Strategic Thinking

Learning Objectives

By the time you have completed this chapter, you should be able to do the following: • Understand how complex strategic thinking is, and appreciate why one cannot do strategic planning with- out it.

• Learn how to go about finding a better strategy through identifying viable opportunities. • Identify situational monopolies or unique market spaces with no competitors. • Learn how to create viable scenarios so that strategic decisions might be made taking into account alterna- tive likely futures.

• Learn how to go about finding a better business model.

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CHAPTER 3Section 3.1 Purpose of Strategic Thinking

Chapter Outline

3.1 Purpose of Strategic Thinking

3.2 Finding Better Strategies

3.3 Finding Unique Market Spaces and Situational Monopolies

3.4 Creating Future Scenarios

3.5 Finding a Better Business Model

Strategic thinking is part of the strategic-planning process, which itself is part of the strategic- management process. This chapter describes what is involved in doing strategic thinking and why it should be done year round, not just when doing strategic planning. It includes many tools and techniques useful in finding and evaluating opportunities as well as trying to understand which of several futures might unfold.

3.1 Purpose of Strategic Thinking Company and business owners need a clear picture of the next few years in the life of the com- pany in order to make decisions so that the company can continue to prosper. Not surprisingly, the further into the future one looks, the more potential outcomes have to be considered.

What does strategic thinking really mean? To be sure, it implies thinking outside the box and not limiting oneself to conventional ideas. One pioneering approach to creativity developed by Edward De Bono is called lateral thinking.

Edward De Bono likens the process to a game of chess, which uses a standard set of pieces on a standard grid. He argues that, in life, the pieces are not a given even though we may perceive them as such. To engage in lateral thinking the object is not to play with the existing pieces but to change the actual pieces themselves. Strategic thinking may also have something to do with “see- ing the big picture,” or being able to distinguish between “the forest and the trees.” Some strategy consultants use the analogy of imagining a helicopter ride that takes one up to a sufficient height to see the big picture, the road beyond the turns, and the hills that, from ground level, are not visible. Some even take managers through lateral thinking and creativity exercises to “free up” people’s thinking, implying that to do these things is to think strategically. While these activities may be useful, they are not sufficient, and they do not constitute strategic thinking. (To learn more about lateral thinking, see De Bono, 1970, 1971, and 1992.)

Earlier, it was noted that a company could operate with a plan rather than with a strategy if it did not have to compete. The term strategy signifies the need to contend with and outwit competi- tion. Therefore, strategic thinking involves finding unique ways to compete and provide customer value. In other words, strategic thinking entails coming up with better strategies and business models.

For example, consider Starbucks. In a March 2011 interview, CEO Howard Schultz admitted that the rapid growth of the chain had become a “carcinogen” on its overall health. He reflected:

 

 

CHAPTER 3Section 3.1 Purpose of Strategic Thinking

“Growth should not be, and is not, a strategy. It’s a tactic.” He recalled visiting a Starbucks store and finding a table of teddy bears for sale. Concerned that this type of merchandise had nothing to do with coffee, he queried the manager of the store who explained that the bears were boost- ing the store’s monthly sales. Schultz realized that the coffee chain had strayed far from its mission and values in its emphasis on this sales metric, which is but one way to measure the health of an organization. In response, Schultz and his team had to engage in a new line of strategic thinking to create better strategies that would deliver customer value and satisfaction and bring the chain back to its roots (Webb, 2011).

It is not possible to create a strategy without using strategic thinking. The quest to find workable alternative strategies—one component of the strategic-planning process—is essentially strategic thinking in action. Discovering the strategy that is “right” for a company can result in a higher market share, a new competitive edge, or discovery of an uncontested market space, all of which is accomplished through strategic thinking. In the Starbucks example, after a period of strategic

The Origin of “Thinking Outside the Box” A phrase we often hear used casually in everyday speech in business, “thinking outside the box” is a useful metaphor for communicating how ordinary people can actually create extraordinary value when working together in organizations. The phrase comes from a famous puzzle in mathematics known as the nine-dot problem. Visualize a page with nine dots arrayed in three rows of three dots each. The objective is to draw four straight lines that connect all of the dots, without lifting your pen- cil from the paper.

The puzzle seems intractable because we immediately assume we are bound by the imaginary square in which the nine dots are arrayed. Of course the puzzle is impossible to solve with that constraint, but the instructions never mentioned any restriction. Most people simply assume this boundary and thus are limited by their perceptions or mental model. The solution requires that three of the four lines extend outside the space defined by the outmost dots (see below). Hence, the metaphor “thinking outside the box” refers to thinking outside of the normal mental models that influence the way we view the world.

 

 

CHAPTER 3Section 3.2 Finding Better Strategies

thinking, Schultz announced the end of monthly comparative sales reporting, and the chain shifted its merchandising to products that were tied to coffee, such as the now-popular “Via” instant cof- fee. Shultz and his team strategically figured that if they could “integrate Via and other products into the emotional connection we have with customers in our stores,” they could launch a new model that would still feed the bottom line but in a way that is consistent with the organization’s mission. Even being able to choose the industry or to dictate the rules of competition, should the company be so fortunate, are legitimate outcomes of strategic thinking (Webb, 2011).

Strategic thinking is not just “thinking” or “blue-skying,” but trying to find different and better ways of competing, of delivering customer value, and of growing—that is, thinking with some purpose in mind. Without such thinking and absent many years of experience, coming up with alternative strategies or business models and choosing a preferred or “best” one becomes con- siderably more difficult. The following sections go into more detail about how to engage in stra- tegic thinking.

3.2 Finding Better Strategies Having discussed the range of potential business strategies in Chapter 1, we shall next examine how companies can make decisions about which strategy or strategies work best for them. Searching for a better strategy could simply mean “look at strategies we aren’t currently pursuing and see whether adopting any of them makes any sense for us.” In meaningful terms, however, the challenge is more complex. In this section, we explore three ways of thinking that would yield better results:

• Play a different game • Be entrepreneurial • Find more opportunities

Play a Different Game Strategy is all about standing out from the competition by finding a unique way to dominate the industry. To paraphrase Michael Porter of the Harvard Business School and leading scholar in the field of strategy, improving the way you do business is desirable, but will not produce long-term benefits if it is something that your competitors can replicate (Porter, 1996). If competitors can easily copy your strategies, you will have to rethink them as you will not be about to maintain your advantage for long.

Discussion Questions 1. Chatting with a guest over dinner, you learn that he manages a small business and that, as this is

a new experience for him, he feels somewhat overwhelmed. How might your knowledge of stra- tegic thinking help him?

2. Is being highly creative the same as being a good strategic thinker? Why or why not? 3. What might be an apt analogy for trying to do strategic planning without doing any strategic

thinking? 4. If a company did only strategic thinking, would it need to do strategic planning? Discuss.

