Find Strategic Opportunities

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Chapter 3

Strategic Thinking

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Learning Objectives

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By the time you have completed this chapter, you should be able to do the following:

Understand how complex strategic thinking is, and appreciate why one cannot do strategic planning without it. Learn how to go about �inding a better strategy through identifying viable opportunities. Identify situational monopolies or unique market spaces with no competitors. Learn how to create viable scenarios so that strategic decisions might be made taking into account alternative likely futures. Learn how to go about �inding a better business model.

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

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3.1 Purpose of Strategic Thinking

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

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

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

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

The Origin of "Thinking Outside the Box"

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

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

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

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

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

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

Strategic thinking is not just "thinking" or "blue-skying," but trying to �ind different and better ways of competing, of delivering customer value, and of growing—that is, thinking with some purpose in mind. Without such thinking and absent many years of experience, coming up with alternative strategies or business models and choosing a preferred or "best" one becomes considerably more dif�icult. The following sections go into more detail about how to engage in strategic thinking.

Discussion Questions

1. Chatting with a guest over dinner, you learn that he manages a small business and that, as this is a new experience for him, he feels somewhat overwhelmed. How might your knowledge of strategic thinking help him?

2. Is being highly creative the same as being a good strategic thinker? Why or why not? 3. What might be an apt analogy for trying to do strategic planning without doing any strategic thinking? 4. If a company did only strategic thinking, would it need to do strategic planning? Discuss.

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3.2 Finding Better Strategies

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

Play a different game Be entrepreneurial Find more opportunities

Play a Different Game

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

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

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

Gary Hamel and C. K. Prahalad, who formulated the "core competencies" business model, made a similar point when they said that �irms should not be too concerned about competing with their current competitors. Focusing on the actions of competitors puts a company in the

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

Associated Press/Ric Francis

position of simply making attempts to "catch up," by which time the industry leaders would have lengthened their lead again. Instead, they suggest that companies should prepare to compete in a future market, one that only they know about and for which, therefore, they would have the greatest lead time preparing to serve. When a company comes up with the right products to serve that market, it will, by de�inition, be the leader and have all others scrambling to follow and catch up (Hamel & Prahalad, 1994). These are valuable points, but identifying such a market is no trivial feat. Preparing to compete in a future market requires an intimate knowledge of industry and market trends as well as what is changing in the general external environment. These are, in fact, the requisite elements for strategic thinking when it is done properly, all the time, year round.

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

Selective products. Trader Joe's has a limited assortment of about 3,200 SKUs (stock- keeping units), a relatively small number for a grocery store. In contrast, a large supermarket would have on the order of 50,000 SKUs. The items turn over quickly. Private-labeled unique products. About 70% of the items in the stores are unusual items that were found on international buying trips and immediately repackaged with the Trader Joe's brand label. The stores do not stock commodities. Because most of the items are unique, customers can buy them only from Trader Joe's. Small, intimate feel of each store. The stores are kept intentionally small and very intimate. A Trader Joe's market is on average about 10,000 square feet. Safeway by comparison has an average store size of 55,000 square feet. If a store gets too crowded, another one is opened. Giving each location a neighborhood-store atmosphere that is not slick or chainlike turns it into a unique social experience for the customer. The Trader Joe's brand is, in fact, the store. Fanatical attention to customers. Everything Trader Joe's does centers on the customer. Its whole philosophy of buying and offering products is predicated on choosing those products that customers will and do buy. The products are selected and tested with the customer in mind. This forges a bond with its customers and gets them to come back time and time again.

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

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

Be Entrepreneurial

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

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

Dustin Moskovitz and Justin Rosenstein were two of the founders of Facebook. In their experiences at the growing giant, they frequently became frustrated with the dif�iculty of project management in an organization with layers of management, hundreds of employees, and a seemingly endless stream of innovations and new ideas. Realizing that their struggles to streamline collaborative work and communication were common to many professionals, they eventually left Facebook to create Asana, a workplace-productivity-software company. Because Moskovitz and Rosenstein had walked in the customer's shoes, they had a great foundation for launching a business that would help other professionals solve common workplace-collaboration and project-management problems (Vance & MacMillan, 2011).

