EM|Upper-Int|3. Strategic‌ ‌planning‌ ‌models‌

So, lots of people write about strategy: what it is, what it is not, and if you google «strategy definition», you’ll get zillions of hits. Each one has its own take on what strategy might mean. In fact, most business people that I’ve worked with have some idea of what they think strategy might be. Yet interestingly enough I found that very few people, even those who work together, actually have the same definition or understanding of strategy.

That’s why, when I work with clients, I always share my definition of strategy. I want to help everyone to understand how it fits with what we’re trying to do together. That gets us on the same page. Okay, so, what does strategy mean for me? Let’s start with some context. Mission is purpose, vision is the destination, values are what we believe and then how we behave.

So strategy. Strategy is the set of decisions and actions that get us where we want to go — to our vision. It’s not a plan, it’s not static, it’s the set of high-level decisions and actions that are required to close the gaps between where we are right now — our current reality, and where we want to go — our vision. It adds clarity, it adds focus. Strategy guides how we deal with the unexpected twists and turns that always, always occur on the road to the destination. And, of course, that definition sounds really simple. We all know that executing strategy, particularly executing strategy well, is anything but simple. I found that if you start with a common definition, then at least you have a great foundation for taking it forward, it’s a great way to start.

Remember: strategy is the set of decisions and actions that get you where you want to go.

Remember: strategy is the set of decisions and actions that get you where you want to go.

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As we mentioned before, a business strategy is often compared to the game of chess: both companies and chess players need strategies to use their resources in the most effective way and to establish a favourable position.

Chess is a violent sport, and when you confront your opponent, you have to

crush their ego. The moves you can play in chess and business are very large, as with just 3 opening moves there are 9 million possible positions.

So, both chess and strategic management involve three different key functions:

1. Strategic thinking

2. Strategic planning

3. Action

First, you scan the environment for different changes (in business that would be social changes, economics, competition, technology, industry, customers, etc.)

Then you analyse that and make a set of plans: what you’re going to do about this, what the opportunities are out there, and what some of the threats you need to guard against are.

Finally, the most important is action: how you move into action, how you turn plans into actionable milestones.

So, that’s where we return to 9 million possible positions and how to choose the best set of decisions and actions in order to make the right move to the destination.

🔹commoditization — the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers

🔹a trade-off — an exchange that occurs as a compromise

🔹value-cost trade-off — the view that a company has the choice between creating more value for customers but at a higher cost, or reasonable value for customers at a lower cost

🔹product differentiation — a marketing strategy that strives to distinguish a company’s products or services from the competition

These two strategies are becoming more used by startups, however, their understanding may not be so clear. Based on the type of ocean, you can assess the two strategies in order to see if it is optimal to enter the market or not. Let’s take a look at the two oceans and the strategies they come with. So, a red ocean strategy involves competing in industries that are currently in existence. This often requires overcoming an intense level of competition and can often involve the commoditization of the industry where companies are competing mainly on price. For this strategy, the key goals are to beat the competition to gain the most amount of value and exploit existing demand.

The competitors will always be evolving and on the hunt to use aggressive marketing techniques such as competitive pricing to win over your consumers.

As you are entering this market you need to see where the demand is and capture it, for example, customer retention is quite important in such a market because you want to win over as many consumers as you can because new buyers are too difficult to attract to red ocean industries. There’s also one important thing to consider about the red ocean market — you’ll have to choose from value or low cost, as here you can’t have both or you fail in the competition, so that is where you make the value-cost trade-off, as most of current companies in red waters do. And this limitation will always lead to the key strategic decision for a company — either you have product differentiation or low cost as the main strategy. Whichever is chosen the organization must align all activities with one of these strategic directions.

Here we are getting to the blue ocean strategy. It is based on creating demand that is not currently in existence, rather than fighting over it with other companies. You must keep in mind that there is a deeper potential of the marketplace that hasn’t been explored yet. Most blue oceans are created from within red oceans by expanding existing industry boundaries. The key to a successful blue ocean strategy is finding the right market opportunity and making the competition irrelevant.

