Develop and evaluate your strategic options for the future

Have you ever tried to analyze why some big organizations fail? 

Or ask yourself why sometimes startups change established industries? 

Organizations fail because they haven't identified and interpret market opportunities and threats
correctly. As a result, they've developed unsuitable competitive strategies. 

Think about famous case studies like Hudak, a former leader in photography that missed out on the
disruptive innovation of digital photography, or Motorola, a former market leader on phones that
missed out on the smartphone market. 

So far, we've only discussed the simple case of your organization following one competitive
strategy. That is, developing a value proposition for one market or market segment and for one
industry. The problem is that most products in the industries follow a fairly predictable life cycle, as
you can see in this figure. Without going into too much detail here, in the early stages, product
categories in the industries grow quickly. It's good for organizations to enter or be in these markets. 
However, as they mature, competition typically gets fiercer and price competition increases. 

Based on that, it's important that you prepare your organization to be able to generate enough
revenue from ongoing business activities to survive, but also generate enough resource leg to set
the organization up for the future. 

So as a strategist, you need to think ambidextrously. 

You need to set up your strategy to exploit current advantages and opportunities, while
simultaneously using your resources and capabilities to form new advantages. 

That's what we're exploring in this week's videos, corporate level strategy decisions. 
Looking at whether investing in other opportunities is a good idea for your organization. 
This relates back to our week one content where we recognized that on the corporate level, you
have to make decisions about which product markets and customer segments your
organization should be active in. To do this, we'll discuss your organization's business
portfolio, and then look into possible growth strategies.

Portfolio analysis / ambidexterity

The challenge for your organization and for you as strategist, will be to identify the appropriate
ways to grow your organization. That means, thinking about how you can best manage your
organization's everyday operations, while identifying new areas of growth. 

One tool that may help you to understand the range of suitable options, is portfolio analysis. 
The idea of portfolio analysis comes from finance. We had tried to select an optimal
portfolio, hedging different investments to either maximize return at a given risk rate, or to minimize
risk in achieving a specified return. 

When translating this logic into strategic thinking, a portfolio and business is a means to optimize
resource allocation in relation to potential, risk, growth, stability, and so on. 

As with financial portfolios, achieving balance is a very important consideration, short-term versus

long-term, risk versus return, and maintenance versus growth. 
One tool that will help you understand your business portfolio is a growth share matrix developed
by the Boston Consulting Group. The aim of this tool is to help develop a balanced portfolio in terms
of cash flow allocation or generation, with the outcome of the analysis being prescribed strategies for
each role or segment. 

To create a portfolio analysis for your organization, you have to assess your organization on two
dimensions. 

On the x-axis, you look at your organization's market share relative to competition. 
On the y-axis, you plot the industry growth rate. 

You then position your organization's various businesses in this two-dimensional matrix. 
Once you have plotted all of them, you can assess whether you have a diverse business or product
portfolio that is likely to generate profits now and in the future. 

As you can see in the figure, you ideally want to have businesses or products in an industry that is
growing, and which you have a high market share. 

However, there may also be some businesses or products that generate a lot of cash for you today
as your market position is very high and the industry is not growing much or at all. This would
represent a cash cow for you, and you can use the profits from those businesses to re-invest in
more future-proofed activities. For example, you may use those surplus funds to invest in some of
your question mark products. 

In these businesses, you have a relatively low market share at this stage. However, the industry is
growing, which indicates market potential. And while dogs are my personal favorite animal, you
don't want to have businesses or products whose industry is barely growing and where you have a
very low market share. 

Based on the position of your businesses or products, some generic recommendations can be

derived, as you can see, summarized in this figure. There are more complex strategy portfolio tools
out there. But the basic idea is to have, A, a firm level dimension and B, an external market
dimension. 

Analyzing your organization's business portfolio is the first step in understanding how to future-
proof your organization. 

Ideally, you would have some cash cows and stars in your organization, that help you to run today's
operations. 

But ideally, you'd also have some question marks in your portfolio, which are likely to move
sideways to become stars in the future, hopefully. 

This requires you to think in an ambidextrous way. 

You need to explore new opportunities which may have arisen to fill identified value gaps. 
But at the same time, you need to exploit your existing strength and businesses. 

Organizations need to be efficient in managing today's business, while also being adaptable enough 
to cope with tomorrow's changing demand. 

Ambidexterity is an important organizational strategy concept, but it also applies to individual

thinking. 

As a strategist, you need to think in an exploitative fashion, asking yourself questions such as, 
 how can I make our business operations more efficient? 
 How can I save costs in what I'm doing? 

On the other hand, you'll also need to think about future opportunities. 

