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134 PART II THE TOOLS OF STRATEGY ANALYSIS
TABLE 6.1
Mechanistic versus organic organizational forms
Feature
Mechanistic forms
Organic forms
Task definit ion
Rigid and highly specialized
Flexible and broadly defined
Coordination and co ntrol
Rules and directives vert ically
imposed
Mutual adjustment, com mon cu lture
Com munication
Vertica l
Vertica l and horizonta l
Knowledge
Centralized
Dispersed
Commit ment and loyalty
To immediate superior
To t he organization and its goals
Environmental context
Stable with low technological
uncertainty
Dynamic w ith significant tech nologica l uncertainty and ambiguity
Source: Adapted from Richard Butler, Designing Organizations: A Decision-Making Perspective (London: Routledge,
1991): 76, by perm ission of (engage Learning.
theory-there is no one best way to organize; it depends upon circumstances.25 Although
Alphabet (Google) and McDonald’s are both large international companies, their structures and systems are very different. McDonald’s manages its franchisees in a highly
detailed, rules-based system. The individual restaurants feature high levels of task specialization and formal procedures that cover every aspect of the restaurant’s operations.
Google emphasizes informality, low job specialization, horizontal communication , and
the importance of principles over rules. These differences reflect differences in strategy,
technology, human resources, and the dynamism of the business environments that
each firm occupies. In general, the more standardized are a firm’s products (beverage
cans, blood tests, or haircuts for army inductees) and the more stable its environment, the greater are the efficiency advantages of mechanistic approach with standard operating procedures and high levels of specialization. Once markets become
turbulent, or innovation becomes desirable, or buyers require customized products,
then the bureaucratic model breaks down.
Contingency also requires the functions within a company to be organized differently. At my university, admissions, student records, and accounting operate on
bureaucratic principles; research, fu nd raising, and external relations are organized
organically.
As the business environment has become increasingly turbulent, the trend has been
toward organic approaches to organizing, which have tended to displace more bureaucratic approaches. During the 21st century, large companies have made strenuous
efforts to restructure and reorganize to achieve greater flexibility and responsiveness.
They have decentralized decision-making, reduced their number of hierarchical layers,
shrunk headquarters staffs, emphasized horizontal rather than vertical communication, and shifted the emphasis of control from supervision to accountability. Strategy
Capsule 6.3 reviews some of these developments.
However, the trend has not been one way. The financial crisis of 2008 and the 2020
COVID-19 pandemic have caused many companies to reimpose top-down control.
Many companies follow the cycles of centralization and decentralization that may help
them balance the trade-off between integration and flexibility.26
Developments in information and communication technology (ICT) have worked in different directions. In some areas, ICT has encouraged informal approaches to coordination.
The huge leaps in the availability of information available to organizational members and
the ease with which they can communicate with one another have increased vastly the
capacity for mutual adjustment without the need for intensive hierarchical guidance and
CHAPTER 6 ORGANIZATION STRUCTURE AND MANAGEMENT SYSTEMS
leadership. In others, the automation of processes through intelligent systems that apply
advanced algorithms to real-time data has reinforced centralization and bureaucratization. Customer services at your bank or telecom provider and most companies’ supply
chains are increasingly managed by centralized software systems.
New Approaches to Business Organization
The emergence of new forms of business organization
when supported by information and communica-
has been widely proclaimed, but slow in coming. Three
tions technologies. Network st ructures have proved
decades ago, two of America’s most prom inent scholars
effective in maintaining the dynamism of complex
of organization identified a “new organizational revolu-
multiproduct, multinational corporations. Social net-
tion” featuring “flatter hierarchies, decentralized decision-
works are not confined by organ izational boundaries;
making, greater tolerance for ambiguity, permeable
hence, network organizations tend to have perme-
boundaries, empowerment of employees, self-organizing
able boundaries. The blurring of corporate boundaries
units, and self-integrating coordinat ion mechanisms’.”
is further enhanced by t he outsourcing of corporate
The reality has bee n evol ution rather than revolution.
functions, open innovation, and strategic alliances.
