Strategic Management: Blue Ocean Strategy - PDF

STRATEGIC MANAGEMENT UNIT 5  UNIT 5 Blue Ocean Strategy Table of Contents 5.1 Blue Ocean Strategy 2 5.1.1 Meaning of B...

STRATEGIC MANAGEMENT UNIT 5  UNIT 5 Blue Ocean Strategy Table of Contents 5.1 Blue Ocean Strategy 2 5.1.1 Meaning of Blue and Red Ocean Strategy 5.1.2 Blue vs Red Ocean Strategies 5.1.3 Principles of Blue Ocean Strategy 5.1.4 Strategy Canvas and Value Curves 5.1.5 Four Actions Framework Eliminate-Reduce-Raise-Create Grid 5.2 Business Models 7 5.2.1 Meaning and Components of Business Models 5.2.2 New Business Models in Internet Economy 5.2.3 Models and Strategies for E-commerce Business 5.2.4 Internet Strategies for Traditional Businesses 5.2.5 Virtual Value Chain 5.3 Strategic Management and Sustainability 14 5.3.1 Startups - Why do they Rise and Decline? 5.3.2 Sustainability-related Threats 5.3.3 Inclusion of Environmental and Societal Sustainability in Strategic Management 5.3.4 The Essence of Triple Bottom Line People-Planet-Profits 2 Unit 5: Blue Ocean Strategy  ∗ Compare and contrast Blue Ocean strategy with Red Ocean strategy. ∗ Describe the key components of a business model. ∗ Evaluate the advantages and challenges associated with the By the end internet economy model. of this unit, ∗ D  efine strategic management and sustainability and explain their you should relationship. ∗ E  valuate the potential risks and benefits of adopting sustainability- be able to: focused strategies. ∗ A  nalyze case studies of companies that effectively managed sustainability-related threats and achieved a positive triple bottom line. Opening Case  Revolutionizing the Music Industry: The Spotify Story In the early 2000s, the music industry was in turmoil. Piracy was rampant, record sales were declining, and artists and labels were struggling to adapt to the digital age. Consumers were overwhelmed by the illegal downloading options and the complexities of online music purchases. This was the ‘Red Ocean’ of the music industry – a market space crowded with competitors fighting over a shrinking profit pool. In 2006, a small startup named Spotify emerged in Sweden. Founded by Daniel Ek and Martin Lorentzon, Spotify was about to revolutionize the music industry with a simple yet radical idea. Their vision was to create a legal, easy- to-use platform for streaming music that provided value to both listeners and artists. Spotify created a blue ocean by introducing a legal, user-friendly streaming service, tapping into an untapped market space away from intense competition.The platform offered a legal alternative to piracy, simplifying music access for users and providing a new revenue stream for artists through streaming. Strategic collaborations with record labels strengthened Spotify’s catalog, negotiations, and overall user experience. Features like personalized playlists and algorithm-driven recommendations kept Spotify ahead in user engagement and innovation. Spotify not only converted users from piracy but also attracted new audiences, expanding the market for music streaming. By focusing on subscription- based streaming, Spotify challenged traditional models, addressing consumer preferences, and creating a new revenue stream. Conclusion: Spotify’s success lied in effectively implementing the Blue Ocean Strategy, transforming the music industry by identifying new markets, delivering unique value, and staying ahead through innovation. Source - https://en.wikipedia.org/wiki/Spotify Discussion Questions 1. How did Spotify create a ‘Blue Ocean’ in an industry that was considered saturated and declining? What lessons can be learned about innovation and market creation? Unit 5: Blue Ocean Strategy 1 5.1 Blue Ocean Strategy Introduction Blue Ocean Strategy is a business concept that suggests companies can succeed not by battling competitors, but rather by creating new, uncontested market spaces that are ripe for growth. The term was coined by W. Chan Kim and Renée Mauborgne in their book “Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant” (2005). At its core, the Blue Ocean Strategy is about creating new demand in an uncontested market space, or a “Blue Ocean”, rather than competing head-to-head with other companies in an existing industry or “Red Ocean”. 5.1.1 Meaning of Blue and Red Ocean Strategy The Blue Ocean Strategy provides a systematic approach to making the competition irrelevant and outlines principles and tools any company can use to create and capture their own blue oceans. This strategy is applicable to all sectors and industries and encourages innovation and growth. The concepts of Blue Ocean and Red Ocean strategies are crucial in the field of business strategy and competitive positioning. These concepts were popularized by W. Chan Kim and Renée Mauborgne in their book “Blue Ocean Strategy.” Red Ocean Strategy The Red Ocean represents all the industries that exist today – the known market space. In Red Oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here, companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowded, prospects for profits and growth reduce. The competitive dynamics often turn bloody (hence, “Red Ocean”), leading to a focus on winning over competitors, often at the cost of diminishing profits and growth. Key Characteristics of Red Ocean Strategy: 02 04 01 Beat the 03 Make the 05 competition value-cost trade-off Competition Exploit existing Align the whole in existing demand system of a firm's market space activities with its strategic choice of differentiation or low cost. Fig. 5.1: Key Characteristics of Red Ocean Strategy Blue Ocean Strategy In contrast, the Blue Ocean symbolizes all the industries not in existence today – the unknown market space, untainted by competition. In Blue Oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In Blue Oceans, competition is irrelevant because the rules of the game are waiting to be set. It’s about expanding market boundaries and creating new spaces. 2 Unit 5: Blue Ocean Strategy Key Characteristics of Blue Ocean Strategy: Make the Break the competition value-cost irrelevant trade-off 02 04 01 03 05 Create Create and Align the whole uncontested capture new system of a firm's market space demand activities in pursuit of differentiation and low cost. Fig. 5.2: Key Characteristics of Blue Ocean Strategy 5.1.2 Blue vs Red Ocean Strategies Red Ocean Strategy competes in existing market space and beats the competition in a known industry landscape, focusing on dividing up the existing pie. In contrast, Blue Ocean Strategy is about creating a new market space and making the competition irrelevant, focusing on enlarging the market pie. It’s about innovation and opening new frontiers, not just competing in known territories. Aspect Red Ocean Strategy Blue Ocean Strategy Market Space Existing market space (known industries). New market space (unknown or untapped industries). Competition High competition. Companies try to Competition is irrelevant due to lack of rivals in outperform rivals. new market space. Focus Competing in existing market share. Creating and capturing new demand. Demand Exploit existing demand. Create new demand. Business Approach Beat the competition. Focus on winning Value