 So what business opportunities should I invest in today to remain competitive in the future? 
 Which product and customer markets will be important to my organization in the future? 
 Which of my current business activities may become obsolete or be threatened by better
alternatives? 

The importance of reviewing your business portfolio and making changes to it and to your value
offerings is highlighted in this McKinsey Report. 

The report found that most organizations allocate the same resources to the same business units
year after year. That makes it difficult to realize strategic goals and it undermines performance. 

I want to emphasize here the importance of having a long-term view. 

Over time spans of less than three years, companies that reallocated higher levels of
resources delivered lower shareholder returns than their more stable peers. Hopefully, your
organization is already active in a diverse portfolio of product markets and market segments. 

However, if this is not the case, you will need to identify opportunities for future growth, which your
portfolio analysis may be helpful for.

Creating value through firm growth / The Ansoff matrix

Sometimes you hear about organizations setting up entirely new businesses. 

For example, Dyson, the British vacuum manufacturer announced the opening of a factory in
Singapore, aimed at developing electric vehicles. Or think about Apple. They diversified their
portfolio by introducing a new product the Apple watch to the existing customers. 
All these activities are aimed towards growing the organization and to ensure that you can continue
to capture value from the market especially when your core offering is in a mature market. 

So, now we'll examine the ways in which your organization can grow. 

To do this, you can use a tool called the Ansoff Matrix which forms part of corporate strategy. 
The highest level of strategy as discussed in week one. This tool helps us ascribe product market
strategies. The main questions that you as a strategists have to ask yourself are, 
 should we grow by using our existing products or 
 should we introduce new products? 
 Should we remain active and
 are existing markets or should we enter a new market? 

A combining existing or new products with existing or new markets. 

You have four ways of growing the organization. 
 Market penetration,
 market development, 
 product development and
 diversification. 

So basically, firms can head in two major directions for future growth. 
Expansion of its current businesses and activities or diversification into new businesses

Let's now look at these four options. 

First, market penetration. This implies that you continue servicing your existing market with 
your existing value proposition and offering. How do you achieve growth you may well ask? 
1. You start thinking about whether you can increase your market share by drawing customers
away from your competition. 
2. Alternatively, you can attempt to increase usage of your offering. 
For example, you can try to get your customers to visit your hotel more often through loyalty
discounts. You may consider this to be the safest way to grow as you know your customers well and
you know you're offering. 

But there's a little risk, correct. However, it doesn't mean this is the easiest way for your organization
to grow. Stealing away market share from your competition, may lead to fears price wars or
retaliation in other markets. Also, your customers may not want to visit a restaurant more often. 
So you may have trouble convincing them of any additional benefit in interacting with you more of. 

The second potential direction for business growth, is market development. 

Here, you provide your existing offering to a new market. So, your organization may decide to
offer you a product or service overseas. 

We can see that with organizations, such as the Australian retailer Woolworths increasingly trying to
gain a significant footprint in the Chinese market. Or maybe, your value proposition works in another
market segment as well. 

Imagine if Red Bull started targeting their drinks at older generations, this would be in line with the
demographic trends of an aging population and grandparents increasingly taking care of the
grandchildren. The Red Bull might help them to stay awake. 

If you follow this growth strategy, you have the risk of the new market not accepting new value
proposition but at least you have little uncertainty about your offering and its benefits and costs. 

Third, your organization may be able to grow through developing new products services and
offering them to your existing markets which would be called product and service development
strategy. You can see this gross strategy happening in many industries and markets. 

For example, when Samsung introduces its newest phone or Adidas now introducing a new line of
performance gear. 

Following this strategy involves all the risks that come with introducing new products. 
However, at least you have a good understanding of the target market having interacted with these
customers before. So, the risk is manageable. 

Finally, you might decide that you want to take on some risk and introduce new offerings to 
new markets which is called diversification strategy. There are several ways to think about this. 
You can look at your value generating activities and the bargaining power of your suppliers
and customers in your industry and see whether you are in a position to vertically integrate. 

Could you internalize processes in the value chain that provide input to your organization's value
generating activities? That is backward integration. Or might you internalize some activities that your
distribution partner currently conducts which is called forward integration? 

In terms of forward integration, think about when Apple decided that they wanted more control
of how the products were sold and opened up the Apple stores. Besides gaining control, Apple
would receive the margin that otherwise external intermediaries would receive. 

This growth strategy might be the riskiest for your organization. 

Nevertheless, it could be the most promising as it does the best job of diversifying your product
portfolio.
Summing up, From a corporate strategy point of view, it's important to be mindful about the life cycle
of your offerings and being cognizant of that to prepare your organization for future growth
opportunities. 

