic groups and eliminating everything else.

Path 2: Look Across Strategic Groups Within
Industries… The case of Champion Enterprises
• Michigan-based Champion Enterprises identified a similar opportunity by looking across two strategic
groups in the housing industry: makers of prefabricated housing and on-site developers. Prefabricated
houses are cheap and quick to build, but they are also dismally standardized and have a low-quality
image. Houses built by developers on-site offer variety and an image of high quality but are dramatically
more expensive and take longer to build.
• Champion created a blue ocean by offering the decisive advantages of both strategic groups. Its
prefabricated houses are quick to build and benefit from tremendous economies of scale and lower costs,
but Champion also allows buyers to choose such high-end finishing touches as fireplaces, skylights, and
even vaulted ceilings to give the homes a personal feel. In essence, Champion has changed the definition
of prefabricated housing. As a result, far more lower to middle-income buyers have become interested in
purchasing prefabricated housing rather than renting or buying an apartment, and even some affluent
people are being drawn into the market.
Path 3: Look Across the Chain of Buyers
• In most industries, competitors converge around a common definition of
who the target buyer is.
• In reality, though, there is a chain of “buyers” who are directly or
indirectly involved in the buying decision. The purchasers who pay for the
product or service may differ from the actual users, and in some cases
there are important influencers as well.
• Although these three groups may overlap, they often differ.

The case of Novo Nordisk
• Think of Novo Nordisk, the Danish insulin producer that created a blue ocean in the
insulin industry.
• Insulin is used by diabetics to regulate the level of sugar in their blood. Historically,
the insulin industry, like most of the pharmaceutical industry, focused its attention on
the key influencers: doctors. The importance of doctors in affecting the insulin
purchasing decision of diabetics made doctors the target buyer group of the industry.
• Novo itself had already created the first “human monocomponent” insulin that was a
chemically exact copy of human insulin. Competitive convergence among the major
players was rapidly occurring.
The case of Novo Nordisk (contd..)
• Novo Nordisk found that insulin, which was supplied to diabetes patients
in vials, presented significant challenges in administering.
• Vials left the patient with the complex and unpleasant task of handling
syringes, needles, and insulin, and of administering doses according to his
or her needs.
• Needles and syringes also evoked unpleasant feelings of social stigmatism
for patients.

Products of Novo Nordisk
• NovoPen (1985): the first user-friendly insulin delivery solution, was designed to remove the hassle and embarrassment of
administering insulin. The NovoPen resembled a fountain pen; it contained an insulin cartridge that allowed the patient to
easily carry, in one self-contained unit, roughly a week’s worth of insulin. The pen had an integrated click mechanism,
making it possible for even blind patients to control the dosing and administer insulin. Patients could take the pen with them
and inject insulin with ease and convenience without the embarrassing complexity of syringes and needles.
• NovoLet (1989): a prefilled disposable insulin injection pen with a dosing system that provided users with even greater
convenience and ease of use.
• Innovo (1999): an integrated electronic memory and cartridgebased delivery system. Innovo was designed to manage the
delivery of insulin through built-in memory and to display the dose, the last dose, and the elapsed time—information that is
critical for reducing risk and eliminating worries about missing a dose.
Novo Nordisk’s blue ocean strategy shifted the industry landscape and transformed the company from an insulin
producer to a diabetes care company. NovoPen and the later delivery systems swept over the insulin market.
Path 4: Look Across Complementary
Product and Service Offerings
• Few products and services are used in a vacuum. In most cases, other products and services affect their
value. But in most industries, rivals converge within the bounds of their industry’s product and service
offerings.
• Take movie theaters. The ease and cost of getting a babysitter and parking the car affect the perceived value
of going to the movies. Yet these complementary services are beyond the bounds of the movie theater
industry as it has been traditionally defined. Few cinema operators worry about how hard or costly it is for
people to get babysitters. But they should, because it affects demand for their business. Imagine a movie
theater with a babysitting service.
• Untapped value is often hidden in complementary products and services. The key is to define the total
solution buyers seek when they choose a product or service.
• See Example: NABI – a Hungarian bus company in the US.
Path 5: Look Across Functional or
Emotional Appeal to Buyers
• Some industries compete principally on price and function largely on calculations of utility; their
appeal is rational.
• Other industries compete largely on feelings; their appeal is emotional.
• It is usually a result of the way companies have competed in the past, which has unconsciously
educated consumers on what to expect.
• We have observed two common patterns. Emotionally oriented industries offer many extras
that add price without enhancing functionality. Stripping away those extras may create a
fundamentally simpler, lower-priced, lower-cost business model that customers would welcome.
Conversely, functionally oriented industries can often infuse commodity products with new life
by adding a dose of emotion and, in so doing, can stimulate new demand.
Path 5: Look Across Functional or
Emotional Appeal to Buyers
Two well-known examples are Swatch, which transformed the functionally
driven budget watch industry into an emotionally driven fashion statement,
or The Body Shop, which did the reverse, transforming the emotionally
driven industry of cosmetics into a functional, no-nonsense cosmetics house