To be able to take advantage of strategic opportunities that they are missing, strategists, organizational leaders, and marketing professionals must learn to look at the world with entrepreneurial eyes and see it from the customer's perspective. Strategic thinking is concerned not

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

Associated Press/Rick Bowmer

simply with how to be different but with generating alternative possibilities of creating customer value that the organization can deliver.

Figure 3.1 shows a matrix of products and markets. All companies in business are, by de�inition, in the top-left cell, selling existing products or services to an existing market. The bottom-right cell—coming up with a new product for a new market—is not common because of the huge risk such a move entails. Its technical term is conglomerate diversi�ication. Companies that must enter a brand new market with a brand new product should do so either through acquisition or one or more strategic alliances if they are to mitigate the high risk. When product- or market-development strategies are implemented, it is rare that only one of the components is affected. Improving the product is likely to expand the market, and expanding the market usually entails improving the product. Improving or modifying the product often attracts new customers, for example when a sedan is modi�ied to be sportier or even into a convertible. Expanding a market usually involves modifying the product in some way. For instance, selling cars in England that are made in the United States or the European Community requires putting the steering wheel and driver controls on the right-hand side.

Figure 3.1: Concentration strategies

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Find More Opportunities

In terms of improving the product or introducing a new one, where do ideas come from besides the customer? Several approaches might be helpful: a system for innovation, Abell's three-dimensional business-de�inition model, an experience-based opportunity-search method, structured brainstorming, and strategic frontiers.

System for Innovation

The system for innovation is most useful for coming up with new product ideas rather than changes to an existing product line. In its most basic form, employees are asked to submit ideas for new products to a new-product-development committee. Employees would be given

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guidelines and some incentive to propose projects and should always have their efforts acknowledged. They would be instructed to give just enough information to enable the committee to determine whether it should follow up on the idea or not. If the idea has merit, the contributor would be asked to provide more detailed information, such as market demand and likely customers, manufacturing process, costs, additional development needed, and likely volume. If the committee then believes that the idea has market potential, it would decide to allocate resources to develop the proposal further, possibly to a prototype stage, along with detailed market and competitive analyses. This would continue until the product was approved for full-scale manufacturing and marketing. Under such a system, the committee would meet as often as there were projects to consider.

Abell's Three-Dimensional Business-De�inition Model

Derek Abell (1980, pp. 29–30) proposed that the mission of a corporation is determined by three dimensions. These are (1) customer groups, or who the company serves; (2) customer needs; and (3) capabilities and technologies, or how the company will meet the customer needs. This analysis is known as Abell's three-dimensional business-de�inition model. Abell maintained that mission statements should contain all three elements. In addition to de�ining a company's mission statement, this model can also be very effective in searching for new opportunities.

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

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

Remember that what you are doing when brainstorming is drawing up a menu of opportunities, not the �inal ones you are going to adopt. You might think of it as creating a wish list, without regard to how many items get on that list. Later, prune the list down to those that appear

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feasible and relevant to the company's business. While you will now have a much smaller number, you may still have too many to adopt. As a guideline, aim for 10 real opportunities, with 4–6 as a more typical range. Investigating the feasibility of more than a handful of opportunities is prohibitively expensive for all but the largest companies. Most, if not all, of these will appear later as strategic issues to be evaluated as to whether it makes sense for the company to pursue them.

An Experience-Based Opportunity-Search Method

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

In explaining how it went about the process of seeking opportunities, the company showed the team a triangular diagram that was used to depict the company's strategic options (Figure 3.2). The points of the triangle each represented one of three variables, one or more of which could be adjusted to stimulate ideas for new business opportunities. These parameters de�ined the project, which was essentially to �ind a number of concrete opportunities the company could pursue.