Alternatives to traditiona l, hierarchical, commandand-control corporate models incl ude the following:
♦
humanistic principles are dedicated to the dignity, liberty, integrity, and well-being of their mem-
sha red va lues, employee participation, flexible
bers. For people to flourish req uires a commitment
communication, and spontaneous coordination
to ethics and self-determination. Thus, Sumantra
substitute for hierarchy, authority, and control.b
Ghoshal and Chris Bartlett’s “individualized corpo-
Ad hocracies are found in the fields of research, con-
ration” envisages a “new moral contract” between
sult ing, engineering, entertainment, and technology
people, compa nies, and society, which gives primacy
development where problem-solving and other
to developing each individual’s unique talents and
nonroutine activities predominate and w here crea-
skill s.d Frederic Laloux’s “tea l organization” embodies
tivity takes precedence over efficiency.
the next evolut ionary stage in human development
have finite lives (e.g., in consu lting and construction),
organ ization structure needs to be dynamically
flexible- hence t he organization of firms around
proj ects. This structure involves team autonomy,
close interaction among team members, and interaction with prior and parallel proj ect teams in order to
share know-how. As cycle times become com pressed
across more and more industries, project-based
compa ny structures are increasingly common.
♦
The humanistic company: Compan ies based on
Adhocracy: A team-based organ izationa l form where
Project-based organizations: Where work assignments
♦
♦
Network structures: Informal organizations are coordinated by social networks-patterns of interactions
among organizational members- rather t han by
hierarchy.’ Such structures are especially effective in
creating and disseminating knowledge- especially
and is comm itted to self-management, human
wholeness, and evolutionary purpose- Patagonia,
the outdoor apparel supplier, is one such exam ple.e
Sources:
‘ R. Daft and A. Lewin, “Where Are the Theori es for the New
Organizational Forms?” Organization Science 3 (1993): 1- 6.
bH_Mintzberg, Structure in Fives: Designing Effective Organizations
(Englewood Cliffs, NJ: Prentice Hall, 1993): Chapter 12.
‘ G. Hedlund, “The Hypermodern MNC: A Heterarchy?” Human
Resource Management 25 (1 986): 9-35; C. Bartlett and S
Ghoshal, Managing across Borders: The Transnational Solution,
2nd edn (Boston, Harvard Business School, 1998).
dS. Ghoshal and C.A. Bartlett. The Individualized Corporation
(New York: Harper Business, 1997).
•F. Laloux, Reinventing Organizations: A Guide to Creating Organizations Inspired by the Next Stage of Human Consciousness
(Nelson Parker, 2014).
135
136 PART II THE TOOLS OF STRATEGY ANALYSIS
Summary
Strategy form ulation and strat egy implementation are closely interdependent. The formulation of
st rategy needs to take account of an organization’s capacity for implementation; at the sa me t ime, the
implementation process inevitably involves creating strategy. If an organization’s st rategic management
process is to be effective then it s strategic plan ning syst em must be linked to actions, commitment s
and their monitoring, and the allocation of resources. Hence, operational plans and capital expenditure
budgets are critical components of a fi rm’s strategic management system.
Strategy im plementation involves t he entire design of the organization. By underst andi ng the
need to reconcile specialization w ith cooperation and coordination, we are able to appreciate t he
funda mental principles of orga nizational desig n.
Applying th ese principles, we can determ ine how best t o allocate individuals to orga nizational units
and how to com bi ne t hese organizational units into broader groupings-in particular, t he choice between basic organizational form s such as functional, divisional, or matrix organizations.
We have also seen how companies’ organizational st ruct ures have been changing in recent years,
influenced both by t he demands of their external environments and the opportunities made available
by adva nces in information and com mun ication technologies.
The chapters t hat follow will have more to say on the organ izational structures and ma nagement system s appropriate to different strategies and different business contexts. In the fi nal chapter (Chapter 14),
we shal l explo re some of the new t rends and new ideas that are reshaping our th inking about organizational design.
Self-Study Questions
1.
Eric Yuan, the CEO of Zoom Video Communications, Inc., has asked for your help in
designing a strategic planning system for the company. Would you recommend a formal strategic planning system with an annual cycle such as that outlined in “The Strategic Planning
System: Linking Strategy to Action” and Figure 6.1? (Note: Zoom’s strategy is summarized in
Strategy Capsule 1.5 in Chapter 1.)
