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Business Strategy & Policy PSU MGMT #562. Week # 5 Blue Ocean, Risk & Flexibility. Dave Garten [email protected] Apple Case – Key Learnings. Company culture has bred inconsistent success Highly innovative & creative w/strong niche Very insular -- stumbled on industry dynamics

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Business Strategy & Policy PSU MGMT #562

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Business Strategy & Policy PSU MGMT #562

Week # 5

Blue Ocean, Risk & Flexibility

Dave Garten

[email protected]


Apple Case – Key Learnings

  • Company culture has bred inconsistent success

    • Highly innovative & creative w/strong niche

    • Very insular -- stumbled on industry dynamics

  • Product advantage is not competitive advantage

  • As differentiation narrows (wintel vs. mac), substitution & economies of scale dominate

  • Windows of opportunity can be a significant factor in success (despite the “best” strategy)

Dave Garten- Business Strategy


Apple

Dave Garten- Business Strategy


Strategy Formulation

Derived from Blue Ocean Strategy by W. Chan Kim and Renee Mauborgne, HBS, 2004

Dave Garten - Business Strategy


Strategy Formulation

“Red Ocean”

“Blue Ocean”

Study of business launches in 108 companies…

Dave Garten - Business Strategy


Strategy Formulation

Reshaping boundaries  value innovation

  • Look across alternative industries

  • Look across chain of buyers

  • Look across complementary products & services

  • Look across functional or emotional appeal of buyers

  • Look across time

Dave Garten - Business Strategy


Netjets

Home Depot

Insulin

Bloomberg

Movies & babysitting

Swatch

Starbucks

Cisco

Strategy Formulation

Dave Garten - Business Strategy


Strategy Formulation

Increase Value

Lower Cost

What can be created?

What can be eliminated?

What can be reduced below industry levels?

What can be raised above industry levels?

Dave Garten - Business Strategy


Strategy Formulation

  • Redefine target toward new market space

  • Simultaneously 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

Costs

Value

Innovation

Derived from Blue Ocean Strategy by W. Chan Kim and Renee Mauborgne, HBS, 2004

Buyer value

Dave Garten - Business Strategy


High

Low

Strategy Formulation: Mapping

Major Airline

Car

SWA

Dave Garten - Business Strategy


Principles of Uncertainty

  • Decisions need to be made in an uncertain environment

  • NPV (traditional managerial finance) does not handle contingent or adaptive decision making

  • The 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

Dave Garten - Business Strategy


Sources of Uncertainty

  • Unpredictable environmental events (e.g. disruptive technologies)

  • Customer or stakeholder demands

  • Competitor’s moves

  • Actions of suppliers and buyers

  • Managerial actions

  • Employee actions

  • Government behavior (or lack there of)

Dave Garten - Business Strategy


Uncertainty & Strategic Response

Level of

Uncertainty

Response:

Strategic intent

Response:

Tactics

Source: Strategy Under Uncertainty by Hugh Courtney, Jane Kirkland and Partick Viguerie HBR 1997

Dave Garten - Business Strategy


Hedge Against Strategic Uncertainty

Dave Garten - Business Strategy


Create/preserve options

Selective flexibility Isolate volatility

Move

Up

Flexibility in Uncertainty

Low

High

Cost of Change

Low High

Uncertainty

Dave Garten - Business Strategy


Some Option data

Dave Garten - Business Strategy


Option Pricing: Black-Scholes

  • C = cost (price) of the option

  • S = the base value of the investment

  • E = the option exercise price

  • t = time until a decision (expiration)

  •  = the level of uncertainty (beta, std. dev)

Dave Garten - Business Strategy


Scenario Analysis

  • Contingency planning – generally one uncertainty

  • Modeling

  • Scenario 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

Dave Garten - Business Strategy


Scenario Analysis

Source: A Note on Scenario Planning by David Garvin and Lynne Levesque, HBR 2006

Dave Garten - Business Strategy


Scenario Example

Source: A Note on Scenario Planning by David Garvin and Lynne Levesque, HBR 2006

Dave Garten - Business Strategy


Scenario Example

Source: A Note on Scenario Planning by David Garvin and Lynne Levesque, HBR 2006

Dave Garten - Business Strategy


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 structure

  • In the real world… build an intuition

    • Framework to evaluate strategic options

Dave Garten - Business Strategy


Backup

Dave Garten - Business Strategy


Apple Case

Source: UBS, 2006

Dave Garten- Business Strategy


Apple Case

Dave Garten- Business Strategy


Jan 2011

Jan 2010

May 2008

Feb 2006

Feb 2004

July 2000

Feb 1996

Dave Garten- Business Strategy


Apple Case

Dave Garten- Business Strategy


NPVq = value/cost

lower

1.“Now”

Act

6. “Never”

2. “Maybe Now”

Manage Riskand Act

5. “Probably

Never”

 sqrt(t)

3.“Probably Later”

Learn before Acting

4.“Maybe Later”

ExplorePossibilities

Before Acting

higher

1.0

Source: Strategy as a Portfolio of Options by Timothy A. Luehrman, HBR 1998

Option Scenarios

Dave Garten - Business Strategy


Selective

20-80%

(20-3-8)

Derived from: IT Outsourcing: Maximizing Flexibility & Control

None

< 20%

(5-5-5)

Full

> 80%

(2-3-9)

Flexibility in Practice

IT outsourcing:

Cost containment vs. core competency

Dave Garten - Business Strategy


Strengths (S)

Weaknesses (W)

1.

2.

.

.

1.

2.

.

.

SO Strategies

WO Strategies

Opportunities (O)

Overcome weaknesses by taking advantage of opportunities

Use strengths to take advantage of opportunities

1.

2.

.

.

ST Strategies

WT Strategies

Threats (T)

1.

2.

.

.

Minimize weaknesses and avoid threats

Use strengths to avoid threats

Strategy Evaluation Tools

SWOT & Strategy Development

Source: Strategic management by Fred R. David

Dave Garten- Business Strategy


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