Figure 3.2: Opportunity-search method

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In simple terms, the options consisted of some combination of �inding new markets, developing new technologies, and modifying the existing business systems. For example, the company could try to �ind new customers without changing either its technical capabilities or its business system. This constraint limited potential customers to large billion-dollar companies or the federal government. Another option would be to update its technical capabilities to develop products for existing markets while maintaining its present business systems. A third possibility would be to innovate with its business system, while keeping the others constant. At a deeper level of complexity the company could change any two sets of variables while keeping the third constant, or it could change all three at once. Clearly, the more variables that are changed simultaneously, the riskier the strategy. Initially, the team was asked to con�ine its search for opportunities to �inding new customers while keeping the other two variables constant. Later, because that constraint was found to be too restrictive, it was relaxed to include acquiring a new technology or core capability if the opportunity in question was signi�icantly large and worth pursuing, and even include changing its business system.

The actual method this team used was a combination inside-outside approach. The inside-out part involved �irst gaining an understanding of the company's products, technologies, capabilities, and business systems, and then trying to �ind new markets and applications that might �it the company. The outside-in part involved �irst looking at competitors, markets, industries, and application areas to �ind opportunities, and then comparing them against the company's technical capabilities and business process to see which were feasible. The project team came up with 28 ideas but quickly discarded half of them because of obvious de�iciencies or mismatches with the company's capabilities. The

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remaining ideas were then pruned to seven candidates, from which the company selected four for further study. The team �inally recommended three solid opportunities that met all criteria. The project showed that gearing up to �ind opportunities is time-consuming and costly and really should be done year round. In this way, a company will have time to act on those it �inds that have real potential.

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

Structured Brainstorming

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

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

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

Associated Press/Paul SakumaWhat other products could we produce for the same customers? Tyson Foods provides a good example of a company �inding new opportunities by expanding its product offerings to existing customers. In 1967, Tyson was doing very well, with $53 million in annual revenues from selling raw chickens, mainly to grocery stores in Arkansas and neighboring states. Growth options at the time were either to truck the chickens to more states or come up with new products. The �irst new product was a chicken patty for sandwiches. In due course, as a result of trying to �igure out how to "do more with chicken" (Tyson's motto), it began offering chicken pieces, marinated chicken, frozen prepared-chicken dinners, chicken tenders, chicken nuggets, and ready-to-eat chicken "buffalo wings." Along with these product innovations, Tyson explored different distribution channels. Instead of selling chicken products only to food shoppers through grocery stores, it set out to reach consumers even when they went out to eat, and expanded its markets to include fast-food outlets, restaurants, airlines, and hospitals. In the early 1980s, it worked with McDonald's to add chicken to its menu. In the decade that followed as Chicken McNuggets became popular, Tyson experienced a 7-fold increase in revenues and 19-fold increase in earnings per share (EPS) (Tucker, 2001). What other types of products might we create, for any customers that have need of our expertise, technologies, and ability? Matsushita Corporation is a conglomerate that produces products for many markets worldwide. At one point, it was faced with the maturing of its rice-cooker, toaster-oven, and food-processor product lines. Using technologies contained in each of them (computer-controlled heating from the rice cooker, heating devices from the toaster, and motors from food processors), it created a new consumer product, a bread machine, that produced a variety of breads reliably and simply every single time. The product produced outstanding sales the �irst year it was introduced (Abraham & Knight, 2001). In contrast, Motorola, which had been producing amazing touch-screen cell phones in its labs in China for the Chinese market, failed to move that technology from China to the United States and other markets. Why? There was no innovation process, or standardized-pipeline mechanism that focused on bringing out a steady stream of innovative products (Nussbaum, 2008). How might we reinvent our business model in order to gain a competitive advantage? Thomas Weisel Partners Group was a leading force in taking dot-com-era �irms public in the late 1990s. Weisel, for example, ushered many small start-ups under the Yahoo! umbrella. But when the dot-com bubble burst in 2000, he was forced to either reinvent the company or take up golf prematurely—probably on a public course. Like many other �irms that survived the crash of the tech market, Weisel now focuses on easily pro�itable social-media and social-networking sites. Because these sites rely on relatively inexpensive technology, they tend to make money quickly. Similarly, Sandy Robertson, a technology-oriented private-equity banker, describes the critical business-model shift from "old" tech to social media: "Social media is the new frontier." Like those �irms that survived the �irst bubble bust, these are aware that the social-media craze might not last forever, either, and remain dynamic and �lexible in their models and practices (Craig, 2001). Apple provides another good example. While not the �irst to bring digital music to market, it simply took over that market when it launched the iPod. Apple's true innovation was making downloading music easy and convenient by adopting a business model that combined hardware, software, and service. Looking to the future, can we predict which industries will have the highest growth? This is a variant of the previous question and involves diversifying into a business in which the company has little experience or know-how. At �irst glance some people might say that pursuing such a strategy would be irresponsible and a recipe for disaster. There are, however, ways of entering a new business area intelligently and while minimizing the inherent risk of a diversi�ication strategy. A company could always hire someone having a