2.
Select a persistently successful team in a professional sport with which you are familiar. To
what extent can the superior capabilities of this team be attributed to the role of processes,
motivation, and structure (as discussed in the section “Developing Organizational Capability”)?
3. Within your own organization (whether a university, company, or not-for-profit organization),
which departments or activities are organized mechanistically and which organically? To what
extent does the mode of organization fit the different environmental contexts and technologies of the different departments or activities?
4. In 2008, Citigroup announced that its consumer business would be split into Consumer
Banking, which would continue to operate through individual national banks, and Global
Cards, which would form a single global business (similar to Citi’s Global Wealth Management
division). On the basis of the arguments relating to the “Defining Organizational Units” section
above, why should credit cards be organized as a global unit and all other consumer banking
services as national units?
CHAPTER 6 ORGANIZATION STRUCTURE AND MANAGEMENT SYSTEMS
5.
During the 1950s and 1960s, General Motors’ North American business was organized around
product divisions. Each division (Cadillac, Buick, Chevrolet, etc.) undertook its own design,
purchasing, manufacturing, and marketing. The separate brands still exist, but GM is now
organized by function: manufacturing, product development and purchasing, marketing and
sales, human resources, information technology, etc. Why is coordination within functions
now more important than coordination within product groups?
6. Draw an organizational chart for a business school that you are familiar with. Does the school
operate with a matrix structure (for instance, are there functional/discipline-based departments together with units managing individual programs)? Which dimension of the matrix
is more powerful, and how effectively do the two dimensions coordinate? How would you
reorganize the structure to make the school more efficient and effective?
Notes
l. L. Bossidy and R. Charan, Execution: 7be Discipline
of Getting Things Done (New York: Random House,
2002) : 71.
2. H. Mintzberg, “Patterns of Strategy Formulation,”
Management Science 24 (1978): 934-948; “Of Strategies:
Deliberate and Eme rge nt,” Strategic Management j ournal
6 (1985): 257-272.
3. Apple Computer: Pre liminary Confidential Offering
Memorandum, 1978. http://www.compute rhisto ry.org/
collections/catalog/102712693.
4. MCI Communications: Planning for the 1990s (Harvard
Business School Case No. 9-190-136, 1990): l.
5. For a description of the strategic planning systems of
the world ‘s leading o il and gas majors, see: R. M. Grant,
“Strategic Planning in a Turbulent Environme nt: Evide nce
from the O il Majors,” Strategic Management j ournal 24
(2003): 491-518.
6. Eni SpA, Long-Term Strategic Plan to 2050 and Action
Plan 2020-23 (San Donato Milanese, February 28, 2020).
7. D. W. Eisenhower, “Remarks at the National Defense
Executive Reserve Conference” (November 14, 1957).
8 . L. Bossidy and R. Charan , Execution: The Discipline
of Getting Things Done (New York: Random Ho use,
2002): 227.
9. P. F. Drucker, The Practice of Management (New York :
Harpe r, 1954).
10. A. Smith , The Wealth C!f Nations (London: De nt, 1910): 5.
11 . K. Eisenhardt, “Agency Theory: An Assessment and Reviews,”
Academy ofManagement Review 14 (1989): 57-74.
12. T. Peters and R. Wate rman , In Search ofExcellence
(New York: Harper & Row, 1982).
13. J.-C. Spender, Business Strategy: Managing Uncertainty,
Opportunity, and Enterprise (Oxford : Oxford University
Press, 2014).
14. R. Nelson and S. G . Winte r, An Evolutionary Theory of
Economic Change (Cambridge, MA: Belknap , 1982).
15. T. W. Malo ne, K. Crowston , J. Lee, and B. Pe ntland,
“Tools for Inventing O rganizations: Toward a Handbook
of Organizational Processes,” Managemen t Science 45
(1999): 425-43.
16. K. B. Clark and T. Fujimoto, Product Development
Pe1formance (Boston: Harvard Business School Press,
1991): 29- 30.
17. M. Weber, Economy and Society : An Outline ofInterpretive Sociology (Berkeley, CA: University of California
Press, 1968).
18. H. A. Simo n , “The Architecture of Complexity,” Proceedings of the American Philosophical Society 106
(1962): 467-482.