innovation. Not about beating over competitors. competition, but making it irrelevant. Strategic Choice Make the value-cost trade-off. Break the value-cost trade-off. Growth Prospects Limited, often zero-sum (one’s gain is High, due to untapped new market space. another’s loss). Profitability Reduced due to fierce competition. Potentially high as competition is irrelevant. Customer Base Focused on existing customers. Targeting new customers and non-customers. Strategic Alignment Align activities with differentiation or Align activities with dual focus on differentiation low cost. and low cost. Innovation Level Often limited to incremental improvements. High level of innovation to create new markets. Unit 5: Blue Ocean Strategy 3  Activity: Create a Venn diagram or a comparative table that highlights the main differences between Blue Ocean and Red Ocean strategies. Use at least three key differences and provide explanations for each. 5.1.3 Principles of Blue Ocean Strategy The Blue Ocean Strategy, as defined by W. Chan Kim and Renée Mauborgne, is based on several core principles that guide businesses in creating new market spaces, or “Blue Oceans.” These principles are designed to shift a company’s focus from competing in overcrowded markets to innovating and creating new markets. Here are the key principles: Making the Reach Beyond Value Innovation Competition Irrelevant Existing Demand 01 03 05 02 04 06 Creating Uncontested Focus on the Big Strategic Market Space Picture, Not the Numbers Sequencing Fig. 5.3: Key Principles of Blue Ocean Strategy Value Innovation: This is the cornerstone of the Blue Ocean Strategy. It refers to the simultaneous pursuit of differentiation and low cost, creating a leap in value for both the company and its customers. Creating Uncontested Market Space: Instead of competing within the confines of an existing industry, Blue Ocean Strategy encourages businesses to break out of the red ocean of bloody competition by creating new market spaces or “Blue Oceans” that are untapped and uncontested. Making the Competition Irrelevant: By creating a new market space, the competition becomes irrelevant as there is no direct rivalry. The company sets the rules of the game. Focus on the Big Picture, Not the Numbers: The strategy urges companies to go beyond the numbers and focus on the bigger picture. This involves understanding what customers truly value and focusing on creating and capturing new demand. Reach Beyond Existing Demand: Rather than focusing solely on existing customers, Blue Ocean Strategy suggests reaching out to non-customers or those who have never used the company’s products or services. Strategic Sequencing: This involves following the right sequence for implementing a blue ocean strategy, which includes buyer utility, price, cost, and adoption. 4 Unit 5: Blue Ocean Strategy 5.1.4 Strategy Canvas and Value Curves The Strategy Canvas and Value Curves are key analytical tools used in the Blue Ocean Strategy framework. They help businesses visualize the current market conditions and identify opportunities for creating new, uncontested market spaces. Strategy Canvas The Strategy Canvas is a visual representation that captures the current state of play in the marketplace. It serves as a diagnostic and action framework for building a compelling Blue Ocean Strategy. High Blue Ocean Strategic Move Offering Level Industry Value Curve Low Competing Factors Fig. 5.4: Strategy Canvas Axes: The canvas has two axes. The horizontal axis on the strategy canvas captures the range of factors that an industry competes on and invests in, while the vertical axis captures the offering level that buyers receive across all of these key competing factors. Purpose: By plotting the current state of competition within an industry, the Strategy Canvas helps identify where competition is currently focusing and where there are opportunities for differentiation. It provides a clear visual depiction of a company’s relative performance across its industry’s factors of competition. Value Curves Value Curves are the central component of the Strategy Canvas and serve as a graphical depiction of a company’s relative performance across its industry’s factors of competition. Characteristics: A Value Curve is a line graph that plots the level of offering that buyers receive on each of the key competing factors. It shows a company’s strategic profile or the way it invests its resources in order to deliver value to customers. Analysis and Strategy Development: By examining the shape of the Value Curve, companies can see the strategy profile of an industry and how well their strategy diverges from those of their competitors. The goal in Blue Ocean Strategy is to redraw the Value Curve to create a new value proposition that expands the market. Creating a New Value Curve: This involves applying the four actions framework (Eliminate-Reduce-Raise-Create) to the factors on the Strategy Canvas. By deciding which factors to eliminate, reduce, raise, or create, companies can shift their focus from beating the competition to making the competition irrelevant, thereby creating a leap in value for buyers and for the company. 5.1.5 Four Actions Framework The Four Actions Framework is a key component of the Blue Ocean Strategy, developed by W. Chan Kim and Renée Mauborgne. It is a powerful tool that challenges companies to rethink their business strategy and create new market space by reconstructing buyer value elements in crafting a new value curve. Unit 5: Blue Ocean Strategy 5 The framework involves four key actions: RAISE Which factors should be raised well above the industry’s standard? ELIMINATE CREATE NEW VALUE Which factors that the CURVE Which factors should be industry has long completed created that the industry on should be eliminated? has never offered? REDUCE Which factors should be reduced well below the industry’s standard? Fig. 5.5: Four Actions Framework Eliminate: This action encourages businesses to remove elements that the industry has long competed on but are no longer relevant or valuable to consumers. The aim is to eliminate factors that do not add value or are taken for granted in the industry. This helps in cutting costs and simplifying the product or service. Reduce: This action focuses on reducing the level of investment or emphasis on certain factors below the industry’s standard. The goal here is to decrease elements that have been overdesigned in the race to beat the competition. By reducing these factors, companies can lower costs and focus on what really matters to consumers. Raise: This action involves increasing certain elements well above the industry’s standard. The idea is to identify and amplify factors that provide a significant leap in value to the consumer. This could involve enhancing quality, functionality, convenience, or other aspects of the product or service. Create: This action is about creating entirely new elements that the industry has never offered. By innovating and creating new factors, companies can unlock new demand and shift the focus from competing within existing market spaces (Red Oceans) to creating new market spaces (Blue Oceans). Application The Four Actions Framework is applied to the Strategy Canvas to redraw the Value Curve. It helps businesses in systematically exploring how they can differentiate their offerings and create a new value curve that unlocks a blue ocean. The framework’s 6 Unit 5: Blue Ocean Strategy effectiveness lies in its ability to simplify the complex process of strategy formulation by focusing on what can be eliminated, reduced, raised, and created, leading to a distinctive strategic profile that is both cost-efficient and value-rich. The end goal of applying the Four Actions Framework is to create a new value proposition that dramatically diverges from the competition, making the competition irrelevant, and creating new market space. This approach encourages innovation, fosters creativity, and leads to a more consumer-centric strategy. 