 

 

CHAPTER 3Section 3.2 Finding Better Strategies

Consider concentration, a recognized strategy by which a company continues to better its product and broaden its market share. If the competition imitates this success by playing the same game, at best a company may gain a limited or momentary edge by developing a new product or power- ful advertisement. Porter would say that this is achieving greater operational effectiveness, not strategy (Porter, 1996). The difference comes when a company can successfully differentiate itself in a way that is difficult or impossible for competitors to imitate. Differentiation is a form of playing a different game—a game which ideally only your company is positioned to win.

For example, TOMS Shoes founder Blake Mycoskie has created a unique business model that’s a win for the company, its customers, and the hundreds of thousands of impoverished children in Argentina, Africa, Ethiopia, and the United States who receive a free pair of shoes for every pair purchased (Cook, 2009). There is nothing particularly special or unique about selling shoes, or the design of the TOMS model. Consumers have hundreds, if not thousands, of choices when it comes to casual, affordable footwear. But Mycoskie’s differentiation strategy of introducing a social mes- sage of “doing good” into his business has resulted in a recognizable and profitable brand.

Gary Hamel and C. K. Prahalad, who formulated the “core competencies” business model, made a similar point when they said that firms should not be too concerned about competing with their current competitors. Focusing on the actions of competitors puts a company in the position of simply making attempts to “catch up,” by which time the industry leaders would have lengthened their lead again. Instead, they suggest that companies should prepare to compete in a future market, one that only they know about and for which, therefore, they would have the greatest lead time pre- paring to serve. When a company comes up with the right products to serve that market, it will, by defini- tion, be the leader and have all others scrambling to follow and catch up (Hamel & Prahalad, 1994). These are valuable points, but identifying such a market is no trivial feat. Preparing to compete in a future market requires an intimate knowledge of industry and mar- ket trends as well as what is changing in the general external environment. These are, in fact, the requisite elements for strategic thinking when it is done prop- erly, all the time, year round.

One clear example of successful differentiation is the grocery store chain Trader Joe’s. The chain began as a small group of stores based in Southern California and by 2011 grew to become a nationwide chain with 365 stores and an estimated $8.5 billion in revenue (Super- market News, n.d.). Joe Coulombe, the chain’s founder, quickly realized that he could not compete against tra- ditional convenience stores such as 7-Eleven or well- known grocery store chains like Safeway. In order to be different, he drew on his love of traveling to France for food and wine, turning trips abroad into business trips to purchase for his stores. Today, Trader Joe’s dif- ferentiates itself in five distinct ways:

Associated Press/Ric Francis

Trader Joe’s stores differentiate themselves from other grocery stores by having fast turnaround; selective and privately labeled products; small, intimate environments; great customer service; and extraordinary value.

 

 

CHAPTER 3Section 3.2 Finding Better Strategies

• Selective products. Trader Joe’s has a limited assortment of about 3,200 SKUs (stock-keeping units), a relatively small number for a grocery store. In contrast, a large supermarket would have on the order of 50,000 SKUs. The items turn over quickly.

• Private-labeled unique products. About 70% of the items in the stores are unusual items that were found on international buying trips and immediately repackaged with the Trader Joe’s brand label. The stores do not stock commodities. Because most of the items are unique, customers can buy them only from Trader Joe’s.

• Small, intimate feel of each store. The stores are kept intentionally small and very intimate. A Trader Joe’s market is on average about 10,000 square feet. Safeway by comparison has an average store size of 55,000 square feet. If a store gets too crowded, another one is opened. Giving each location a neighborhood-store atmosphere that is not slick or chainlike turns it into a unique social experience for the customer. The Trader Joe’s brand is, in fact, the store.

• Fanatical attention to customers. Everything Trader Joe’s does centers on the customer. Its whole philosophy of buying and offering products is predicated on choosing those products that customers will and do buy. The products are selected and tested with the customer in mind. This forges a bond with its customers and gets them to come back time and time again.

• Extraordinary value. Trader Joe’s buying target is a product with significant value, com- prising taste, quality, private labeling, and price. Each product has to pass a number of tests in the tasting process. Trader Joe’s thus ensures that the products taste good, meet rigorous standards of quality, and are priced competitively. That spells value from the customer’s point of view. If Trader Joe’s cannot find the best price for a product, the item is not carried in its stores (Abraham, 2002).

Trader Joe’s is a model of what it means to play by your own rules and win. The chain’s busi- ness model is unrivaled, with popular products and a trusted brand name. Customer loyalty is what sets Trader Joe’s apart from competing grocers. After all, isn’t one supermarket much like another? Finally, Trader Joe’s selects the items it stocks and sells, whereas chain supermarkets all stock the same selection of brand-name products that manufacturers supply to all supermarkets. Because the grocery chains stock a common selection of name brands, manufacturers have bar- gaining power over them. That is why Trader Joe’s is also more profitable.

Be Entrepreneurial Those with an entrepreneurial mindset are “different” from everyone else. They see opportunity where others do not. They seem to have a special knack for discovering opportunities and thinking outside the box. Entrepreneurs are extremely mindful of value generation and tirelessly seek new ways to produce and deliver value. When something takes a long time to accomplish, they look for a faster way. If something keeps breaking down while using it, they look for a more reliable way. If something is too complex, they find a simpler solution.

The entrepreneur’s ability to see opportunity depends first on a level of dissatisfaction with what exists today and a clear conception of the problem. After that, they generate ideas and possible solutions until arriving at a resolution to the problem, which they then develop into a product or service with commercial potential. In each instance, it is the customer’s needs and level of per- ceived satisfaction that drive the changes pursued. The customer base is considered the number one concern, and the entrepreneur must constantly attempt to “walk in the customers’ shoes” in order to determine what will fulfill their needs.

Dustin Moskovitz and Justin Rosenstein were two of the founders of Facebook. In their experiences at the growing giant, they frequently became frustrated with the difficulty of project management

 

 

CHAPTER 3Section 3.2 Finding Better Strategies

in an organization with layers of management, hun- dreds of employees, and a seemingly endless stream of innovations and new ideas. Realizing that their struggles to streamline collaborative work and com- munication were common to many professionals, they eventually left Facebook to create Asana, a workplace- productivity-software company. Because Moskovitz and Rosenstein had literally walked in the customer’s shoes, they had a great foundation for launching a business that would help other professionals solve common workplace-collaboration and project-man- agement problems (Vance & MacMillan, 2011).

To be able to take advantage of strategic opportunities that they are missing, strategists, organizational lead- ers, and marketing professionals must learn to look at the world with entrepreneurial eyes and see it from

the customer’s perspective. Strategic thinking is concerned not simply with how to be different but with generating alternative possibilities of creating customer value that the organization can deliver.