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great amount of experience and know-how in the proposed industry to head up the effort. It could also acquire a company already in that business whose management had the necessary experience and expertise. Assuming that these steps could take care of the inherent initial risk, the issue here is identifying which industries are growing rapidly.

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

Strategic Frontiers

In their book, The Power of Strategy Innovation, Robert Johnston and Douglas Bate propose that companies adopt a process called "strategy innovation" which is the term they use for strategic thinking (2003). One important concept put forth is exploring a strategic frontier, which they describe as anything a company might do in the future that it is not currently doing or that could be an extension of its current strategy. That might involve targeting a new market, entering another business, merging with another company, forming a strategic alliance, broadening the product line, adopting a new technology, and so on. The authors de�ine strategic frontier as "that unexplored area of potential growth that lies between today's business and tomorrow's opportunities," (113). Table 3.1 presents some examples of strategic frontiers.

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

Table 3.1: Some strategic frontiers

Company-Speci�ic Company-Generic Marketplace

New product Franchising Arti�icial intelligence

New product category Globalization Biotechnology

New distribution channel JIT manufacturing Genomics

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New manufacturing process Mass customization Internet

New positioning Outsourcing Nanotechnology

New sourcing strategy Partnerships Smart materials

New technology Patent exploration Wireless communications

Services Automation

Source: Reprinted from The power of strategy innovation: A new way of linking creativity and strategic planning to discover great business opportunities (p. 177), by R. E. Johnston Jr. and J. D. Bate, 2003, New York: AMACOM. Reprinted with permission.

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

Horizon 1 constitutes the company's core business and accounts for the lion's share of pro�its and cash �low. The Horizon 1 business must be successful for initiatives in Horizons 2 and 3 to be viable. Horizon 2 comprises businesses or lines of business on the rise that could transform the company but not without considerable investment. They might be described as the emerging stars of the company. Though pro�its are still several years away, they show strong revenue growth and a growing customer base. They are entrepreneurial in nature and focus on increased revenues and market share. They could be extensions of the �irm's current business or moves into new directions. Horizon 2 emphasizes building new streams of revenue for the �irm that could in time become Horizon 1 businesses. Horizon 3 businesses are options on future opportunities, but they are not simply ephemeral ideas. Rather, they are real activities and investments, however small, such as research projects, minority stakes, pilot projects, etc. These might never show a pro�it or conversely they could be successes that eventually end up as Horizon 1 businesses (Baghai, Coley, & White, 2000).

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

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

Discussion Questions

1. If playing a "different game" makes so much sense strategically, why doesn't every company follow that advice? 2. Is it possible for established companies—even ones in mature industries—to think entrepreneurially? 3. Consider a company that had an "opportunity-�inding" process it followed throughout the year. Presumably its opportunity "pipeline" would be full and it would constantly be deciding which ones to pursue, an enviable position to be in. What could go wrong with such a process? Why might it not produce envisioned results?

4. Might following a rigid process for identifying and analyzing opportunities sti�le creativity? Doesn't creativity �lourish better in a freewheeling environment? Discuss.