5.2 Business Models A business model defines how a company creates, delivers, and captures value. It’s a conceptual structure that supports the viability of a business and explains how it operates, makes money, and how it intends to achieve its goals. The components of a business model describe the rationale of how an organization creates, delivers, and captures value and involves various aspects of a business, from market positioning to operational processes. 5.2.1 Meaning and Components of Business Models Meaning of Business Models A business model is essentially a plan for the successful operation of a business, identifying sources of revenue, the intended customer base, products, and details of financing. It is a blueprint for how a company intends to make money and sustain itself in the long term. The business model also encapsulates the value proposition, i.e., the value that the company promises to deliver to its customers. Components of Business Models 01 02 03 Value Customer Channels Proposition Segments 04 05 06 Customer Revenue Key Relationships Streams Resources 07 08 09 Key Key Cost Activities Partnerships Structure Fig. 5.6: Components of Business Models 1. Value Proposition: This is the core of the business model, defining what makes the product or service attractive to customers, how it solves a problem or fulfills a need, and what differentiates it from competitors. 2. Customer Segments: Identifies the specific groups of people or organizations the business aims to serve. Each segment has distinct needs, characteristics, or behaviors requiring separate offerings or marketing strategies. 3. Channels: Describes how a company communicates with and reaches its customer segments to deliver the value proposition. Channels can be direct (like sales forces) or indirect (like retail), and they can span across various phases of a customer’s interaction. Unit 5: Blue Ocean Strategy 7 4. Customer Relationships: Defines the types of relationships a company establishes with specific customer segments. Relationships can range from personal to automated, and from transactional to long-term. 5. Revenue Streams: Represents the cash a company generates from each customer segment. Revenue streams can be one-time payments or recurring revenues resulting from ongoing payments. 6. Key Resources: The most important assets required to make a business model work. These can be physical, financial, intellectual, or human resources. 7. Key Activities: The most important activities necessary to execute a company’s value proposition. These could include production, problem-solving, or platform/network maintenance. 8. Key Partnerships: The network of suppliers and partners that make the business model effective. Partnerships can help optimize operations, reduce risks, or acquire resources. 9. Cost Structure: Describes all costs incurred to operate a business model. This will include fixed and variable costs, economies of scale, and economies of scope. A well-designed business model should align these components to ensure they reinforce each other and create a strong, coherent whole. By understanding and effectively implementing each component, businesses can strategically position themselves for success in their respective markets. 5.2.2 New Business Models for Internet Economy The internet economy, characterized by its rapid growth and constant evolution, has given rise to several innovative business models. These models leverage the unique capabilities of the internet, including its vast reach, accessibility, and ability to connect people and resources globally. Here are some key new business models that have emerged in the internet economy: E-Commerce Marketing 01 06 Subscription Services Content Monetization 02 07 Freemium Models Data Monetization 03 08 On-Demand Services Platform-Based Models 04 09 Crowdsourcing and Peer-to-Peer (P2P) Platforms Crowdfunding 05 10 Fig. 5.7: New Business Models for Internet Economy E-Commerce: This model involves selling goods and services online. It ranges from large-scale online retailers like Amazon to niche e-commerce sites. E-commerce can be Business-to-Business (B2B), Business-to-Consumer (B2C), Consumer-to- Consumer (C2C), or Consumer-to-Business (C2B). Subscription Services: Companies offer regular, ongoing access to products or services for a recurring fee. Examples include Netflix for entertainment, Spotify for music, and various software-as-a-service (SaaS) models like Adobe Creative Cloud. 8 Unit 5: Blue Ocean Strategy Freemium Models: This approach involves offering a basic service for free while charging for premium features. It’s common in software and app development, like LinkedIn’s free professional networking service and a paid option for additional features. On-Demand Services: These are services provided on an as-needed basis, facilitated by the internet. Rideshare services like Uber and home service providers like TaskRabbit operate on this model. Peer-to-Peer (P2P) Platforms: P2P platforms connect individuals for the exchange of services or resources, bypassing traditional middlemen. Examples include Airbnb for lodging and LendingClub for personal loans. Marketing: In this model, an online retailer pays commission to external websites for traffic or sales generated from their referrals. This is a common strategy for bloggers and influencers. Content Monetization: Creators and publishers earn revenue through various means such as advertising, sponsored content, paywalls, or subscriptions. YouTube video monetization and online news subscriptions are examples. Data Monetization: Companies collect and analyze data to extract insights, which can be monetized directly or used to improve products and services. This model is especially prevalent in tech industries. Platform-Based Models: These businesses create value by facilitating interactions between two or more distinct but interdependent groups of customers. Examples include eBay for buyers and sellers, and Google which connects searchers with advertisers. Crowdsourcing and Crowdfunding: Businesses or individuals obtain needed services, ideas, or content by soliciting contributions from a large group of people, especially from an online community. Kickstarter for funding projects and Wikipedia for information gathering are examples. Each of these models leverages the internet’s capacity for scalability, connectivity, and innovation. They reflect