Figure 3.1 shows a matrix of products and markets. All companies in business are, by definition, in the top-left cell, selling existing products or services to an existing market. When product- or market-development strategies are implemented, it is rare that only one of the components is affected. Improving the product is likely to expand the market, and expanding the market usually entails improving the product. Improving or modifying the product often attracts new customers, for example when a sedan is modified to be sportier or even into a convertible. Expanding a market

Exsisting Markets Product development

M a rk

e t d e ve

lo p m

e n t

Exsisting Products

Improved Products

New Products

Expanded Markets

New Markets

Conglomerate Diversification

Figure 3.1: Concentration strategies

Associated Press/Rick Bowmer

Nike used a concentration strategy to develop a whole new line of athletic apparel in addition to its athletic shoes.

 

 

CHAPTER 3Section 3.2 Finding Better Strategies

usually involves modifying the product in some way. For instance, selling cars in England that are made in the United States or the European Community requires putting the steering wheel and driver controls on the right-hand side. The bottom-right cell—coming up with a new product for a new market—is not common because of the huge risk such a move entails. Its technical term is conglomerate diversification. Companies that must enter a brand new market with a brand new product should do so either through acquisition or one or more strategic alliances if they are to mitigate the high risk.

Find More Opportunities In terms of improving the product or introducing a new one, where do ideas come from besides the customer? Several approaches might be helpful: a system for innovation, Abell’s three-dimensional business-definition model, an experience-based opportunity-search method, structured brain- storming, and strategic frontiers.

System for Innovation The system for innovation is most useful for coming up with new product ideas rather than changes to an existing product line. In its most basic form, employees are asked to submit ideas for new products to a new-product-development committee. Employees would be given guidelines and some incentive to propose projects and should always have their efforts acknowledged. They would be instructed to give just enough information to enable the committee to determine whether it should follow up on the idea or not. If the idea has merit, the contributor would be asked to provide more detailed information, such as market demand and likely customers, manufacturing process, costs, additional development needed, and likely volume. If the committee then believed that the idea has market potential, it would at this stage decide to allocate resources to develop the pro- posal further, possibly to a prototype stage, along with detailed market and competitive analyses. This would continue until the product was approved for full-scale manufacturing and marketing. Under such a system, the committee would meet as often as there were projects to consider.

Abell’s Three-Dimensional Business-Definition Model Derek Abell (1980, pp. 29–30) proposed that the mission of a corporation is determined by three dimensions. These are (1) customer groups, or who the company serves; (2) customer needs; and (3) capabilities and technologies, or how the company will meet the customer needs. Abell maintained that mission statements should contain all three elements. In addition to defin- ing a company’s mission statement, this model can also be very effective in searching for new opportunities.

The first step is to brainstorm different kinds of customers or customer groups that might use or buy the product. Then brainstorm different products that could be made using the company’s skills, capabilities, and technologies. For example, a furniture company that makes the upholstery for all its furniture and whose business was declining, produced an idea in a brainstorming session to manufacture sails for boats—the same skills employed in making upholstery, but using differ- ent designs and different materials. Lastly, brainstorm other products your customers need or buy that you might provide.

 

 

CHAPTER 3Section 3.2 Finding Better Strategies

With respect to this last dimension, consider Reader’s Digest Association, publisher of Reader’s Digest, the largest-circulation magazine in the world in 1992 (around 28 million readers). As famous and as popular as its magazine and brand were at the time, the real value to the com- pany is the huge database of subscribers that it had (about 50 million households in the United States and an equal number spread across other countries). It has used that database to sell vari- ous products such as condensed books and other publications, videos, CDs, and so on. In 1992, 66.7% of its revenues and 91.8% of its operating profits came from selling products through mail order (its “database-distribution channel”), far higher percentages than its flagship magazine (Kopp and Lois Shufeldt, 1994). Using Abell’s model, what other products could it send down this distribution channel (that would be amenable to mail order and that would appeal to its subscriber base)?

Remember that what you are doing when brainstorming is drawing up a menu of opportuni- ties, not the final ones you are going to adopt. You might think of it as creating a wish list, with- out regard to how many items get on that list. Later, prune the list down to those that appear feasible and relevant to the company’s business. While you will now have a much smaller num- ber, you may still have too many to adopt. As a guideline, aim for 10 real opportunities, with 4–6 as a more typical range. Investigating the feasibility of more than a handful of opportuni- ties is prohibitively expensive for all but the largest companies. Most, if not all, of these will appear later as strategic issues to be evaluated as to whether it makes sense for the company to pursue them.

An Experience-Based Opportunity-Search Method A few years ago a multidisciplinary team of students at California State Polytechnic University undertook a yearlong project to identify commercial opportunities for a large aerospace company in the Los Angeles area. The company had a system for innovation, which in the past three years or so had yielded over 80 ideas, of which only three had been pursued and implemented. All three had subsequently been sold to other companies, because the company did not consider them to be integral to their core business. In terms of ongoing products and revenue streams, the com- pany was still searching for opportunities to pursue. Clearly, the company’s system for innovation was not working. Furthermore, finding new opportunities took on particular urgency because the defense industry was in the midst of a long-term decline.

In explaining how it went about the process of seeking opportunities, the company showed the team a triangular diagram that was used to depict the company’s strategic options (Figure 3.3). The points of the triangle each represented one of three variables, one or more of which could be adjusted to stimulate ideas for new business opportunities. These parameters defined the project, which was essentially to find a number of concrete opportunities the company could pursue.

In simple terms, the options consisted of some combination of finding new markets, develop- ing new technologies, and modifying the existing business systems. For example, the company could try to find new customers without changing either its technical capabilities or its business system. This constraint limited potential customers to large billion-dollar companies or the fed- eral government. Another option would be to update its technical capabilities to develop prod- ucts for existing markets while maintaining its present business systems. A third possibility would be to innovate with its business system, while keeping the others constant. At a deeper level of

 

 

CHAPTER 3Section 3.2 Finding Better Strategies

complexity the company could change any two sets of variables while keeping the third constant, or it could change all three at once. Clearly, the more variables that are changed simultaneously, the riskier the strategy. Initially, the team was asked to confine its search for opportunities to find- ing new customers while keeping the other two variables constant. Later, because that constraint was found to be too restrictive, it was relaxed to include acquiring a new technology or core capa- bility if the opportunity in question was significantly large and worth pursuing, and even include changing its business system.