Case: QB (Quick Beauty)
• QB House created a blue ocean in the Japanese barbershop industry and is
rapidly growing throughout Asia.
• At the heart of QB House’s blue ocean strategy is a shift in the Asian
barbershop industry from an emotional industry to a highly functional one.
• In Japan the time it takes to get a man’s haircut hovers around one hour.
Why?
• A long process of activities is undertaken to make the haircutting
experience a ritual.
QB (continued..)
• Numerous hot towels are applied, shoulders are rubbed and massaged,
customers are served tea and coffee, and the barber follows a ritual in cutting
hair, including special hair and skin treatments such as blow drying and
shaving. The result is that the actual time spent cutting hair is a fraction of the
total time. Moreover, these actions create a long queue for other potential
customers. The price of this haircutting process is 3,000 to 5,000 yen ($27 to
$45). So? Is it a PROBLEM?
• Many people, especially working professionals, do not wish to waste an
hour on a haircut.
QB (contd..)
• QB House stripped away the emotional service elements of hot towels, shoulder rubs, and tea and coffee.
• It also dramatically reduced special hair treatments and focused mainly on basic cuts.
• QB House then went one step further, eliminating the traditional time-consuming wash-and-dry practice by creating the “air
wash” system—an overhead hose that is pulled down to “vacuum” every cut-off hair. This new system works much better and
faster, without getting the customer’s head wet. These changes reduced the haircutting time from one hour to ten minutes.
• Moreover, outside each shop is a traffic light system that indicates when a haircut slot is available. This removes waiting time
uncertainty and eliminates the reservation desk.
• In this way, QB House was able to reduce the price of a haircut to 1,000 yen ($9) versus the industry average of 3,000 to 5,000
yen ($27–$45) while raising the hourly revenue earned per barber nearly 50 percent, with lower staff costs and less required
retail space per barber.
• QB House created this “no-nonsense” haircutting service with improved hygiene. It introduced not only a sanitation facility set
up for each chair but also a “one-use” policy, where every customer is provided with a new set of towel and comb.
Path 6: Look Across Time
• All industries are subject to external trends that affect their businesses over time. Think of the rapid rise
of the Internet or the global movement toward protecting the environment. Looking at these trends with
the right perspective can show you how to create blue ocean opportunities.
• Most companies adapt incrementally and somewhat passively as events unfold. Whether it’s the
emergence of new technologies or major regulatory changes, managers tend to focus on projecting the
trend itself. That is, they ask in which direction a technology will evolve, how it will be adopted, whether
it will become scalable.
• But key insights into blue ocean strategy rarely come from projecting the trend itself. Instead they arise
from business insights into how the trend will change value to customers and impact the company’s
business model. By looking across time—from the value a market delivers today to the value it might
deliver tomorrow— managers can actively shape their future and lay claim to a new blue ocean.
Case: iTunes
• Apple observed the flood of illegal music file sharing that began in the late 1990s.
• By 2003 more than two billion illegal music files were being traded every month.
While the recording industry fought to stop the cannibalization of physical CDs,
illegal digital music downloading continued to grow.
• With the technology out there for anyone to digitally download music free instead
of paying $19 for an average CD, the trend toward digital music was clear.
• Apple capitalized on this decisive trend with a clear trajectory by launching the
iTunes online music store in 2003.