how businesses have adapted to the changing landscape of the digital age, focusing on user experience, convenience, and leveraging network effects. Activity: Choose at least three companies known for disrupting traditional industries with their internet- based models. Consider different sectors for a diverse analysis. Research Each Company:(e.g., Airbnb, Uber, Netflix). Conduct thorough research on each selected company. Focus on understanding their business models, history, and the industries they have disrupted. For each company, identify the key features of their business model. How do they use the internet to operate and reach customers? What makes their approach innovative compared to traditional businesses in the same industry? Analyze how these companies utilize the advantages of the internet economy. Consider aspects like global reach, scalability, data utilization, and customer engagement. Discuss the challenges each company faced when introducing its innovative model, as well as the opportunities they capitalized on. How did they overcome the hurdles, and what factors contributed to their success? Evaluate the impact of each company on its respective traditional industry. Have they caused major shifts in how the industry operates? What are the positive changes or potential risks they have introduced? Prepare to engage in a class debate. Develop an argument about whether these business models bring positive change or introduce new risks to traditional industries. Use evidence from your research to support your position. Present your findings to the class. Structure your presentation to first introduce each company and its business model, followed by your analysis of their impact, challenges, and opportunities. Unit 5: Blue Ocean Strategy 9 5.2.3 Models and Strategies for E-commerce Business E-commerce businesses operate in a dynamic and rapidly evolving online marketplace, which requires distinct models and strategies to succeed. Below are various models and strategies commonly used in the e-commerce domain: E-commerce Business Models 02 B2B (Business-to-Business) 01 B2C (Business-to-Consumer 04 C2B (Consumer-to-Business) 03 C2C (Consumer-to-Consumer) 06 Dropshipping 05 Subscription Model Fig. 5.8: E-commerce Business Models B2C (Business-to-Consumer):Involves selling products or services directly to individual consumers online. Example: Online retailers like Amazon or fashion stores like ASOS. B2B (Business-to-Business): Involves online sales between businesses. Example: Alibaba, which connects manufacturers with retailers. C2C (Consumer-to-Consumer): Where consumers sell directly to other consumers, usually facilitated by a third- party platform. Example: eBay, Etsy, or Craigslist. C2B (Consumer-to-Business): Individuals offer products or services to businesses, often through an intermediary platform. Example: Stock photo websites where photographers sell their photos to businesses. Subscription Model: Customers pay a recurring price at regular intervals for access to a product or service. Example: Netflix for entertainment, Dollar Shave Club for grooming products. Dropshipping: Store doesn’t keep the products it sells in stock. Instead, it purchases the product from a third party and has it shipped directly to the customer.Lowers inventory and operating costs. 10 Unit 5: Blue Ocean Strategy E-commerce Strategies 01 SEO and 02 Content Social Marketing Media Marketing 03 08 Email Omni-Channel Marketing Retailing 07 04 Marketplace Pay-Per-Click Model Advertising 06 05 Personaliza- tion and AI Mobile Commerce Fig. 5.9: E-commerce Strategies SEO and Content Marketing: Optimizing website content to rank higher in search engine results and using content marketing to attract and engage customers. Social Media Marketing: Using platforms like Facebook, Instagram, and Twitter to market products, engage with customers, and build brand awareness. Email Marketing: Sending personalized, targeted emails to a subscriber list to promote products, offer discounts, or update customers on new items. Pay-Per-Click Advertising: Online advertising model in which an advertiser pays a publisher each time an advertisement link is “clicked on.” Example: Google AdWords, Facebook Ads. Mobile Commerce: Optimizing online shopping experiences for mobile devices. Ensuring the e-commerce platform is mobile-friendly or has a dedicated app. Unit 5: Blue Ocean Strategy 11 Personalization and AI: Using data analytics and AI to personalize shopping experiences, product recommendations, and customer service. Marketplace Model: Operating as a marketplace for other vendors to sell their products on your platform, charging them a fee or commission. : Amazon, which allows third-party sellers on its platform. Omni-Channel Retailing: Integrating various methods of shopping available to consumers (e.g., online, in a physical store, or by phone). Each of these models and strategies offers unique advantages and can be chosen based on the specific goals, resources, and market positioning of the e-commerce business. The key to success in e-commerce is often a combination of selecting the right business model and strategically leveraging various online marketing and sales tactics. 5.2.4 Internet Strategies for Traditional Businesses Traditional businesses, often characterized by their physical presence and pre-internet operational models, can significantly benefit from integrating internet strategies into their operations. Let us have a look at the essential elements of integrating internet strategies into traditional businesses. Online Presence: Build a simple, user-friendly website. Be active on social media platforms relevant to your target audience. E-commerce: Add an online shopping feature to your website. Use established online marketplaces to sell your products. Digital Marketing: Use social media and email to promote your business. Create interesting content like blogs or videos related to your products or services. Customer Interaction Online: Use online tools to manage customer relationships. Offer customer support through digital channels like live chat or email. Data Use: Apply basic data analysis to understand customer preferences and improve your business strategies. Mobile Optimization: Ensure your website and emails look good and work well on smartphones. Online Security: Protect your online business and customer information with good cybersecurity practices. 12 Unit 5: Blue Ocean Strategy  Activity: Choose a familiar business that originally had only physical stores but now also sells products or services online.