A blue ocean is focused more on creating new markets based on upcoming trends or demands of consumers. For example, if a new generation of smartphones comes to the market, this may require new technology such as a new type of device to charge the phone or something else that is an extra necessity to make the life of the user easier.

As the competition is fairly low and they are mainly focusing on their own innovations as well as products there is no need to focus on their actions. There is a focus on trying to increase the size of the industry by attracting people who have never purchased in that industry.

What is great about this market is that it can be quite flexible, if a new demand appears on the market which is not met, you can either improve your product with a new version that meets that certain demand or just create a new demand that focuses on solving that certain problem that the customer has which has created a demand in the first place.

A quite innovative strategy to use in the blue ocean market is to take the innovative product or service and create your own sort of market based on different criteria such as focusing on a specific demand within a wider market and offering many different solutions.

By focusing on a smaller niche this offers a better chance to gain most of the consumers within the niche (the segment of the market) in your own favourites as well as turning them into loyal customers.

As for the value-cost trade-off, the blue ocean strategy has broken that concept and developed the tools for assuring that both high value and low cost are achieved. In fact, if you don’t break the value cost trade-off, competitors will easily duplicate what you are doing and the ocean will once again be very red. So, the main strategic actions will be headed on having both differentiation and low cost. To put it simply, you are going to look at every process and cut all unnecessary costs that don’t create or contribute to value.

The two strategies have their own advantages as well as disadvantages, for the right product or service they can both be very efficient.

Personally, I would recommend the Red Ocean strategy towards startups as well as Small to Medium-size enterprises as they can be more productive in such markets, therefore more profitable. I believe that the blue ocean strategy is intended more for Multinational Enterprises because it may require more resources to survive and be successful in those markets.

At the same time, you need to understand that neither of the two strategies needs to be applicable to a type of organization, they can both be successful for all organizations and businesses if the environment of the market is a habitable environment in which to do business.

Red Ocean companies

• Coke and Pepsi
• Ryanair
• Microsoft products

Blue Ocean companies

• Apple products
• Starbucks
• Tesla Motors
• Nintendo
• Airbnb
• Cirque du Soleil
• Uber

You can certainly come up with more examples of Red Ocean companies even just thinking about famous companies around the world or those in your own country. Being in the Red Ocean market doesn’t mean that it’s bad or will not lead you to success. It’s just another strategy and vision a company decides upon to reach their customers, be ready to face the competition and choose between differentiation or low cost.

Go to the next slide and find out about the real cases of famous companies «swimming» in one of the oceans.

• short-haul — used to describe things that involve transporting passengers or goods over short distances
• no-frills — characterized by the absence of inessential features
• a commodity — a product that you can buy or sell
• steep — (of a price or amount) unduly high
• stiff competition — strong competition from rivals or opponents

One industry in which a red ocean strategy would be necessary is the soft drink industry. This industry has been in existence for a long time, and there are many barriers to entry. There are industry leaders in place such as Coke and Pepsi, and there are also many smaller companies in competition for market share. There’s also limited shelf space and vending spots, well-established brand recognition of popular, current brands, and many other factors that affect new competition. This causes the soft drink industry to be very competitive to enter and succeed in. And to try and succeed, a company will choose to be either different or concentrate on low cost to beat that competition and take some market share.

Ryanair is another example of a red ocean strategy. They are competing very successfully in the already saturated red ocean of the short-haul airline business. Their strategy is focused on providing a low-cost no-frills airline. It is able to achieve low costs through many methods including using secondary airports further away from a city than the main airport, allowing only online booking and check-in, and requiring customers to pay for all extras, amongst other methods. With Ryanair, the service isn’t of great differentiation in some way from other airlines, but it is cheap.