19. J. D. Orton and K. E. We ick , “Loosely Coupled Syste ms: A
Reconceptualization,” Academy ofManagement Review 15
(1990): 203- 223.
20. “P&G Faces Up to Mistakes in Beauty Business,” Wall
Street journal (Novembe r 9, 2015).
21. J. D. Tho mpson , Organizations in Action (New York :
McGraw-Hill , 1967).
22. C. A. Bartlett and S. Ghoshal, “Matrix Management: Not
a Structure, a Frame of Mind,” Ha rva rd Business Review
(July/August 1990): 138-145.
23. “Idea: Theories X a nd Y,” The Economist online extra
(October 6, 2008), www.economist.com/ node/ 12370445,
accessed December 18, 2017.
24. T. Burns and G. M. Stalker, The Management ofInnovation (London: Tavistock, 1961).
25. L. Donaldson, “Contingency Theo1y (Structural),” in
R. Tho rpe and R. Holt (eds.), The Sage Dictionary of
Qualita tive Managemen t Research (London: Sage,
2008).
26. ]. Nicke rson and T. Zenger refer to this as structural
modulation: “Being Efficiently Fickle : A Dynamic Theory
of O rganizatio na l Cho ice,” Organiz ation Science 13
(2002): 547- 567.
137
7 The Sources and Dimensions of Competitive Advantage
8 Industry Evolution and Strategic Change
9 Technology-Based Industries and the Management
of Innovation
7
~—-
The Sources and
Din1ensions of
Con1petitive Advantage
If you don’t have a competitive advantage-don’t compete!
JACK WELCH, CEO, GENERAL ELECTRIC 1981-2001
OUTLINE
♦
Introduction and Objectives
♦
How Is Competitive Advantage Established?
•
The Nature and Significance of Differentiation
•
External Sources of Competitive Advant age
•
Analyzing Differentiat ion: The Demand Side
•
Internal Sources of Competit ive Advantage: Strategic
Innovation t hroug h Business Models and Blue Ocean
Strat egy
•
Ana lyzing Differen tiation: The Supply Side
•
Bringing It All Together: The Va lue Chain in
Differentiation Analysis
♦
How Is Competitive Advantage Sustained?
♦
Cost Advantage
♦
Differentiation Advantage
Can Firms Pursue Both Cost and Differentiation
♦
Advantage?
•
The Sources of Cost Advantage
♦
Summary
•
Using the Va lue Chain to Analyze Cost s
♦
Self-Study Questions
♦
Notes
142 PART III BUSINESS STRATEGY AND THE QUEST FOR COMPETITIVE ADVANTAGE
Introduction and Objectives
In this chapter, we integrate and develop the elements of competitive advantage that we have analyzed
in previous chapters. Chapter 1 noted that a firm can earn superior profitability either by locating in an
attractive industry or by establishing a competitive advantage over its rivals. Of these two, competitive
advantage is the more important: as we showed in Chapter 4 (“Does Industry Matter?”), profitability
varies more within indust ries than between industries. Hence, the primary goal of a strategy is to build
competitive advantage for the firm .
Chapters 3 and 5 provided the t wo primary components of our ana lysis of competitive advantage.
The last part of Chapter 3 analyzed the external sources of competitive advantage: the determinants
of the key success factors within a market. Chapter 5 analyzed the internal sources of competitive
advantage: the potential for the firm’s resources and capabi lities to establish and sustain competitive
advantage.
Here, we bring these themes together to look more deeply at competitive advantage. We first
explore the dynamics of competitive advantage, examining the processes through w hich competitive
advantage is created and destroyed. This points to how competitive advantage can be attained and
sustained. We then examine the two primary dimensions of competitive advantage: cost advantage and
differentiation advantage and develop systematic approaches to their analysis.
By the time you have completed t his chapter, you will be able to:
•
Identify how a firm can create competitive advantage- including the rol es that anticipation, agil ity, business model innovation, and blue ocean strategies can play.
•
Identify how a firm can sustain competitive advantage- including the use of different
types of isolating mechanism.
•
Use cost analysis to identify the sources of cost advantage in an industry, assess a firm’s
relative cost position, and recommend strategies to enhance cost competitiveness.