(e.g. JioMart,Tata Cliq). Look up for information about your chosen company online. Focus on how they expanded from being just a store (or stores) to also doing business on the internet. Identify what specific internet strategies the company uses. This could include their website, how they sell things online, their social media presence, and any digital marketing they do. Note any big changes the company had to make to move into the online world. Did they change the way they advertise? How do they talk to customers? The kind of products they sell? Find out what results or benefits the company has seen from moving online. Are they reaching more customers? Selling more products? Write down your thoughts about how well the company did this transition. What did they do well? What could they have done better? Share what you found out with your class. Talk about the company’s journey to the online world and discuss the strategies they used and the results they saw. 5.2.5 Virtual Value Chain The concept of the virtual value chain was created (propounded) by Jeffrey Rayport and John Sviokla. Jeffrey Rayport John Sviokla Understanding the Virtual Value Chain The Virtual Value Chain (VVC) is a business model that describes how businesses can add value to their products or services through the use of digital technology. This concept is similar to the traditional value chain, but it focuses on the virtual or digital aspects. Key Points of the Virtual Value Chain What It Is The VVC is about using information and digital tools to improve business processes. It’s a way companies can create new, digital products or services from the data and information they gather in their business. Below are the 5 stages of Virtual Value Chain: Gather Organize Select 01 02 03 04 05 Synthesize Distribute Fig. 5.10: Five Stages of Virtual Value Chain Unit 5: Blue Ocean Strategy 13  Gather: Collecting data and information. Organize: Arranging this data in a meaningful way. Select: Choosing the right information for the right purpose. Synthesize: Combining different pieces of information to create something new and valuable. Distribute: Sharing this new value with customers or within the company. Examples: A retailer using customer shopping data to create personalized marketing campaigns. An online platform that gathers user preferences and then recommends products or services. Benefits Helps businesses understand their customers better. Can lead to new, innovative products or services. Improves efficiency and can reduce costs. Challenges Requires good technology and data analysis skills. Businesses need to ensure customer data is used ethically and protected. Why It Matters In today’s digital world, understanding the Virtual Value Chain can help businesses stay competitive and relevant. It shows how data and digital tools can be used to add value in new and innovative ways. 5.3 Strategic Management and Sustainability What is Strategic Management? It’s about planning and making decisions to guide a business towards its long-term goals. It involves setting objectives, analyzing competitive environments, assessing the organization’s capabilities, and making sure that management rolls out these plans effectively. Why is Sustainability Important in Business? Sustainability in business means operating in a way that is environmentally friendly, socially responsible, and economically viable. It’s about ensuring the business doesn’t harm the planet or people, and that it can keep going for a long time. Combining the Two When businesses plan their strategies, they are now including sustainability goals. This means they make decisions considering not just profit, but also the impact on the environment and society. Benefits of Sustainable Strategic Management Companies can reduce waste, save energy, and lower costs. They can improve their brand image and attract customers who value sustainability. It helps ensure the business can thrive in the long-term by being adaptable and responsible. 14 Unit 5: Blue Ocean Strategy Examples: A company choosing to use renewable energy sources to reduce its carbon footprint. Businesses opting for fair trade products to ensure ethical practices in their supply chains. Challenges of Sustainable Strategic Management Balancing profitability with environmental and social responsibilities can be tough. It often requires changing traditional ways of doing business, which can be costly or difficult. 5.3.1 Startups why they rise and decline A startup is a young company founded by one or more entrepreneurs to develop a unique product or service and bring it to market. Startups aim to grow rapidly as a result of offering something that addresses a gap in the market or fulfils an unmet need. They are often technology-oriented and have high growth potential. Why Startups Rise 1 2 3 Innovative Meeting Unmet Flexibility and Ideas Needs Adaptability 4 5 Technological Attracting Advancement Investment Fig. 5.11: Reasons behind Rise of Startups Innovative Ideas: Startups often succeed because they bring new, innovative solutions to the market. Example: Airbnb revolutionized the hospitality sector with its unique home-sharing model. Meeting Unmet Needs: They identify and address needs that are not being met by existing companies. Example: Uber’s ride-sharing service filled a gap in urban transportation. Flexibility and Adaptability: Being small and agile, startups can adapt quickly to market changes, unlike larger, more established companies. Technological Advancement: Many startups leverage the latest technologies to offer improved services or create entirely new offerings. Attracting Investment: Successful startups often attract significant investment which helps them grow. Venture capitalists and angel investors typically fund startups with high growth potential. Unit 5: Blue Ocean Strategy 15 Why Startups Decline Market Management Competition Issues 01 02 03 04 05 Financial Poor Product- Failure to Challenges Market Fit Scale Fig. 5.12: Reasons behind Decline of Startups Financial Challenges: Many startups struggle with cash flow and run out of capital, often due to insufficient revenue or high operating costs. Market Competition: Startups can fail if they are unable to compete with larger, established companies who might copy their ideas or offer similar services at lower prices. Poor Product-Market Fit: If a startup’s product doesn’t align well with customer needs or desires, it likely won’t succeed. Management Issues: Startups often face challenges due to inexperienced management, including poor decision- making and lack of leadership skills. Failure to Scale: Some startups struggle to transition from a small, dynamic operation to managing large scale production or services. Examples of Decline: Theranos: Once a high-flying startup in the biotech space, it collapsed due to fraudulent practices and misrepresentations about its technology. We Work: Initially successful in providing shared workspaces, it faced a dramatic decline due to unsustainable business practices and failure to go public. 5.3.2 Sustainability-related Threats Sustainability-related threats are challenges that pose a risk to the health of our planet and the well-being of its inhabitants. These threats often stem from human activities and have long-term negative impacts on the environment, society, and economies. Key examples include: Climate Change: Caused by increased levels of greenhouse gases like CO2 in the atmosphere, mainly from burning fossil fuels. Leads to global warming, extreme weather, and changing climate patterns. Pollution: Air, water, and soil pollution from industries, agriculture, and urban development. Causes health problems in humans and animals, and damages ecosystems. Deforestation: The large-scale removal of forests for agriculture, logging, or urban expansion. Leads to loss of biodiversity, disruption of water cycles, and contributes to climate change. 