Starbucks is an excellent example of a company that has successfully implemented the blue ocean strategy. Many cafes were already established when Starbucks was launched. Instead of focusing on their coffee, they have developed the Starbucks brand as different, a strategy still unexplored in this sector. Starbucks has chosen to develop a wide variety of beverages: coffee, but also teas, smoothies and «Frappuccino». By providing newspapers and a free wifi network, Starbucks encourages coffee lovers to stay, chat and relax, adding value to its brand. This has allowed Starbucks to become a social venue and differentiate from others. Starbucks turned the coffee industry on its head by shifting its focus from commodity coffee sales to the emotional atmosphere in which customers enjoy their coffee, so the steep price appeared good value for money. With almost no advertising, Starbucks became an international brand with margins roughly five times the industry average.

Nintendo is a leading video game company headquartered in Kyoto, Japan. In the early 2000s, the company faced stiff competition from Microsoft and Sony. This was when Nintendo launched its radical new console — the «Wii» in 2006. The Nintendo Wii has chosen innovation as the core of its strategy. This is a key principle of the blue ocean strategy that reduces costs and differentiates at the same time. To reduce costs, Nintendo has eliminated the hard drive and DVD functionality found in most game consoles and which reduces quality and processing graphics. At the same time, Nintendo introduced wireless motion control to differentiate itself from the market offer. This allowed the company to offer a range of new features and benefits that had not been seen in the game world before, such as the ability to use a game console to get in shape or play in a larger social group. So here, besides low cost and differentiation, we can see the technological innovation that added value.

Cirque du Soleil took the world by storm. Its strategic move challenged the traditions of the circus industry creating a blue ocean of a new market space, by blending opera and ballet with the circus format. Its shows combine the circus with adult theater, showing incredible acrobatics and physical feats set to a storyline and original music. The founders looked at the traditional circus model and asked, «What if we eliminated animals, traveling from city to city, and reduced the fun factor as part of our value proposition? In exchange, we’ll create more thrill and a higher danger factor in combination with a theme and increased dependency on artistic music and dance.»

The result was their customer segment no longer focused on families with kids and instead focused on theater-goers. They saved not only on the cost of animal care and the cost of star performers but they were also able to charge more than double the ticket price of the traditional circus, creating much greater margins.

The Red Ocean strategy

Advantages and disadvantages

Key features

Advantages The market is already established and fixed. It is clear what products and services customers want. Disadvantages There is usually an established market leader who will be very hard to beat as they control as much as 80 percent of customer budgets. There are usually numerous niches trying to capture market share in a subset of the total market. Competition is stiff and bloody. Pricing pressures and margin pressures for the innovators.

A focus on current customers A high level of competition Beating the competition with aggressive marketing Using existing technological resources Exploiting existing demand Making the value-cost trade-off Strategic choice of differentiation OR low cost Mainly small- to medium-sized businesses

The Blue Ocean strategy

Advantages and disadvantages

Key features

Advantages The market is very flexible to new demands. There can be a very high-profit margin in new markets. The successful creation of a blue ocean can create brand value which could last for years or even decades. Disadvantages These markets are new and there is the risk of completely misjudging the market and getting it wrong. This can be painful because creating a blue ocean typically requires a large investment. Blue oceans eventually become red oceans. There are few success stories of companies who have successfully used the blue ocean strategy. Because blue oceans are new, with no existing customer base, a lot of time needs to be spent educating customers as to the benefits of the category.

A focus on noncustomers A low level of competition Making the competition irrelevant Creating technological innovation Creating and capturing new demand Breaking the value-cost trade-off Strategic activities in search of both differentiation and low cost Mainly composed of large firms

1. trade-off

2. cut and dried

3. commoditization

4. product differentiation

5. differentiation

6. trade-off

7. short-haul

8. no-frills

9. commodity

10. steep

11. stiff competition

12. a value-cost trade-off

1. trade-off

2. cut and dried

3. commoditization

4. product differentiation

5. differentiation

6. trade-off

7. short-haul

8. no-frills

9. commodity

10. steep

11. stiff competition

12. a value-cost trade-off