To do that, there are various growth strategies that may be suitable for your organization.

Blue Ocean strategy overview / Value innovation

In this course thus far, I've stressed the importance of running your organization with your mind in
the present, but also preparing it for the future. That is exploring new opportunities while
exploiting your existing resources, capabilities, and businesses. 

Exploring new opportunities often has to do with innovation, in product and services, 

but also in business processes. Innovation related topics are discussed in great detail in the Be
Disruptive course. 

However, in terms of competitive strategy, a valid questions you may now have is, how can you
come up with a new value offering? 

Think about Thailand's multi-million dollar medical tourism industry. Medical tourism, which

combines medical treatment in tourism, has emerged as a standalone industry and has shown a
tremendous rate of growth. Several healthcare organizations and forward-looking governments have
taken strategic approaches that differ from cost leadership or differentiation. As a result, Thailand
has been able to position itself as a leading destination for medical tourism with some hospitals able
to attract net margins of more than 20 percent.

These healthcare players and governments have followed a strategic approach that we know as a
Blue Ocean. 

This tool, the Blue Ocean Strategy Framework, can help you rethink current markets and value
offerings. 

We'll discuss it for the remainder of this video. 

When we covered the foundations of competitive strategy, we focused on the importance of

positioning your organization based on market conditions. The generic strategies that exist at a more
abstract level are differentiation and cost leadership. These generic strategies relate back to the
definition of value, namely, its key dimensions of benefits and costs. 

Following the presented logic of the industrial view of firm strategy, we essentially said
that organizations should either position themselves as a cost leader or a differentiator, not both. 

If you try to do both, you run the risk of being stuck in the middle and losing to firms that are either
cheaper or provide better solutions. 

But what if you challenge this assumption? 

What if you try to tackle this cost value trade-off? 
That's what professors Kim and Mauborgne did. 
While they did suggest that organizations shouldn't try to compete in what they call Red
Oceans, industries that are already well-defined and their competition is intense, Blue Oceans
are different. 

Blue Oceans are new market spaces where competition is minimized. Blue Ocean thinking
encourages entrepreneurs and managers to act differently, to try and find or create market spaces
that are not currently being served. The cornerstone of this type of strategic thinking is what is called
value innovation. 

Value innovation defies one of the most commonly accepted dogmas of competition-based
strategy, the value cost trade-off. Those who seek to create Blue Oceans pursue differentiation
and low cost simultaneously. This is how a leap and value for both the company and its bias is
achieved. 

Value to bias comes from the offerings utility minus its price. 

Value to the company is generated from the offerings price minus its cost. 
Value innovation is achieved only when the whole system of utility, price, and cost is aligned. 
So what are the differences between these two ways of thinking strategically? 

Let's look at the following table. 

As you can see, redefining customer groups is a crucial aspect of Blue Ocean thinking. 
While we won't get into too much detail in this video, I encourage you to look at the non-customers of
your industry. 
Who is not buying the industry offerings at this stage? 
 Is it one, people who may buy them soon, for example, university graduates who will enter
the workforce and then have income, and will be interested in buying your offerings? 
 Or is it two, non-customers who refuse to buy offerings because they don't meet their
needs, do not like certain aspects of it, for example, because of the price or other relevant
features? 
 Or three, is it non-customers who've never thought about your market because their market
is distant from yours? 

Looking again at the example of medical tourism in Thailand, we can identify these three groups of
non-customers. 
First tier of non-customers are also called soon to be non-customers who are on the edge of the
industry. For example, patients who are frustrated with high costs in their own country like citizens
from the United States. Or patients who are upset with long waiting times, for example, those from
countries with socialized medical services. Or patients who are unsatisfied with the quality of local
options, for example, effluent people from developing countries. 

Then the second tier of non-customers, also called refusing non-customers. 

Here, we talk about people who forgo addressing the medical condition due to the costs, or people
who choose not to pursue elective treatment such as cosmetic surgery or dental work, or people
who are unable to get visas, for example, people from the Middle East that want to go to the United
States post 9/11. 

Finally, the third tier of non-customers, also called unexplored non-customers, who are currently
in seemingly distant markets, for example, healthy individuals without medical conditions, but who
may elect to take preventative actions such as exercise, or those people focusing on non-medical
wellness offerings such as massage. 

To finish up, some of the important aspects of Blue Ocean thinking are;
first, questioning existing industry boundaries, and
second, not accepting the cost versus differentiation trade-off as a given. 

Blue Ocean thinking allows you to think outside the box and come up with disruptive competitive
strategies. 

You'll hear more about that in the Be Disruptive course.