16 Unit 5: Blue Ocean Strategy Water Scarcity: Overuse and pollution of water resources, coupled with climate change, leading to water shortages. Affects drinking water supply, agriculture, and ecosystems. Loss of Biodiversity: Extinction of species due to habitat destruction, climate change, pollution, and overexploitation. Reduces ecosystem resilience and can disrupt human food sources. Overconsumption and Waste: Excessive consumption, particularly in developed countries, leads to wastage of resources and accumulation of waste, including plastic pollution. Social Inequality: Disparities in access to resources, healthcare, and economic opportunities, often exacerbated by environmental issues. Resource Depletion: Unsustainable use of natural resources like fossil fuels, minerals, and timber, leading to their depletion. Impact of These Threats These threats challenge the sustainability of our planet, meaning they make it harder for future generations to have a good quality of life. They can lead to health problems, food and water shortages, loss of homes (due to sea-level rise or extreme weather), and conflicts over resources. Why It’s Important to Address Them Addressing sustainability-related threats is crucial to ensure a healthy, liveable planet for future generations. It involves changing how we use resources, transitioning to renewable energy, conserving natural habitats, and ensuring equitable access to resources. 5.3.3 Inclusion of Environmental and Societal Sustainability in Strategic Management Incorporating environmental and societal sustainability into strategic management means that a company not only focuses on financial success but also on its impact on the environment and society. This approach is increasingly important for businesses seeking long-term viability and positive community impact. 1. Environmental Sustainability in Strategic Management This involves strategies that reduce a company’s environmental footprint, such as: Reducing Carbon Emissions: * Example: Tesla’s business model, which revolves around electric vehicles, is aimed at reducing reliance on fossil fuels and minimizing carbon emissions. Sustainable Sourcing: * Example: IKEA sources its wood and cotton from sustainable suppliers to minimize deforestation and water wastage. Waste Reduction and Recycling:  * Example: Adidas produces shoes and clothing from recycled plastic waste, reducing landfill and ocean pollution. Unit 5: Blue Ocean Strategy 17 2. Societal Sustainability in Strategic Management This includes strategies that contribute positively to society, such as: Fair Labor Practices: * Example: Patagonia, an outdoor apparel company, ensures fair labor practices and safe working conditions in its supply chain. Community Engagement and Development: * Earound xample: Google, through its initiative Google for Startups, supports entrepreneurs in various communities the world, fostering innovation and job creation. Product Safety and Customer Welfare: * Esafety. xample: Johnson & Johnson’s commitment to removing harmful chemicals from its products to ensure customer 3. Combined Environmental and Societal Strategies Some companies integrate both aspects into their strategy: Sustainable Products and Community Support: * Epairxample: TOMS Shoes’ business model not only focuses on sustainable shoe production but also on giving a of shoes to a child in need for every pair sold. Green Energy and Employee Well-being: * and Example: Salesforce, a cloud-based software company, invests in renewable energy sources for its operations promotes employee wellness and development. Why This Inclusion is Important By including environmental and societal considerations in their strategic planning, businesses can achieve sustainable growth and build a positive brand image. It helps in attracting customers and investors who are increasingly conscious of ethical and sustainable practices. This approach also prepares companies to adapt to regulatory changes related to environmental and social governance (ESG). 5.3.4 The Essence of Triple Bottom Line In today’s ever-changing business landscape, sustainability is essential for firms to gain a competitive advantage across financial, social, and environmental domains. The triple bottom line concept underscores that success encompasses societal welfare alongside financial gains, shaping a comprehensive measure of achievement. The Triple Bottom Line (TBL) concept, introduced by John Elkington in 1994, expands business evaluation beyond profit, incorporating social and environmental dimensions. TBL, represented by People, Planet, and Profits, fosters sustainability in decision-making across sectors, complementing financial concerns with holistic performance assessment. John Elkington What is the Triple Bottom Line? Three ‘P’s: It’s based on three Ps: Profit, People, and Planet. Profit: This is the traditional measure of corporate profitability. It’s about a company making money, which is essential for its survival and growth. 18 Unit 5: Blue Ocean Strategy  People: This refers to social responsibility. Companies should contribute positively to society, ensuring fair treatment and benefits for their employees and the communities where they operate. Planet: This represents environmental responsibility. Businesses should strive to minimize their environmental footprint, reducing pollution and waste, and using resources sustainably. Why is it Important? Sustainable Business Practices: It encourages businesses to think about the long-term impacts of their actions on society and the environment, not just short-term gains. Risk Management: Companies that ignore their social and environmental impact might face risks like regulatory fines, loss of public trust, or resource shortages. Brand Reputation and Loyalty: Businesses that embrace the Triple Bottom Line can build a stronger brand, attract more customers, and inspire loyalty by showing they care about more than just profits. Examples: Patagonia: Known for its commitment to the environment, it donates a portion of its profits to environmental causes and uses sustainable materials. Ben & Jerry’s: Besides being profitable, it focuses on social issues, like supporting fair trade and community projects. LEGO: While profitable, LEGO also emphasizes sustainability by investing in renewable energy and pledging to make its products more sustainable. Challenges Measuring Impact: Unlike financial profits, measuring the social and environmental impact can be more complex. Balancing the Three Ps: Sometimes, these three aspects can conflict with each other, making it challenging for businesses to balance them effectively. Embracing the Triple Bottom Line is increasingly seen not just as a moral choice but as a practical one for long-term business success. Understanding People-Planet-Profits People Planet Profit Fig. 5.13: People-Planet-Profits People (Social Responsibility): This refers to a company’s impact on society. It’s about being socially responsible — treating employees fairly, supporting community development, and ensuring products or services are safe and beneficial. Example: A company providing good