The actual method this team used was a combination inside-outside approach. The inside-out part involved first gaining an understanding of the company’s products, technologies, capabili- ties, and business systems, and then trying to find new markets and applications that might fit the company. The outside-in part involved first looking at competitors, markets, industries, and application areas to find opportunities, and then comparing them against the company’s technical capabilities and business process to see which were feasible. The project team came up with 28 ideas but quickly discarded half of them because of obvious deficiencies or mismatches with the company’s capabilities. The remaining ideas were then pruned to seven candidates, from which the company selected four for further study. The team finally recommended three solid oppor- tunities that met all criteria. The project showed that gearing up to find opportunities is time- consuming and costly and really should be done year round. In this way, a company will have time to act on those it finds that have real potential.

Opportunities are the lifeblood of any organization and one of the primary sources for key stra- tegic issues for the company. Many strategic issues entail making choices between opportunities a company could pursue and, in fact, the key ones find their way into one strategic alternative or another. That is when the decision is made as to which opportunity or opportunities should be pursued, particularly in the typical case where the company cannot afford to pursue more than one at a time.

Technology Technical capabilities and core competence

Market Large ($B) customers, Government agencies

Business System RFPs, proposals,

contracts, cooperative customer development

Figure 3.2: Opportunity-search method

 

 

CHAPTER 3Section 3.2 Finding Better Strategies

Structured Brainstorming Thinking outside the box helps businesspeople seek solutions to problems in ways that are neither mundane nor predictable. The following opportunity-seeking questions may serve to facilitate a structured brainstorming process to develop potential opportunities:

• Are there other customers who might benefit from our product, even if the product is used differently? Hughes Aircraft was a major aerospace and defense contractor that faced shrinking markets for its products when defense budgets began declining in the early 1990s. One of its divisions focused on selling and servicing satellites for govern- ment and industrial clients. To reduce its dependence on government contracts, it cre- ated a different business model directed at a consumer market. The technology that it had developed for the military and large corporate customers was repurposed to enable the beaming of television channels and movies off satellites to home-mounted satellite- dish receivers. By 2001, the division, now called DirecTV, accounted for 77% of Hughes’ profits at the time (Tucker, 2001).

• What other products could we produce for the same customers? Tyson Foods provides a good example of a company finding new opportunities by expanding its product offer- ings to existing customers. In 1967, Tyson was doing very well, with $53 million in annual revenues from selling raw chickens, mainly to grocery stores in Arkansas and neighboring states. Growth options at the time were either to truck the chickens to more states or come up with new products. The first new product was a chicken patty for sandwiches. In due course, as a result of trying to figure out how to “do more with chicken” (Tyson’s motto), it began offering chicken pieces, marinated chicken, frozen prepared-chicken dinners, chicken tenders, chicken nuggets, and ready- to-eat chicken “buffalo wings.” Along with these product innovations, Tyson explored different distribution channels. Instead of sell- ing chicken products only to food shoppers through grocery stores, it set out to reach consumers even when they went out to eat, and expanded its markets to include fast-food outlets, restaurants, airlines, and hospitals. In the early 1980s, it worked with McDonald’s to add chicken to its menu. In the decade that followed as Chicken McNuggets became pop- ular, Tyson experienced a 7-fold increase in revenues and 19-fold increase in earnings per share (EPS) (Tucker, 2001).

• What other types of products might we create, for any customers that have need of our expertise, technologies, and ability? Matsushita Corporation is a conglomerate that produces products for many markets worldwide. At one point, it was faced with the maturing of its rice-cooker, oven-toaster, and food-processor product lines. Using technologies contained in each of them (computer-controlled heating from the rice cooker, heating devices from the toaster, and motors from food processors), it created a new consumer product, a bread machine, that produced a variety of breads reli- ably and simply every single time. The product produced outstanding sales the first year it

Associated Press/Paul Sakuma

Tyson Foods reached more customers by offering different kinds of chicken products.

 

 

CHAPTER 3Section 3.2 Finding Better Strategies

was introduced (Abraham & Knight, 2001). In contrast, Motorola, which had been produc- ing amazing touch-screen cell phones in its labs in China for the Chinese market, failed to move that technology from China to the United States and other markets. Why? There was no innovation process, or standardized-pipeline mechanism that focused on bringing out a steady stream of innovative products (Nussbaum, 2008).

• How might we reinvent our business model in order to gain a competitive advantage? Thomas Weisel Partners Group was a leading force in taking dot-com-era firms public in the late 1990s. Weisel, for example, ushered many small start-ups under the Yahoo! umbrella. But when the dot-com bubble burst in 2000, he was forced to either reinvent the company or take up golf prematurely—probably on a public course. Like many other firms that survived the crash of the tech market, Weisel now focuses on easily profitable social-media and social-networking sites. Because these sites rely on relatively inexpen- sive technology, they tend to make money quickly. Similarly, Sandy Robertson, a technol- ogy-oriented private-equity banker, describes the critical business-model shift from “old” tech to social media: “Social media is the new frontier.” Like those firms that survived the first bubble bust, these are aware that the social-media craze might not last forever, either, and remain dynamic and flexible in their models and practices (Craig, 2001). Apple provides another good example. While not the first to bring digital music to market, it simply took over that market when it launched the iPod. Apple’s true innovation was mak- ing downloading music easy and convenient by adopting a business model that combined hardware, software, and service.

• Looking to the future, can we predict which industries will have the highest growth? This is a variant of the previous question and involves diversifying into a business in which the company has little experience or know-how. At first glance some people might say that pursuing such a strategy would be irresponsible and a recipe for disaster. There are, how- ever, ways of entering a new business area intelligently and while minimizing the inherent risk of a diversification strategy. A company could always hire someone having a great amount of experience and know-how in the proposed industry to head up the effort. It could also acquire a company already in that business whose management had the neces- sary experience and expertise. Assuming that these steps could take care of the inherent initial risk, the issue here is identifying which industries are growing rapidly.

While finding opportunities for growth should always be a top priority for a company, there is an endless list of companies that have allowed themselves to become distracted from their main busi- ness, whether through an acquisition, integrating vertically backwards, diversifying, or searching for other opportunities. A company must continue to perform optimally at its core business while the search for new opportunities takes place simultaneously. When the current business stops growing, two things happen: pressure to maintain profits and the stock price leads to cost-cutting, includ- ing programs for new-product development, and the cash available for developing new sources of revenue dries up (Fisher, 2001). Putting a manager or small group permanently in charge of the opportunity-finding process will enable the company to keep its focus on its present business, the growth of which must be maintained. Losing that focus can be fatal to a business (Reis, 1996).