•
Use differentiation analysis to identify the sources of differentiation and formulate strategies that create differentiation advantage.
•
Appreciat e the feasibility of pursuing both cost and differentiation advantage.
How Is Competitive Advantage Established?
Competitive advantage refers to a firm’s ability to outperform its rivals. Most of us can
recognize competitive advantage when we see it: Starbucks in coffee shops, Vestas in
wind turbines, Google in online search , and Spotify in music streaming. Yet, defining
competitive advantage is troublesome. Competitive advantage can be defined broadly
in terms of a firm’s superiority in creating value for its stakeholders, or more narrowly
in terms of profitability. Because of the difficulties in identifying and measuring total
CHAPTER 7 THE SOURCES AND DIMENSIONS OF COMPETITIVE ADVANTAGE
value creation (see the section on “Strategy as a Quest for Value” in Chapter 2), I shall
take the simple approach and define competitive advantage as: a firm ‘s potential to
earn a higher rate ofpro.fit than its direct competitors. I emphasize the potential for
superior profitability rather than actual superior profitability to take account of the
fact that competitive advantage may not be revealed in higher profitability-a firm may
forgo current profit in favor of investing in market share, technology, customer loyalty,
or executive perks. For example, over the ten-year period, 1998-2007, Amazon earned
a net loss, despite its obvious competitive advantage in online retailing. Amazon had
foregone profit in favor of sales growth.
In viewing competitive advantage as the result of matching internal strengths to
external success factors, I may have conveyed the notion of competitive advantage
as something static and stable. In fact, as we observed in Chapter 4 when discussing
competition as a process of “creative destruction,” competitive advantage is a disequilibrium phenomenon: it is created by change and, once established, it is eroded by
competition.1 The changes that generate competitive advantage can be either internal
or external. Figure 7 .1 depicts the basic relationships.
External Sources of Competitive Advantage
External changes create competitive advantage when they have differential effects on
companies because of their different resources and capabilities or strategic positioning.
For example, among fast-fashion retailers, the COVID-19 pandemic of 2020 had a more
serious impact on H&M than on Uniqlo (a subsidiaty of Fast Retailing Ltd.), because of
the latter’s superior online platform.
The more an industry is buffeted by external change and the greater the difference
in the strategic positioning of firms , the greater the dispersion of profitability among
firms. The world’s beer industry is relatively stable and the similarities between the
leading firms-AB InBev, Carlson , Heineken , and Molson Coors-result in a narrow
dispersion in profitability among them. The major toy companies (Mattel, Lego, Hasbro,
Bandai Namco, and MGA Entertainment), by contrast, comprise a heterogeneous group
that experience unpredictable shifts in consumer preferences, resulting in wide and
variable profitability differences.
FIGURE 7.1
The emergence of competitive advantage
How does competitive
advantage emerge?
External sources of change, e.g.,
• Changing customer demand
Internal sources
of change
• Changing prices of inputs
• Technological change
Resource heterogeneity
among firm s creates
winners and losers
Some firms are faster
and more effective
in exploiting change
Some firm s capable of
strateg ic innovations (e.g.,
new business models or
locating “blue oceans”)
143
144 PART III BUSINESS STRATEGY AND THE QUEST FOR COMPETITIVE ADVANTAGE
The competitive advantage that arises from external change also depends on firms’
ability to respond to change. Entrepreneurial responsiveness involves one of two key
capabilities:
• Anticipation. Over its 100-year history, IBM has demonstrated a remarkable
ability to renew its competitive advantage through anticipating, then taking
advantage of, many of the major shifts in the IT sector: the birth of the mainframe, the rise of personal computing, advent of the internet, migration of
value from hardware to software and services, cloud computing, big data, and
quantum computing. Conversely, Hewlett-Packard, now HP Inc. , has been less
adept in recognizing and responding to these changes.