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

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3.3 Finding Unique Market Spaces and Situational Monopolies

Section 1.6 introduced Kim and Mauborgne's concept of a blue ocean and why it made so much sense to look for one (Kim & Mauborgne, 2005). This section explains two related techniques that are central to strategic thinking: �inding a blue ocean, and how to �ind a situational monopoly, a related concept proposed by Milind Lele of the University of Chicago Graduate School of Business (2005).

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

Kim and Mauborgne's two analytic techniques for beginning to think about how to �ind a blue ocean, namely the strategy canvas and the four- action framework, are summarized in the following sections.

The Strategy Canvas

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

When the offering levels of each competing factor, whether for an industry, a segment of it, or a company, are connected, the resulting plot or strategic pro�ile is called a value curve. For a company, its value curve is a depiction of its relative performance across the key competitive factors of its industry. Figure 3.3 shows a depiction of the strategy canvas for the personal-computer industry.

Figure 3.3: The strategy canvas for the personal computer industry

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

Value curves of segments and companies may or may not intersect. In parts where they overlap, a company is not differentiated on those competitive factors. Where the company's value curve is higher than the industry's, the company is clearly differentiated on those issues. In a

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With Apple computers, Steve Jobs implemented a strategy that turned the personal computer into a personal accessory that the consumers could be identi�ied with.

Associated Press/Paul Sakuma

situation where a company uses issues on which the industry doesn't even register such, as using unique competitive factors, the company can be said to have found a blue ocean.

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

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

Although there will always be a corporate industrial market for PCs, by 2008, with mobs of excited customers �illing its branded retail stores, Apple had created a blue ocean marketplace where the other PC competitors were no longer relevant. By August 2010, Apple had become the most valuable technology stock in the world and then became the company with the biggest market capitalization in the world (Crum, n.d.).

The Four-Action Framework

A �irst attempt at plotting a company's value curve might disappoint if the curve is too similar to that of the industry. This means, of course, that the company is not at all or not suf�iciently

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differentiated. The four-action framework is designed to stimulate thinking to �ind ways to differentiate the company and even ways of competing that have not been contemplated by the industry, which is to say, a blue ocean.

Situational Monopoly

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

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

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

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

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

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

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

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

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

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

Questions for Critical Thinking and Engagement

1. In our contemporary era of business and organizing, is it possible for a true monopoly to develop? If yes, in what industries and why? If no, why not? What about a situational monopoly?

2. What factors made it desirable and easier for mainstream supermarkets to enter the domain of Whole Foods/Wild Oats than in the past?

3. Can the creation of a situational monopoly be strategic, or a byproduct of circumstances? 4. Do organizations with situational monopolies spend resources to keep others out of the market? Why or why not? 5. Identify another example of a once situational monopoly that now splits market share or that has exited the market entirely. Describe the circumstances either in writing or during class discussion, as directed by your instructor.

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Discussion Questions

1. Which concept is more useful, in your opinion, in trying to �ind a unique market space with no competitors—the strategy canvas and four-action framework or a situational monopoly? Give reasons for your answer.

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

3. "Monopoly" still has an unfortunate and illegal connotation, yet owning a monopoly space is perfectly legal, highly pro�itable, and quite common. If you had to come up with another name for it, what would it be?

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

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

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3.4 Creating Future Scenarios

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

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

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

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

Futures Research

Methods of looking at or analyzing the future are called futures-research methods. One of the most relevant methods that would enhance strategic thinking is scenario planning. Despite the fact that scenario planning requires weeks to months of time, training, and expertise, companies often bene�it greatly from the shared learning process as well as from the end result. Such planning can serve to position and hone employee skills as well as change set thinking habits.

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

Belinda Images/SuperStock

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

Create scenarios that are plausible, not necessarily probable. Determine what it would take to be successful in each scenario; give your creativity free rein. Assess current capabilities and be painfully realistic. Identify gaps between current capabilities and what it would take to be successful in each scenario. Be honest in your analysis. Make choices considering all your options.

Scenario Planning

Scenarios are detailed descriptions that attempt to predict or project the way that something might happen in the future. Engaging in scenario planning fosters preparedness; it allows managers to imagine a range of potential futures and get ready for them before they occur, should they occur. Further, it allows enough time for a management team to consider what the company might do for each scenario should it materialize (Fahey, 2003).