Strategic Frontiers In their book, The Power of Strategy Innovation, Robert Johnston and Douglas Bate propose that companies adopt a process called “strategy innovation” which is the term they use for stra- tegic thinking (2003). One important concept put forth is exploring a strategic frontier, which they describe as anything a company might do in the future that it is not currently doing or that

 

 

CHAPTER 3Section 3.2 Finding Better Strategies

could be an extension of its current strategy. That might involve targeting a new market, entering another business, merging with another company, forming a strategic alliance, broadening the product line, adopting a new technology, and so on. The authors define strategic frontier as “that unexplored area of potential growth that lies between today’s business and tomorrow’s opportu- nities,” (113). Table 3.1 presents some examples of strategic frontiers.

Their method advocates first getting top-management agreement or alignment as to which stra- tegic frontier is to be explored, but this unnecessarily limits the person or group and runs the risk of the chosen frontier not being the correct one. It is better for the exploration to be open-ended and to inform it with information about how industries, competitors, and markets change.

Table 3.1: Some strategic frontiers

Company-Specific Company-Generic Marketplace

New product Franchising Artificial intelligence

New product category Globalization Biotechnology

New distribution channel JIT manufacturing Genomics

New manufacturing process Mass customization Internet

New positioning Outsourcing Nanotechnology

New sourcing strategy Partnerships Smart materials

New technology Patent exploration Wireless communications

Services Automation

Source: Robert E. Johnston Jr. and J. Douglas Bate (2003), The power of strategy innovation: A new way of linking creativity and strategic planning to discover great business opportunities. New York: AMACOM, p. 117.

One of the best models for sustained growth that embodies some concepts discussed earlier comes from a book written by three partners at McKinsey & Company, a well-known global man- agement-consulting firm. They call the model the “three horizons of growth”:

• Horizon 1 constitutes the company’s core business and accounts for the lion’s share of profits and cash flow. The Horizon 1 business must be successful for initiatives in Horizons 2 and 3 to be viable.

• Horizon 2 comprises businesses or lines of business on the rise that could transform the company but not without considerable investment. They might be described as the emerg- ing stars of the company. Though profits are still several years away, they show strong rev- enue growth and a growing customer base. They are entrepreneurial in nature and focus on increased revenues and market share. They could be extensions of the firm’s current business or moves into new directions. Horizon 2 emphasizes building new streams of revenue for the firm that could in time become Horizon 1 businesses.

• Horizon 3 businesses are options on future opportunities, but they are not simply ephem- eral ideas. Rather, they are real activities and investments, however small, such as research projects, minority stakes, pilot projects, etc. These might never show a profit or conversely they could be successes that eventually end up as Horizon 1 businesses (Baghai, Coley, & White, 2000).

 

 

CHAPTER 3Section 3.3 Finding Unique Market Spaces and Situational Monopolies

The key is to manage all three horizons concurrently. Putting off Horizon 2 or 3 businesses is tanta- mount to closing down the company’s future. While these may be new terms for short-, medium-, and long-range projects, the principle is the same. To ensure long-term growth, the company has to “fill the pipeline” and then nurture Horizon 2 and 3 projects into Horizon 1 successes. A com- pany’s vision has to encompass all three horizons, not just Horizon 1. Using earlier constructs, this describes a formal opportunity-finding mechanism operating all the time, producing a “portfolio” of products or businesses with growth potential. These opportunities then have to be managed and brought into the mainstream of what the company does, its Horizon 1 businesses. Identify- ing and starting Horizon 3 businesses, for example, takes a very different entrepreneurial mindset and approach from managing the current core Horizon 1 business successfully. The difference is opportunity-finding and strategic thinking.

The new opportunity or fledgling business should be run as a separate enterprise, primarily because it might require a business model very different from the company’s current one. Try- ing to create and implement a new business model while operating the existing one is difficult at best. Christensen proposed the concept of a disruptive strategy, that is, one that will disrupt the market but at the same time broaden the customer base and help the company grow. He cites the example of Teradyne, a company that made sophisticated integrated-circuit-testing equipment. In the mid-1990s, it sensed that competitors were about to introduce a cheaper, simpler version of the product that could test simple circuits at the low end of the market. Rather than wait, Tera- dyne decided to beat them to it. Because creating such a product would also disrupt Teradyne’s current product, it needed to be handled by an independent group within the company. By keep- ing very tight control on costs and a separate focus, the venture achieved $150 million in annual sales within 18 months of its release in 1998 (Christensen, Johnson, & Darrell, 2002).

3.3 Finding Unique Market Spaces and Situational Monopolies Section 1.6 introduced Kim and Mauborgne’s concept of a blue ocean and why it made so much sense to look for one (Kim & Mauborgne, 2005). Because it is central to strategic thinking, this section explains two related techniques for finding a blue ocean detailed in that book, as well as how to find a situation monopoly, a related concept proposed by Milind Lele of the University of Chicago Graduate School of Business (2005).

Discussion Questions 1. If playing a “different game” makes so much sense strategically, why doesn’t every company fol-

low that advice? 2. Is it possible for established companies—even ones in mature industries—to think

entrepreneurially? 3. Consider a company that had an “opportunity-finding” process it followed throughout the year.

Presumably its opportunity “pipeline” would be full and it would constantly be deciding which ones to pursue, an enviable position to be in. What could go wrong with such a process? Why might it not produce envisioned results?

4. Might following a rigid process for identifying and analyzing opportunities stifle creativity? Doesn’t creativity flourish better in a freewheeling environment? Discuss.

5. A company has, over time, succeeded in differentiating itself and raising its profits. What must it do to capture those benefits over an extended period? Can a differentiated edge erode? Discuss.

 

 

CHAPTER 3Section 3.3 Finding Unique Market Spaces and Situational Monopolies

Value innovation is at the core of a blue-ocean strategy, which places as much emphasis on value as it does on innovation. Instead of having to make a trade-off between differentiation and cost, as most strategies require, value innovation seeks to pursue differentiation and low cost simultane- ously, which is easier to do when you are in a market space with no competition.

Kim and Mauborgne’s two analytic techniques for beginning to think about how to find a blue ocean, namely the strategy canvas and the four-action framework, are summarized in the follow- ing sections.

The Strategy Canvas The strategy canvas technique takes the form of a graphical two-dimensional representation. The x-axis comprises a list of the factors on which the industry currently competes, such as price, fea- tures, promotion, distribution, service, and so forth. The y-axis represents the offering level that buyers receive across all these competing factors.

When the offering levels of each competing factor, whether for an industry, a segment of it, or a company, are connected, the resulting plot or strategic profile is called a value curve. For a company, its value curve is a depiction of its relative performance across the key competitive

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CHAPTER 3Section 3.3 Finding Unique Market Spaces and Situational Monopolies

factors of its industry. Figure 3.4 shows a depiction of the strategy canvas for the personal- computer industry.

Value curves can depict performance of an industry or its segments. Creating value curves can be based on extant knowledge of an industry or company, or a melding of the opinions of a group. The fact that what results isn’t as accurate as if done through extensive research doesn’t matter. The important thing is to ask the right questions and focus on the right issues. Greater skill comes through more practice.