• Agility. As markets become more turbulent and unpredictable, quickresponse capability becomes increasingly important as a source of
competitive advantage. Speed requires timely information that feeds into
fast-cycle systems. Zara, the retail fashion chain owned by the Spanish
company Inditex, has built a vertically integrated supply chain that cuts the
time between a garment’s design and retail delivery to under three weeks
(against an industry norm of three to six months). 2 While time-based competition3 and strategic agility’ have long been recognized as sources of
competitive advantage, advances in real-time data collection and automated
decisions have allowed “sense-and-respond” systems to radically reduce
firms ‘ reaction times. 5
Internal Sources of Competitive Advantage: Strategic
Innovation through Business Models and
Blue Ocean Strategy
Competitive advantage may also be generated internally through innovation which creates competitive advantage for the innovator while undermining previously established
competitive advantages- the essence of Schumpeter’s “creative destruction.” Although
innovation is typically thought of as applications of new technology, our emphasis
here is strategic innovation- new approaches to serving customers and competing
with rivals.
Business Model Innovation Strategic innovation has long been recognized as
an important source of competitive advantage. Four decades ago, McKinsey & Co.
distinguished between “same game” strategies (“playing by the traditional rules”)
6
and “new game” strategies (“rewriting them completely”). More recently, the term
business model innovation has been used to describe the introduction of novel
7
approaches to creating and/ or capturing value within an industry. Because business
model innovation is “about delivering existing products that are produced by existing technologies to existing markets and … often involves changes invisible to the
8
outside world, it can bring advantages that are hard to copy.” Indeed , most new
companies entering the Fortune 500 between 1997 and 2007 owed their success to
innovative business models. 9 However, a great deal of business model innovation
involves the adaptation and transfer of an existing business model from a different
sector (see Strategy Capsule 7.1).
CHAPTER 7 THE SOURCES AND DIMENSI ONS OF COMPETITIVE ADVANTAGE
The Historical Origins of Business Model Innovations
Franchising. The system of local licensed distri butors,
Business model innovations are typically associated with
♦
e-commerce businesses such as Google, eBay, Facebook,
each w ith defined excl usive territories, is attributed
Amazon, and Spotify. Yet, many of these business models
to the Singer Sewing Machine Company w hich
are variants on business models established much ear-
introduced its system in the 1880s.
lier. Significant business model innovations include the
Consumer cooperatives. The Rochdale Society of
♦
following:
Equitable Pioneers’ cooperative grocery store was
not the world’s first consu mer cooperative, but cre-
Free content supported by paid advertising origi♦
nated with US commercial radio at t he beginning of
the 1920s.
ated a model for future cooperatives.
•
owners-was developed by Muhammad Yunus’s
Platform business models. A platform is an interface
♦
Grameen Bank during the 1970s.
between two sets of platform users. Among the first
Tied products (razor-and-blades) model involving
♦
platform businesses were auction houses. Sotheby’s
below-cost pricing of the durable item and prem ium
was established in 1744, Christies in 1766.
♦
pricing of consumables, was introduced by Gillette’s
Shared-ownership models used by Airbnb, Zipcar,
NetJets, and t he like have their origins in real est ate
ti meshares (pioneered by the Swiss company,
Ha pi mag, during the 1960s).
Micronnance-sma ll loans to low-income business
♦
competitors during the 191 Os, then copied by Gillette.
Mail order. The first major mail order reta iler was
Montgomery Wa rd, established in 1872.
Business model innovations can be classified in different ways; a study by IBM identified three generic types:
• New industry models- reconfigurations of the conventional industry value chain
such as Dell’s direct sales model for PCs or Zara’s vertically integrated fastfashion model.
• New revenue models-changing the value proposition, the target audience or
pricing strategy. In the 1980s, Rolls Royce introduced “Power by the Hour”:
instead of buying jet engines outright, airlines could pay usage based fees for
engines, maintenance, and spares and other support services. Sulake, the Finnish creator of Habbo Hotel, initiated the model of free video games with microtransactions for in-game accessories. Roblox, the children’s gaming platform,
generates more than $1 billion a year from such transactions.
• New enterprise models- involve reconfiguring enterprise boundaries and partner
relationships. Apple’s iPhone, with outsourced manufacture and third-party
applications distributed through its online store, created a new model of the
smartphone business.
145
146 PART III BUSINESS STRATEGY AND THE QUEST FOR COMPETITIVE ADVANTAGE
Conceiving of business model innovations is easier than implementing them. To the
extent that most business model innovations are variations on existing themes, ana10
new
possibilities.
