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04/18/23 1
Business Strategy & Policy PSU MGMT #562
Dave [email protected]
Week # 5Blue Ocean, Risk & Flexibility
04/18/23 Dave Garten- Business Strategy 2
Apple Case – Key Learnings
1. Company culture has bred inconsistent success
1. Highly innovative & creative w/strong niche2. Very insular -- stumbled on industry dynamics
2. Product advantage is not competitive advantage
3. As differentiation narrows (wintel vs. mac), substitution & economies of scale dominate
4. Windows of opportunity can be a significant factor in success (despite the “best” strategy)
04/18/23 Dave Garten- Business Strategy 3
Apple
04/18/23 Dave Garten - Business Strategy 4
Strategy Formulation
Derived from Blue Ocean Strategy by W. Chan Kim and Renee Mauborgne, HBS, 2004
Red Ocean Blue OceanKnown boundaries Uncontested market space
Increasing competition for existing demand
Redefine the value proposition (“leap in value for
the buyer”)
Globalization reducing niche/protected opportunities…
Competition becomes “irrelevant”
Bloody … Pull in a whole new group of customers
Examples: Model T, Southwest, Cirque de Soliel,
eBay
04/18/23 Dave Garten - Business Strategy 5
Strategy Formulation
Study of business launches in 108 companies…
0% 20% 40% 60% 80% 100%
Profit
Revenue
NewInvestment
“Blue Ocean” “Red Ocean”
04/18/23 Dave Garten - Business Strategy 6
Strategy FormulationReshaping boundaries value
innovation 1.Look across alternative industries2.Look across chain of buyers3.Look across complementary products
& services4.Look across functional or emotional
appeal of buyers5.Look across time
04/18/23 Dave Garten - Business Strategy 7
Look across: Examples
Alternative industries
Chain of buyers
Complementary products & services
Functional/emotional appeal of buyers
Time
Strategy Formulation
NetjetsHome Depot
InsulinBloomberg
Movies & babysitting
SwatchStarbucks
Cisco
04/18/23 Dave Garten - Business Strategy 8
Strategy FormulationLower Cost Increase Value
What can be eliminated?
What can be reduced below industry levels?
What can be created?
What can be raised above industry levels?
04/18/23 Dave Garten - Business Strategy 9
Strategy FormulationRedefine target toward new market spaceSimultaneously pursue differentiation & low cost to achieve a leap in value (utility)Challenge deep reliance on:
Existing customers Finer and finer segmentation
Focus on non-customers Edge of market Unexplored non-customers
Derived from Blue Ocean Strategy by W. Chan Kim and Renee Mauborgne, HBS, 2004 Buyer value
Costs
ValueInnovation
04/18/23 Dave Garten - Business Strategy 10
Strategy Formulation: Mapping
0
20
40
60
80
100
Price Meals Lounges SeatingChoice
Hubconnection
Friendlyservice
Speed Frequencypoint to
point
High
Low
CarSWA
Major Airline
04/18/23 Dave Garten - Business Strategy 11
Principles of UncertaintyDecisions need to be made in an uncertain environmentNPV (traditional managerial finance) does not handle contingent or adaptive decision makingThe creation of an option (to take action) is tangible and positive
Manages levels of commitment as certainty unfolds…
Flexibility: an option to manage uncertainty Highest value under uncertainty and risk
04/18/23 Dave Garten - Business Strategy 12
Sources of UncertaintyUnpredictable environmental events (e.g. disruptive technologies)Customer or stakeholder demandsCompetitor’s movesActions of suppliers and buyersManagerial actionsEmployee actionsGovernment behavior (or lack there of)
04/18/23 Dave Garten - Business Strategy 13
Uncertainty & Strategic Response
L1Pretty clear
future
L2Future
alternatives
L3Range of
future alternatives
L4 True
ambiguity
Level of Uncertainty
Shaper Adapter Reserving the right to Play
Response:Strategic intent
Big Bet No regrets OptionResponse:Tactics
Source: Strategy Under Uncertainty by Hugh Courtney, Jane Kirkland and Partick Viguerie HBR 1997
04/18/23 Dave Garten - Business Strategy 14
Hedge Against Strategic Uncertainty
Strategic Risk
Countermove Example
Industry margin squeeze
Shift to more collaboration
Semiconductors -> fabless modelPharmaceuticals-> ally with biotech
Technology shift