Value curves of segments and companies may or may not intersect. In parts where they overlap, a company is not differentiated on those competitive factors. Where the company’s value curve is higher than the industry’s, the company is clearly differentiated on those issues. In a situation where a company uses issues on which the industry doesn’t even register such, as using unique competitive factors, the company can be said to have found a blue ocean.

From the founding of Apple Computer in 1976, Steve Jobs envisioned the PC as a personal- information device. The Microsoft-Intel alliance, euphemistically called WinTel, appropriated this notion and made the PC business that of an industrial computer, sold in quantities to large corporations. By 2001, the PC market had degener- ated into a “red ocean” of price/performance compe- tition where ever-faster computers with ever-greater memory and storage were being offered at ever- decreasing prices.

Jobs saw an opportunity to refocus the PC on people, not corporations. Jobs’ vision of the PC was not so much a personal computer as it was a personal acces- sory, much like the automobile had become by the 1950s. He envisaged the computer as something that people would use as a tool while at the same time being something to which they attached their identity, much as they might a designer handbag. Jobs realized this vision by designing Apple’s computer to be visually beautiful, so it became almost a fashion statement. In manufacturing Apple incorporated industry-leading screen technology and superior case materials such as titanium rather than the plastics used by competitors. Apple set the industry standard for customer service, and reintroduced the concept of branded retail stores. The Apple Stores are about brand building, not sales; for the first two or three years, Apple lost money on every computer sold in its stores. Apple deliberately raised prices of its products to cover the advanced visual appeal of its machines and the high level of cus- tomer support, aware such prices would reduce the price/performance metrics of its products.

Although there will always be a corporate industrial market for PCs, by 2008, with mobs of excited customers filling its branded retail stores, Apple

Associated Press/Paul Sakuma

With Apple computers, Steve Jobs imple- mented a strategy that turned the personal computer into a personal accessory that the consumers could be identified with.

 

 

CHAPTER 3Section 3.3 Finding Unique Market Spaces and Situational Monopolies

had created a blue ocean marketplace where the other PC competitors were no longer relevant. By August 2010, Apple had become the most valuable technology stock in the world and then became the company with the biggest market capitalization in the world (Crum, n.d.).

The Four-Action Framework A first attempt at plotting a company’s value curve might disappoint if the curve is too similar to that of the industry. This means, of course, that the company is not at all or not sufficiently differ- entiated. The four-action framework is designed to stimulate thinking to find ways to differenti- ate the company and even ways of competing that have not been contemplated by the industry, which is to say, a blue ocean.

Situational Monopoly The conventional mental model of a monopoly is a company that accounts for 100% of sales in a given industry; that is the definition taught in every introductory economics course. Governments created the majority of such monopolies. In Britain, for example, in the past the state ran the railroads, telecommunications, airlines, health care, and other major industries. Most have since been privatized, except for the National Health System (Abraham, 1974).

Notwithstanding the traditional definition, a form of monopoly exists that most successful com- panies operate at different phases of their operation. Lele termed this a situational monopoly or monopoly space, and it exists because a company either creates or takes advantage of a situation to charge monopoly prices. It is “an ownable space for a useful period of time” and is natural, legal, and surprisingly common (2005, p. 25). Consider the high concessions prices at movie the- aters and sports arenas. Vendors are able to charge inflated prices because the facilities allow only food and drink that was purchased there to be consumed on the premises. Similarly, consumers are forced to pay high prices for brand-name replacement-ink cartridges for printers if the war- ranty is not to be voided. In the personal-care-products business one can see this same situation with replacement-razor blades.

Companies can create a situational monopoly through innovative business practices. Dell was able to enjoy a 10-year monopoly when it was the only computer manufacturer selling made-to-order PCs for the corporate market. Enterprise Rent-A-Car grew to be the largest car-rental company in the United States because it is the only car-rental company that caters to people for local, non- travel-related needs such as renting a car when their own car is being serviced or repaired, and it will pick you up and drop you off at the end (Lele, 2005).

To discover where your company’s next monopoly space might be, look for a pattern and a situa- tion where customers want something that existing competitors can’t or won’t provide. In other words, look for an emerging need, incumbent inertia, and new capability. All three conditions must be present for a monopoly space to be opening up (Lele, 2005).

Because owning a monopoly space is legal and produces high profits, every company should want to look for one and hang on to it as long as possible. In fact, Lele says, a company’s chief respon- sibility should be to find its next monopoly space. That should be the goal, and how to get there should be the strategy (2005).

 

 

CHAPTER 3Section 3.3 Finding Unique Market Spaces and Situational Monopolies

Case Study The Merger of Whole Foods and Wild Oats: Shattering the Situational Monopoly

In early 2007, the premium organic and natural-foods grocer Whole Foods proposed a purchase of competitor Wild Oats’ 190 stores. Subsequently, the Federal Trade Commission challenged the deal, claiming that because Whole Foods and Wild Oats were the “only two nationwide operators of pre- mium natural and organic supermarkets in the United States,” the purchase would enable the cre- ation of a monopoly in this market.

In his ruling against the FTC, United States District Judge Paul L. Friedman highlighted the ways in which contemporary market dynamics shatter monopolies. Essentially, although Whole Foods and Wild Oats were the only supermarkets dedicated to the sale of natural and organic products, Friedman pointed out that other national supermarket chains such as Wegmans, Safeway, Publix, Kroger, Supervalu (and subsequently, even Walmart) have invested heavily to compete in this market. Court documents even referred to statements made by Whole Foods that the chain had reduced prices in order to be com- petitive with some of these other mainstream supermarkets’ natural and organic offerings.

Although Whole Foods and Wild Oats together at one point had a monopoly space on premium natural and organic groceries, other supermarkets had realigned their strategies to enter and compete in this market. “To put it colloquially,” Friedman wrote, “this train has already left the station” (Federal Trade Commission v. Whole Foods Market, Inc., and Wild Oats Markets, Inc., p. 37).

The Whole Foods/Wild Oats merger calls into question the staying power of monopolies and situ- ational monopolies. The current economy, enabled by globalization, quick and flexible decision mak- ing (often facilitated by digital media), and the need to be adaptive and dynamic in business practices may extinguish these notions. What do you think?

Questions for Critical Thinking and Engagement 1. In our contemporary era of business and organizing, is it possible for a true monopoly to

develop? If yes, in what industries and why? If no, why not? What about a situational monopoly? 2. What factors made it desirable and easier for mainstream supermarkets to enter the domain of

Whole Foods/Wild Oats than in the past? 3. Can the creation of a situational monopoly be strategic, or a byproduct of circumstances? 4. Do organizations with situational monopolies spend resources to keep others out of the market?