Office products
logical reasoning is an effective tool for revealing
retailer, Staples Inc., was established as the “Toys ‘R’ Us for office supplies”; cannabis
infrastructure company, Diego Pellicer Worldwide, Inc. envisages itself as the “Starbucks of marijuana.”
Implementing business model innovations comes up against the resistance created
by commitment to the prevailing business model. Established companies may be reluctant to experiment with new business models because of their adherence to current
asset allocations or to senior executives’ perceptions of the “dominant logic” of their
business. 11 However, using the lexicon of business models may assist in overcoming
these barriers: business models offer a narrative that can be used, not only to simplify
cognition, but also as a communication device creating a sense of legitimacy around
the initiative 12 Moreover, adopting new business models does not necessarily involve
abandoning existing models-increasingly, companies are getting used to operating
Blue Ocean Strategy
Kim and Mauborgne argue that the best value-creati ng
for example, Dell ‘s integrated system for ordering,
opport unities for business lie not in existing industries
assembling, and distributing PCs, which permitted
following conventional approaches to competing (what
unprecedented customer choice and speed of
they refer to as “red oceans”), but seeki ng uncontested
fu lfil lment.
market space. These “blue ocea ns” may be entirely new
industries created by technolog ical innovation (such as
The strategy canvas is a framew ork for developi ng
artificial intelligence and nanotechnology), but are more
blue ocean strategies. The horizonta l axis shows the dif-
likely to be the creation of new market space w ithin
ferent product characteristics along w hich the firm s in
existing industries using existing tech nologies. This
t he industry compete; the vertical axis shows t he amount
may involve:
of each cha racteristic a firm offers its customers. Starting
♦
w ith the value line showing the industry’s existing offerNew customer seg ments for existing products-
ings, the challenge is to identify a strategy that ca n pro-
for exa mple, Tesla’s Powerwall battery for electrica l
vide a novel combi nation of attributes. This involves fou r
storage in the home.
types of choice:
Reconceptualization
♦
of
existing
prod uct s-for
♦
example, Mark Zuckerberg’s reconceptua lization of
Raise: What factors should be raised well above t he
a printed Facebook of class members as an on line,
ind ustry’s standard?
Eliminate: Which factors t hat t he industry has long
♦
♦
interactive, and social platform.
Novel recombinations of product attributes and
competed on should be eliminated?
reconfig urations of established va lue chains that
establish new positions of competitive advantage-
♦
Reduce:Which factors should be red uced well below
the indu stry’s standard?
CHAPTER 7 THE SOURCES AND DIMENSIONS OF COMPETITIVE ADVANTAGE
multiple models: Netflix offers both video streaming and DVDs by mail. Pursuing
multiple business models can offer companies the benefits of both synergy and risk
spreading. 13
Blue Ocean Strategy An alternative approach to identifying the potential for
strategic innovation is that developed by INSEAD’s Kim Chan and Renee Maubo rgne. Their blue ocean strategy involves a quest for “uncontested market space.”14
The challenge is “to create new rules of the game by breaking the existing value/
15
cost trade-off.” One approach is to combine performance attributes that were
previously viewed as conflicting. Thus, JetBlue combines the low fares typical of
budget airlines together with superior inflight services . Strategy Capsule 7.2 outlines how the concept of blue ocean strategy can help companies pursue strategic
innovation.
♦
Creat e: Which fact ors should be created that the
ind ustry has never offered?
Source: Based upon W. C. Kim and R. Mauborgne, Blue Ocean
Strategy: How to Create Uncontested Market Space and Make the
Competition Irrelevant (Boston: Harvard Business School Press,
2005)
Fig ure 7.2 com pa res value lines for Cirq ue du Soleil
and a trad itiona l ci rcus.
FIGURE 7.2
The strategy canvas: Value lines for Cirque du Soleil and the traditional circus
High
• Cirque du Soleil
• Traditional circus
Low
——————————
147
148 PART III BUSINESS STRATEGY AND THE QUEST FOR COMPETITIVE ADVANTAGE
How Is Competitive Advantage Sustained?
Once established, competitive advantage is eroded by competition. The speed of
erosion depends on competitors’ ability to