Multiple bets Sony: Betamax, BluerayMS
Brand erosion Redefine scope of brand
AmEx
Dominant competitor
Redesign business (“avoidance”)
Target vs. WalmartFamily Dollar vs. Walmart
Customer priority shift
Conduct market experiments
Capital One
Market stagnation
Expand value proposition, segment
Intel Centrino
04/18/23 Dave Garten - Business Strategy 15
Flexibility in UncertaintyC
ost o
f C
hang
e Low
High
Low HighUncertainty
Create/preserve optionsSelective flexibility Isolate volatility
Move
Up
04/18/23 Dave Garten - Business Strategy 16
Some Option data
Data 4/16/11
Stock Price Beta Call OptionJan 2012
Call OptionJan 2013
Walmart 54 0.37 @60 strike$0.63/share
@55 stri$3.65/share
Qualcom 53 1.06 @60 strike$2.50/share
@60 strike$5.20/share
04/18/23 Dave Garten - Business Strategy 17
Option Pricing: Black-Scholes
C = cost (price) of the optionS = the base value of the investmentE = the option exercise pricet = time until a decision (expiration) = the level of uncertainty (beta, std. dev)
04/18/23 Dave Garten - Business Strategy 18
Scenario AnalysisContingency planning – generally one uncertaintyModelingScenario analysis – multiple uncertainties driven by subjective interpretation Helps to breaks down bias, risk-aversion, disruption Develop scenario descriptions, driven by key
uncertainties Model the scenarios Develop indicators to track how the future unfolds. Develop plans and (contingencies) for each scenario
Source: A Note on Scenario Planning by David Garvin and Lynne Levesque, HBR 2006
Scenario Analysis
04/18/23 Dave Garten - Business Strategy 19
Source: A Note on Scenario Planning by David Garvin and Lynne Levesque, HBR 2006
Scenario Example
04/18/23 Dave Garten - Business Strategy 20
Source: A Note on Scenario Planning by David Garvin and Lynne Levesque, HBR 2006
Scenario Example
04/18/23 Dave Garten - Business Strategy 21
Source: A Note on Scenario Planning by David Garvin and Lynne Levesque, HBR 2006
04/18/23 Dave Garten - Business Strategy 22
Uncertainty & Flexibility Summarized
Flexibility/options are tools to manage uncertainty Use flexibility in areas of high uncertainty Isolate volatile elements – architect boundaries
Value of options changes with time Volatility drops (less uncertainty) Revisiting project valuation/options
Scenario analysis - a helpful tool to instill structureIn the real world… build an intuition Framework to evaluate strategic options
04/18/23 Dave Garten - Business Strategy 23
Backup
04/18/23 Dave Garten- Business Strategy 24
Apple Case
Source: UBS, 2006
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
2003 2004 2005 2006 2007 2008
Rev
enu
e (M
illio
ns)
Software revenue ($M)
iTunes+iPOD accessories revenue ($M)
iPOD ($M)
Mac Revenue ($M)
04/18/23 Dave Garten- Business Strategy 25
Apple Case
04/18/23 Dave Garten- Business Strategy 26
Jan 2010
July 2000 Feb 1996
May 2008 Feb 2006
Feb 2004
Jan 2011
04/18/23 Dave Garten- Business Strategy 27
Apple Case
04/18/23 Dave Garten - Business Strategy 28
Option Scenarios
1.0
NPVq = value/cost
sqrt
(t)
lower
higher
1.“Now”1.“Now”ActAct
2. “Maybe Now”2. “Maybe Now”Manage RiskManage Risk
and Actand Act
3.“Probably Later”3.“Probably Later”Learn beforeLearn before
Acting Acting
4.“Maybe Later”4.“Maybe Later”ExploreExplore
PossibilitiesPossibilitiesBefore ActingBefore Acting
5. “Probably 5. “Probably Never”Never”
6. “Never”6. “Never”
Source: Strategy as a Portfolio of Options by Timothy A. Luehrman, HBR 1998
04/18/23 Dave Garten - Business Strategy 29
Flexibility in Practice
Derived from: IT Outsourcing: Maximizing Flexibility & Control
Selective20-80%(20-3-8)
None< 20%(5-5-5)
Full> 80%(2-3-9)
IT outsourcing: Cost containment vs. core competency
04/18/23 Dave Garten- Business Strategy 30
Strategy Evaluation ToolsSWOT & Strategy Development
Opportunities (O)
Threats (T)
Strengths (S) Weaknesses (W)
SO Strategies
ST Strategies
WO Strategies
WT Strategies
Use strengths to take advantage of opportunities
Use strengths to avoid threats
Overcome weaknesses by
taking advantage of opportunities
Minimize weaknesses and
avoid threats
1.2...
1.2...
1.2...
1.2...
Source: Strategic management by Fred R. David