Why or why not? 5. Identify another example of a once situational monopoly that now splits market share or that has

exited the market entirely. Describe the circumstances either in writing or during class discus- sion, as directed by your instructor.

Discussion Questions 1. Which concept is more useful, in your opinion, in trying to find a unique market space with no

competitors—the strategy canvas and four-action framework or a situational monopoly? Give reasons for your answer.

2. Do you think there are differences between the benefits of a highly differentiated strategy and being in a monopoly space? If so, what are they? If not, why not?

 

 

CHAPTER 3Section 3.4 Creating Future Scenarios

3.4 Creating Future Scenarios The consequences of any decision made today play out in the future. Likewise, the product of every decision made during the strategic-planning process, including the strategy itself, happens in the future. It is important then that strategists and key organizational managers should feel comfortable in thinking about the future, because that is where they are going to live and work, implement plans and achieve results, and take the company to where it is going.

Some, managers are not comfortable thinking about or dealing with the future, adopting an atti- tude that it is beyond their purview and instead the burden of the executives. Many view it as “beyond their control.” They feel that nothing they can do can change the inexorable momentum that carries us into the future. That is a fatalistic attitude.

One cannot change other people or their behavior, but one can control how one responds to other people and what one does oneself. Most of all, it is a deep-down belief that what you do does make a difference and can affect how things turn out in the future. This is called a normative attitude. People with a normative attitude do not extrapolate everything. While certain industries that are stable for a number of years lend themselves to short-term extrapolation, others are more volatile or unstable and are likely to be discontinuous; the future will be unlike the past.

How does thinking about the future relate to strategic thinking? First, any kind of strategic thinking is going to be set in the future, so learning some ways of forecasting or anticipating the future can serve you very well. Secondly, trying to do strategic thinking with a fatalistic or naïve attitude about the future will adversely affect the results achieved. Instead, a normative attitude asks, of all possible futures, what can be done to bring about a desired future. Finally, being comfortable about the future means being comfortable with ambiguity, uncertainty, incompleteness, and subjectivity. This is easier said than done. For example, most accountants, used to dealing only with historical information, find dealing with the future very difficult. In fact, they have resisted auditing forecast information for pub- lic companies for years, unwilling to take responsibility because of the uncertainty (Abraham, 1978).

Futures Research Methods of looking at or analyzing the future are called futures-research methods. The most relevant and widely used tool that would enhance strategic thinking is scenario planning, a tool designed to create a small number of plausible futures constructed around critical issues for the company about which sufficient information is unavailable to determine how the issue will turn out. Despite the fact that scenario planning requires weeks to months of time, training, and exper- tise, companies often benefit greatly from the shared learning process as well as from the end result. Such planning can serve to position and hone employee skills as well as change set thinking habits.

3. “Monopoly” still has an unfortunate and illegal connotation, yet owning a monopoly space is per- fectly legal, highly profitable, and quite common. If you had to come up with another name for it, what would it be?

4. Can you use the four-action framework without a comprehensive knowledge of the industry in which your company is competing?

5. Must one use the strategy-canvas tool together with the four-action framework, or can they yield benefits when used alone? Discuss.

 

 

CHAPTER 3Section 3.4 Creating Future Scenarios

Doug Randall (2009), managing partner of Monitor 360 and a partner at the strategic-consulting firm Monitor, believes that the future should be explored in order to understand more fully options that might be considered today. He offers the five following recommendations:

•  Create scenarios that are plausible, not necessarily probable.

•  Determine what it would take to be successful in each scenario; give your creativity free rein.

•  Assess current capabilities and be painfully realistic.

•  Identify gaps between current capabilities and what it would take to be successful in each sce- nario. Be honest in your analysis.

•  Make choices considering all your options.

Scenario Planning Scenarios are detailed descriptions that attempt to predict or project the way that something might hap- pen in the future. Engaging in scenario planning fos- ters preparedness; it allows managers to imagine a

range of potential futures and get ready for them before they occur, should they occur. Further, it allows enough time for a management team to consider what the company might do for each scenario should it materialize (Fahey, 2003).

Scenario planning begins with issues deemed critical to the future of the company and about which sufficient information is unavailable to determine how the issue will turn out. For example, a critical issue for the automobile industry in the United States might be energy prices, or more specifically gasoline prices. For the housing, construction, and lumber industry, as well as home- buyers, the critical issue is interest rates, a principal driver and inhibitor of demand. A critical issue for the movie-theater industry and its suppliers today is digital technology. In what form and when will digital-transmission and -projection systems be introduced; and what will persuade movie theaters to invest in and switch to that technology? Some economists, business leaders, scien- tists, and geopolitical strategists are convinced that water is the new oil; that is, water is rapidly becoming the “blue gold” and in short supply. Does this represent an opportunity or a threat? (Ebb without Flow, 2009). It is around such critical issues that a scenario is devised, or, better yet, two to three scenarios so that they may be compared and contrasted. Potential strategies are not only possible responses to a scenario about the future but also to what different players are likely to face and do within each scenario. These actions in turn may influence which strategy may be more appropriate (Wells, 1998).

To begin forming scenarios, one needs to collect information about key forces impinging on that critical issue and driving forces in the macro environment. This is very research-intensive and could cover markets, new technology, political factors, economic trends, demographic changes, and so on. Peter Schwartz says that in this phase one should look for major trends and trend breaks. Next,

Belinda Images/SuperStock

Futures-research methods are a way to analyze the future, enhancing strategic thinking through scenario planning and future mapping.

 

 

CHAPTER 3Section 3.5 Finding a Better Business Model

the key factors and driving forces are ranked on the basis of two criteria: (1) how important they are in determining the success or outcome of the critical issue identified in the beginning, and (2) the degree of uncertainty surrounding them. One is looking for the most important and the most uncertain. The factors that are most important and most uncertain will now form the axes along which the eventual scenarios will differ. The purpose is to end up with just a few scenarios whose distinctions make a real difference to decision makers. These sets of issues must be reshaped and regrouped in such a way that a logic for each one emerges and a story (the scenario) can be told. As Stuart Wells says, “The essence of this process is writing stories about the future as if we were viewing the past” (Wells, 1998).

Perhaps a benefit of equal importance to the value of the insights gained from developing sce- narios is the learning that takes place during the process. This learning should be integrated into the strategic-thinking and decision-making processes. Liam Fahey (2003) suggests the following scenario-learning principles:

• Scenarios are only a means to an end and should primarily inform decision makers and influence decision making.

• Scenarios should be used to carefully form questions about the present and the future and guide how they might be answered.

• Each step must aim to identify, challenge, and refine manager mindsets and expertise, rather than attempt to perfect scenario content.

