5/14/20151 business strategy & policy psu mgmt #562 dave garten [email protected] week #...

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)


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



Study of business launches in 108 companies…

0% 20% 40% 60% 80% 100%

Profit

Revenue

NewInvestment

“Blue Ocean” “Red Ocean”


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


Look across: Examples

Alternative industries

Chain of buyers

Complementary products & services

Functional/emotional appeal of buyers

Time


NetjetsHome Depot

InsulinBloomberg

Movies & babysitting

SwatchStarbucks

Cisco


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?


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


Strategy Formulation: Mapping

0

20

40

60

80

100

Price Meals Lounges SeatingChoice

Hubconnection

Friendlyservice

Speed Frequencypoint to

point

High

Low

CarSWA

Major Airline


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


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)


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


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


Flexibility in UncertaintyC

ost o

f C

hang

e Low

High

Low HighUncertainty

Create/preserve optionsSelective flexibility Isolate volatility

Move

Up


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


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)


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



Scenario Example




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


Backup


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)


Apple Case


Jan 2010

July 2000 Feb 1996

May 2008 Feb 2006

Feb 2004

Jan 2011


Apple Case


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


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


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

5/14/20151 business strategy & policy psu mgmt #562 dave garten [email protected] week #...

Documents

best strategy slide

blue ocean strategy

time slide

risk slide

ebay slide

risk flexibility slide

uncertainty highest

swatch starbucks cisco