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

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To begin forming scenarios, one needs to collect information about key forces impinging on that critical issue and driving forces in the macro environment. This is very research-intensive and could cover markets, new technology, political factors, economic trends, demographic changes, and so on. Peter Schwartz says that in this phase one should look for major trends and trend breaks. Next, the key factors and driving forces are ranked on the basis of two criteria: (1) how important they are in determining the success or outcome of the critical issue identi�ied in the beginning, and (2) the degree of uncertainty surrounding them. One is looking for the most important and the most uncertain. The factors that are most important and most uncertain will now form the axes along which the eventual scenarios will differ. The purpose is to end up with just a few scenarios whose distinctions make a real difference to decision makers. These sets of issues must be reshaped and regrouped in such a way that a logic for each one emerges and a story (the scenario) can be told. As Stuart Wells says, "The essence of this process is writing stories about the future as if we were viewing the past" (Wells, 1998).

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

Scenarios are only a means to an end and should primarily inform decision makers and in�luence decision making. Scenarios should be used to carefully form questions about the present and the future and guide how they might be answered. Each step must aim to identify, challenge, and re�ine manager mindsets and expertise, rather than attempt to perfect scenario content. Scenarios bring to light information that enables managers to track and monitor how the future is developing. In this way, the learning process is ongoing.

Discussion Questions

1. Because there is more than one possible future, we don't know how things are going to turn out; that is, we don't have a crystal ball. Explain why going through scenario planning might provide more useful information than just getting the latest forecast from the Wall St. Journal or New York Times.

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

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

4. Can strategic thinking be done without some form of scenario planning? 5. Are scenario planning and other similar methods only possible for large corporations? Can you think of any way in which small companies might access those bene�its?

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3.5 Finding a Better Business Model

Section 1.8 introduced the concept of a business model as having elements that describe how a company goes about attracting more customers, making money, and growing. A more detailed model of the �irm can be more helpful when doing strategic thinking concerning how to improve one's business model or �ind a better one.

This model, shown as a "business-model canvas" in Figure 3.4, has nine building blocks (Osterwalder & Pigneur, 2010):

Key partnerships (KP)—the outsourced activities and resources acquired outside the company Key activities (KA)—the activities required to deliver the above elements Value propositions (VP)—why do customers buy from the company? Customer relationships (CR)—the relationships established and maintained with each customer segment Customer segments (CS)—which ones does the company serve? Key resources (KR)—assets required to offer and deliver the above elements Channels (CH)—communication, distribution, and sales channels used Cost structure (CS)—the cost structure of the elements of the business model Revenue streams (RS)—revenue streams that result from the value propositions successfully offered to customers

Figure 3.4: The business model canvas

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Using the same business-model canvas, Figure 3.5 shows how Skype's business model disrupted the telecommunications providers. In its �irst �ive years, Skype had over 400 million users, experienced over 100 billion free calls, and in 2008, generated $550 million in U.S. revenues.

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

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

Figure 3.5: Skype vs. Telco

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Source: Reprinted from Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers (p. 99), by A. Osterwalder and Y. Pigneur, 2010, Hoboken, NJ: John Wiley & Sons. Reprinted with permission.

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Summary

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

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

Searching for a better strategy involves playing a different game—not being like your competitors, being entrepreneurial (looking at things from a customer's perspective and looking for opportunities all the time), and �inding more opportunities. The chapter presents a number of useful techniques for coming up with opportunities, like Abell's three-dimensional business-de�inition model, structured brainstorming, and identifying strategic frontiers.

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

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

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

Concept Check

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Key Terms

entrepreneurial mindset Seeing opportunities everywhere.

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

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

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

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

scenario planning A planning tool designed to create a small number of plausible futures constructed around critical issues for the company about which suf�icient information is unavailable to determine how the issue will turn out.

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

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

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

value curve A depiction of a company's relative performance (its strategic pro�ile) across the key competitive factors of its industry on a strategy canvas.

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

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