Case: iTunes
• In agreement with five major music companies—BMG, EMI Group, Sony, Universal Music Group, and
Warner Brothers Records—iTunes offered legal, easy-to-use, and flexible à la carte song downloads.
• iTunes allowed buyers to freely browse two hundred thousand songs, listen to thirty-second samples, and
download an individual song for 99 cents or an entire album for $9.99.
• By allowing people to buy individual songs and strategically pricing them far more reasonably, iTunes broke
a key customer annoyance factor: the need to purchase an entire CD when they wanted only one or two songs
on it.
• iTunes also leapt past free downloading services, providing sound quality [The sound quality is consistently
poor because most people burn CDs at a low bit rate to save space] as well as intuitive navigating, searching,
and browsing functions.
• Customers have been flocking to iTunes, and recording companies and artists are also winning.

The Nature of Strategic Management

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Nature of Strategic Management

Uploaded by

Copyright:

Available Formats

The Nature of Strategic

Prepared by: Dewan Mahboob Hossain 1

Prepared by: Dewan Mahboob Hossain 5

Prepared by: Dewan Mahboob Hossain 6

Prepared by: Dewan Mahboob Hossain 7

Prepared by: Dewan Mahboob Hossain 8

• Vision and Mission Statements

Vision statement: “What do we want to become?”

Prepared by: Dewan Mahboob Hossain 10

Prepared by: Dewan Mahboob Hossain 11

• Internal strengths and weaknesses:

• Long-term objectives/goals: for more than one year.

Prepared by: Dewan Mahboob Hossain 15

Prepared by: Dewan Mahboob Hossain 16

Prepared by: Dewan Mahboob Hossain 17

Prepared by: Dewan Mahboob Hossain 18

Prepared by: Dewan Mahboob Hossain 20

Prepared by: Dewan Mahboob Hossain 21

Prepared by: Dewan Mahboob Hossain 25

Prepared by: Dewan Mahboob Hossain 27

Prepared by: Dewan Mahboob Hossain 28

Prepared by: Dewan Mahboob Hossain 31

Prepared by: Dewan Mahboob Hossain 34

Prepared by: Dewan Mahboob Hossain 35

Prepared by: Dewan Mahboob Hossain 36

Prepared by: Dewan Mahboob Hossain 40

Prepared by: Dewan Mahboob Hossain 42

Economic forces Competitors,

Prepared by: Dewan Mahboob Hossain 43

Prepared by: Dewan Mahboob Hossain 46

Prepared by: Dewan Mahboob Hossain 47

Prepared by: Dewan Mahboob Hossain 48

Prepared by: Dewan Mahboob Hossain 49

Prepared by: Dewan Mahboob Hossain 52

Prepared By: Dewan Mahboob Hossain 57

Prepared By: Dewan Mahboob Hossain 58

Prepared By: Dewan Mahboob Hossain 61

Prepared By: Dewan Mahboob Hossain 65

Prepared By: Dewan Mahboob Hossain 66

Prepared By: Dewan Mahboob Hossain 68

Prepared By: Dewan Mahboob Hossain 70

Prepared By: Dewan Mahboob Hossain 72

• Expropriation (the action by the state or an authority of taking property

Prepared By: Dewan Mahboob Hossain 74

Prepared By: Dewan Mahboob Hossain 75

Prepared By: Dewan Mahboob Hossain 76

Prepared By: Dewan Mahboob Hossain 78

Prepared By: Dewan Mahboob Hossain 79

Prepared By: Dewan Mahboob Hossain 80

Prepared By: Dewan Mahboob Hossain 82

Prepared By: Dewan Mahboob Hossain 85

Prepared By: Dewan Mahboob Hossain 86

Prepared By: Dewan Mahboob Hossain 87

Prepared By: Dewan Mahboob Hossain 91

Prepared By: Dewan Mahboob Hossain 95

Prepared By: Dewan Mahboob Hossain 99

Prepared By: Dewan Mahboob Hossain 100

Prepared By: Dewan Mahboob Hossain 102

Prepared By: Dewan Mahboob Hossain 104

Prepared By: Dewan Mahboob Hossain 105

Pepared By: Dewan Mahboob Hossain 106

Pepared By: Dewan Mahboob Hossain 107

Pepared By: Dewan Mahboob Hossain 108

Pepared By: Dewan Mahboob Hossain 109