• Scenarios bring to light information that enables managers to track and monitor how the future is developing. In this way, the learning process is ongoing.

3.5 Finding a Better Business Model Section 1.8 introduced the concept of a business model as having elements that describe how a company goes about attracting more customers, making money, and growing. A more detailed model of the firm can be more helpful when doing strategic thinking on how to improve one’s business model or find a better one.

Discussion Questions 1. Because there is more than one possible future, we don’t know how things are going to turn out;

that is, we don’t have a crystal ball. Explain why going through scenario planning might provide more useful information than just getting the latest forecast from the Wall St. Journal or New York Times.

2. In your opinion, is the cost of engaging an expert on scenario planning and all the management time involved worth the benefit? Give reasons for your answer, particularly with respect to what benefits might be produced.

3. Scenario planning is a complex, time-consuming activity. Can you think of another way to gener- ate similar results at much less cost?

4. Can strategic thinking be done without some form of scenario planning? 5. Are scenario planning and other similar methods only possible for large corporations? Can you

think of any way in which small companies might access those benefits?

 

 

CHAPTER 3Section 3.5 Finding a Better Business Model

This model, shown as a “business-model canvas” in Figure 3.5, has nine building blocks (Oster- walder & Pigneur, 2010):

• Key partnerships (KP)—the outsourced activities and resources acquired outside the company

• Key activities (KA)—the activities required to deliver the above elements • Value propositions (VP)—why do customers buy from the company? • Customer relationships (CR)—the relationships established and maintained with each

customer segment • Customer segments (CS)—which ones does the company serve? • Key resources (KR)—assets required to offer and deliver the above elements • Channels (CH)—communication, distribution, and sales channels used • Cost structure (CS)—the cost structure of the elements of the business model • Revenue streams (RS)—revenue streams that result from the value propositions success-

fully offered to customers

Key Partners (KP)

Key Activities (KA)

Value Proposition (VP)

Customer Relationships (CR)

Cost Structure (CS)

Revenue Streams (RS)

Key Resources (KR)

Channels (CH)

Customer Segments (CS)

Figure 3.4: The business model canvas

Using the same business-model canvas, Figure 3.6 shows how Skype’s business model disrupted the telecommunications providers. In its first five years, Skype had over 400 million users, experi- enced over 100 billion free calls, and generated 2008 U.S. revenues of $550 million.

As a strategic-thinking exercise, first use the business-model canvas to describe the company’s current business model (keep entries very brief). Regard each of the nine elements as a source for business-model innovation; elements can be changed one at a time or several at a time.

As you can see, it requires a great deal of creativity and strategic thinking to come up with feasible and purposeful ways of improving the business model to help the company be more successful.

Source: Alexander Osterwalder and Yves Pigneur, Business Model Generation: A Handbook for Visionaries, Game Changers, p. 44. Copyright © 2010 John Wiley & Sons. Reprinted with permission.

 

 

CHAPTER 3Summary

Summary

In Chapter 1, you learned that strategic planning is a process designed to choose the best strategy a company can follow as well as decide on its purpose, vision, and objectives. Because strategic thinking, done well, produces potential strategies to follow and suggestions for innovating its busi- ness model, it is an indispensable prerequisite to doing strategic planning.

This chapter explored the complex concept of strategic thinking—what it is and how to do it. Stra- tegic thinking includes the constant search for a better strategy, the constant search for a better business model, and the constant search for a “blue ocean,” situational monopoly, or uncontested market space. It also includes developing alternative futures or scenarios to reduce future risk and guide strategic choice.

Searching for a better strategy involves playing a different game—not being like your competitors, being entrepreneurial (looking at things from a customer’s perspective and looking for opportuni- ties all the time), and finding more opportunities (the chapter presents a number of useful tech- niques for coming up with opportunities, like Abell’s three-dimensional business-definition model, structured brainstorming, and identifying strategic frontiers).

Finding a “blue ocean” is made easier using two related techniques—the strategy canvas and the four-action framework, both created by the authors of the book Blue Ocean Strategy. Finding a situational monopoly is easier and, ironically, upends our mental model of a monopoly (illegal in the United States although the situational monopolies described here are quite legal).

The chapter presents the most useful technique for developing alternative futures—scenario planning. To derive the full benefits, a company wanting to use it should get expert consultation because of its complexity.

Key Partners (KP)

Maximum Outsourcing

Roughly Similar Voice Offering

Global Reach Without the Limitations of a Network

Cost Structure of a Software Company 90% Free Usage, 10% Paying

Key Activities (KA)

Software Development and No Network Maintenance

No Infrastructure

Automated Mass Customization

Software Distribution 100% Low-Cost Channels

Value Proposition (VP)

Customer Relationships (CR)

Cost Structure (CS)

Revenue Streams (RS)

Key Resources (KR)

Channels (CH)

Customer Segments (CS)

Figure 3.5: Skype vs. Telco

Source: Adapted from Alexander Osterwalder and Yves Pigneur, Business Model Generation: A Handbook for Visionaries, Game Changers, p. 99.Copyright © 2010 John Wiley & Sons. Reprinted with permission.

 

 

CHAPTER 3Summary

The chapter concludes with the business-model canvas, a tool comprising nine building blocks that facilitates improving the company’s business model either incrementally (changing any one of the building blocks at a time) or more radically (changing two or more building blocks simultaneously). Such moves have to be analyzed for feasibility and effect before being considered seriously.

Key Terms

entrepreneurial mindset Seeing opportunities everywhere.

four-action framework A tool designed to stimulate thinking to find ways to differentiate the company and of competing that have not so far been contemplated by the industry (a blue ocean).

futures-research methods Techniques for looking at or analyzing the future.

normative attitude A deep-down belief that what you do does make a difference and can affect how things turn out in the future.

monopoly space or situational monopoly Exists because a company either created or took advantage of a situation to charge monopoly prices. It is an ownable space for a useful period of time.

scenario planning A planning tool designed to create a small number of plausible futures con- structed around critical issues for the company about which sufficient information is unavail- able to determine how the issue will turn out.

strategic frontier Essentially anything a company might do in the future that it is not currently doing or that could be considered an extension of its current strategy.

strategy canvas A graphical two-dimensional representation: The x-axis comprises a list of the factors the industry currently competes on, such as price, features, promotion, distri- bution, service, etc., and the y-axis represents the offering level that buyers receive across all these competing factors.

thinking outside the box A metaphor for thinking outside of the normal mental models that influence the way we view the world.

value curve A depiction of a company’s rela- tive performance (its strategic profile) across the key competitive factors of its industry on a strategy canvas.

value innovation Seeks to pursue strategies of differentiation and low-cost leadership simultaneously.