working conditions, supporting local community projects, or ensuring ethical supply chain practices. Unit 5: Blue Ocean Strategy 19 Planet (Environmental Responsibility): This aspect focuses on a business’s environmental impact. Companies are encouraged to minimize their ecological footprint by reducing pollution, conserving natural resources, and promoting sustainability. Example: Using renewable energy sources, reducing waste through recycling, or creating products that are environmentally friendly. Profits (Economic Viability): While traditional business models focus solely on financial success, the Triple Bottom Line recognizes that profits are essential but should not be pursued at the expense of social and environmental health. Example: A business that is profitable but also invests in eco-friendly technologies and fair employee wages. The essence of the Triple Bottom Line is that a successful business not only generates profits but also operates in a socially and environmentally responsible way. It’s about creating value that benefits not just the company, but also society and the environment. Activity: Engage in a debate to explore different perspectives on how a startup should prioritize People (social responsibility), Planet (environmental sustainability), and Profits (financial success). Research your role to understand the priorities and concerns of your stakeholder. Prepare points that support your stakeholder’s perspective. Consider arguments other stakeholders might have and how you can respond to them. Reflect on what you learned from other perspectives. Discuss how startups can realistically balance People, Planet, and Profits. (Roles to choose from - Founders,Investors, Employees, Environmental Activists) 20 Unit 5: Blue Ocean Strategy  Case Study 1 Netflix Netflix is a popular platform that many people use to watch movies and TV shows. It started in 1997 by Reed Hastings and has grown to have about 109 million members in over 190 countries as of 2017.The idea for Netflix came when Hastings had to pay a late fee for returning a DVD.Initially, Netflix send DVDs to customers by mail for a monthly fee. As the internet became more widespread, Netflix shifted to streaming movies and shows online.In 2013, Netflix started making its own TV shows, like “House of Cards.” This was a big risk, costing about $100 million, but it paid off with award nominations and a rise in Netflix’s stock value.Netflix then began making its own movies, like “Okja,” which was shown at the Cannes festival and sparked discussions about streaming movies and traditional cinemas. Forbes recognized Netflix as one of the most innovative companies in 2017. Netflix and the Blue Ocean Strategy: What Netflix Changed (Eliminate and Reduce): Netflix got rid of the need to go to stores to buy or rent DVDs. They moved from physical DVDs to an online platform, removing the need for storing DVDs. What Netflix Improved (Raise): They made watching movies more convenient – you don’t have to leave home, and you can pause and resume movies anytime. The payment method is simple; you just need a card. What Netflix Introduced (Create): Netflix introduced online accounts with a monthly fee, offering unlimited watching. The platform suggests new movies based on what you’ve watched before. Source: https://en.wikipedia.org/wiki/Netflix Discussion Questions: 1. How did Netflix’s shift from mailing DVDs to streaming online follow the Blue Ocean strategy? Think about how they eliminated, reduced, raised, and created aspects of their service to make this transition. Unit 5: Blue Ocean Strategy 21  Case Study 2 iTunes Before iTunes, people who wanted to listen to music legally had to buy a whole CD, even if they liked just one song. This led to a rise in illegal music downloads as there was no legal way to buy individual songs online.Apple saw this gap in the market and launched the iPod, a portable music player, followed by iTunes, a website where you could buy individual songs legally. iTunes was a big hit because it met customers’ needs – they could now legally buy just the songs they liked without needing a CD. However, over time, other companies like Spotify and Deezer started offering music online for free. They didn’t tie their services to specific devices, unlike iTunes, which was closely linked with Apple products. Reflecting on iTunes and Blue Ocean Strategy: Eliminate: Physical CDs: iTunes eliminated the need for buying entire CDs for one favorite song. Physical Stores: No more going to a store. Music could be purchased from home. Raise: Access to Music: Made accessing individual songs easier. Convenience: iTunes users could buy music anytime, without leaving their house. Legal Compliance: Provided a legal way to download individual songs, respecting copyright laws. Create: New Market for Digital Music: iTunes created a whole new way of buying music – song by song, online. Integration with Apple Devices: Designed iTunes to work seamlessly with iPods and later, iPhones, creating an integrated music experience. Reduce: Cost per Song: Reduced the cost for consumers by allowing them to buy just the songs they wanted, not the whole album. Piracy: By providing a legal, convenient alternative, iTunes aimed to reduce the rates of illegal music downloading. While iTunes initially changed the music industry, it didn’t fully adapt to the next wave of changes, like the shift to streaming services, which offered even more accessibility and convenience. Apple’s experience with iTunes shows the importance of continually evolving and innovating, especially in fast-paced industries. Companies need to keep up with changes in customer preferences and technological advancements to stay competitive. Source: https://en.wikipedia.org/wiki/ITunes Discussion Questions: 1. How sustainable was Apple’s Blue Ocean strategy with iTunes? What more could Apple have done to keep its edge as the market changed? 2. What can other companies learn from the iTunes story about product and thinking innovation? How can a company stay ahead in a fast-changing industry and avoid getting too comfortable with their initial success? 22 Unit 5: Blue Ocean Strategy  Summary The principles of Blue Ocean emphasizes the creation of new demand and value via innovation while reducing costs. This involves breaking away from industry norms and identifying untapped market segments. The strategy canvas, a tool visualizing competitive factors and a company’s value proposition relative to competitors. Value curves aid in identifying areas for differentiation and innovation, enhancing the value offered. The framework of Four Actions (Eliminate, Reduce, Raise, Create), highlights the importance of simultaneously eliminating certain factors and enhancing others to create a new value curve, enabling companies to stand out in the market. Business models outline how a company operates and makes money, focusing on customer value, revenue sources, and key operations. The internet economy has led to diverse e-commerce models like B2C, B2B, C2C, and C2B, along with strategies like SEO, social media marketing, and mobile commerce. Traditional businesses can thrive online by building a strong web presence and utilizing digital marketing. The Virtual Value Chain (VVC) uses digital tools to add value to products or services through stages like gathering and synthesizing data. Strategic Management is about guiding a business towards long-term goals through careful planning and decision-making. Sustainability in business, encompassing environmental and societal responsibility, is vital for long-term success. Startups often rise due to innovation and addressing unmet needs but may decline due to financial struggles or poor market fit. The Triple Bottom Line expands a business’s focus to include not just profits but also social and environmental impacts. The essence of “People-Planet-Profits” signifies a balance between corporate profitability and positive impacts on society and the environment. Unit 5: Blue Ocean Strategy 23 Exercise your mind MCQS Choose the correct answers from options given below: 1. The Strategy Canvas is used to: a) Analyze competitors’ pricing strategies b) Identify areas of competition in a saturated market c) Visualize a company’s strategic positioning relative to its competitors d) Showcase a company’s financial performance over time 2. Business model is a_________ a) A company’s organizational structure b) A plan for maximizing profits through aggressive advertising c) A framework for creating, delivering, and capturing value d) A blueprint for technological innovation 3. How does sustainability impact strategic management? a) Sustainability is often disregarded in strategic decision-making b) Sustainability only relates to environmental concerns, not societal ones c) Incorporating sustainability can enhance long-term business viability d) Sustainability is only relevant for large corporations, not start-ups 4. Internet strategies for traditional businesses often involve: a) Ignoring online platforms in favor of offline marketing b) Establishing a strong social media presence without changing business operations c) Adapting existing business models to leverage online opportunities d) Relying solely on physical storefronts for sales 5. The Four Actions Framework involves: a) Increasing prices to match competitors b) Eliminating factors that industry rivals compete on c) Emphasizing differentiation and cost leadership simultaneously d) Imitating the strategies of the leading competitor 24 Unit 5: Blue Ocean Strategy  True/False State whether the following statements are True or False: 1. The Strategy Canvas is a tool used to visually compare a company’s strategy against that of its competitors. 2. The Four Actions Framework involves reducing costs in areas that competitors are already investing heavily in. 3. The triple bottom line (TBL) considers economic, environmental, and social performance as three key pillars of business success. 4. The rise of start-ups is often attributed solely to innovative products, without considering changing market trends. 5. Start-ups are immune to failure if they have a groundbreaking idea. Short Answer Questions Answer the following questions briefly: 1. Define Blue Ocean strategy. 2. Outline the significance of value curves in the context of Blue Ocean strategy. 3. How does Blue Ocean strategy differ from Red Ocean strategy? 4. Explain what is a business model, and why it is essential for a company. 5. List the key components of a business model and briefly explain each one. 6. Describe the concept of a virtual value chain. 7. Explain strategic management, and why it is important for businesses. 8. Explain what a start-up is, and how it differs from an established company. 9. Name three factors that commonly lead to the rapid rise of successful start-ups. 10. Explain the concept of the triple bottom line and its three main components. 11. How can businesses incorporate environmental sustainability in their strategic planning? Unit 5: Blue Ocean Strategy 25  Long Answer Questions Answer the following questions briefly: 1. Explain how the Blue Ocean strategy encourages businesses to focus on innovation and value creation rather than competing in crowded markets. 2. Analyze the role of sustainability in strategic management decisions. How can a company’s sustainable practices contribute to its long-term success and competitiveness? 3. Compare and contrast the factors that lead to the rise of successful start-ups and the reasons behind the decline of others. What lessons can aspiring entrepreneurs learn from these experiences? 4. Formulate strategies that start-ups can employ to sustain their growth and prevent potential decline in the face of competitive markets. 5. Evaluate the ethical implications of a company prioritizing profit over environmental and social considerations. How can the triple bottom line help organizations achieve a balanced approach? 6. Sustainable Harvest Café, a new farm-to-table restaurant, wants to prioritize people, planet, and profits equally. Investigate the challenges and opportunities the café may encounter in achieving a balanced triple bottom line. Propose marketing and operational strategies to communicate the café’s commitment to sustainability to its customers. Answers MCQS 1. Answer: C) 2. Answer: C) 3. Answer: C) 4. Answer: C) 5. Answer: B) True/False 1. Answer : True Explanation: The Strategy Canvas is a graphical representation that illustrates a company’s competitive positioning in relation to key factors in comparison to its competitors. 2. Answer : False Explanation: The Four Actions Framework focuses on breaking the industry’s value-cost trade-off by eliminating factors that have long been taken for granted and creating new factors to attract customers. 3. Answer : True  xplanation: The triple bottom line framework evaluates a company’s performance based on its impact on profits, E people (society), and the planet (environment). 4. Answer : False Explanation: The rise of start-ups is influenced by factors like innovation, market trends, entrepreneurial ecosystems, funding availability, and adaptability to evolving circumstances. 5. Answer : False Explanation: Even with innovative ideas, start-ups can fail due to various factors such as poor execution, inadequate funding, market changes, and competition. 26 Unit 5: Blue Ocean Strategy  Key Terms Blue Ocean Strategy Red Ocean Strategy Strategy Canvas Value Curve Four Actions Framework Blue Ocean Strategy Business Models E-Commerce Virtual Value Chain Digital Marketing SEO (Search Engine Optimization) Social Media Marketing Mobile Commerce Strategic Management Sustainability Startups Triple Bottom Line People-Planet-Profits s References Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter, First Free Press Edition Crafting and Executing Strategy- The Quest for Competitive Advantage by Thompson, Strickland, Gamble & Jain, Tata McGraw-Hill Concepts in Strategic Management & Business Policy by Thomas L. Wheelen & J. David Hunger, Pearson Competing for the Future by Gary Hamel & C.K. Prahlad,. Blue Ocean Strategy by Kim & Mauborgne Hitt, M.A. (2016) Strategic management: Concepts and cases: Competitiveness and globalization, Google Books. Cengage Learning. Available at: https://books.google.com/books/about/Strategic_ Management_Concepts_and_Cases.html?id=gc84CgAAQBAJ Unit 5: Blue Ocean Strategy 27