Individual Assignment
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DRU502Lesson10Presentation.pptxDRU 502: Innovation and Entrepreneurship Lesson 10
Entrepreneurial Strategies
J. Richard Johnson, PhD
www.CIAM.edu | 9550 Flair Drive, Suite #201, El Monte, CA 91731 | 626-350-1500 | [email protected]
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Entrepreneurial Strategies—”blue ocean” vs. “competitive advantage”
Objectives of this Presentation
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Learning Outcomes
Lesson 10
Explain the difference between “blue ocean” strategy and “competitive strategy”
Assess clients’ situations in terms of this distinction
Verbalize the consequences for the clients
Provide useful recommendations to clients based on what you have learned in this course, plus your research
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Entrepreneurial Strategies
Theories of competitive advantage: To compete, or to look for the “blue ocean.”
Michael Porter’s Theory of Competitive Advantage
There are only 3 ways in which an organization can create a competitive advantage (assuming there is competition):
Overall cost leadership (“commodities”)
Differentiation (no one else does exactly what you do)
Focus (focus on serving a specialized, usually “narrow” customer base)
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Michael Porter (1980) believed that there were only three ways in which an organization could create a competitive advantage (assuming that its products or services were offered by competitors).
Overall cost leadership (you make something everybody else makes at lower unit cost)
Differentiation (nobody else makes exactly what you make, and consumers are willing to pay a little extra to buy what you make rather than a substitute)
Focus (you make a product or produce a service which is generally available, but focus on serving a narrow customer base and doing it better than anyone else)
Porter’s theory assumes that there is, and always will be, competitors. Further, only the first two bullets describe “pure” strategies. The third is a hybrid based on a highly specialized, distinct market. He believed that you cannot be leader in “differentiation” and also be a “cost leader.” Ponder this.
“Blue ocean” theory tells us that we should find a niche or ecosystem where there are no competitors. Porter’s theory, according to the adherents of “blue ocean” strategy, tells how to survive in a “red ocean,” i.e., an environment in which there are many competitors. In this week’s discussion, you will engage the dialogue between these two perspectives.
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Porter’s theory assumes that there is, and always will be, competitors.
Further, only the first two strategies are “pure” strategies
That is, you have to chose one or the other, because…
…you cannot be leader in “differentiation” and also be a “cost leader.”
Why?
Let’s consider the impact of differentiation on unit costs…
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A firm must pay all of its expenses, plus make a profit from the sales of its products.
Thus, a firm must pay for not only the direct costs of production, but for its overhead, which includes
Research
New product development
Product testing
Creating customer awareness and “needs” for innovative products
So, if a firm wants to use the differentiation strategy, it will spend possibly a great deal of money on these activities, which will drive its unit costs up.
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Entrepreneurial Strategies
On the other hand, some firms focus on the efficiency of producing goods or services that may have been invented and developed by others.
They focus on cost minimization (hopefully with quality constraints), to keep their direct costs as low as possible.
If a firm like this decided to become a differentiator instead of a cost-leader, it would be taking 2 big risks:
They would be learning as they went along, since they don’t do this normally
Their costs would go up because of increased overhead*
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*Note: Cost leaders do spend money on R&D, but this is usually aimed at process improvement—so they can continuously lower their unit costs. And they tend to spend much less on R&D than differentiators do, for reasons that are by now hopefully obvious.
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…and thus, they would lose their status as “cost leader” with a high risk of failure as “differentiators.”
So, you cannot do both, according to Porter.
But if a company wants to change its “pure strategy,” it is easier for a differentiator to become a cost leader than for a cost leader to become a differentiator.
Important Distinction: When Peter Drucker said “aim at market leadership,” he did NOT necessarily mean to aim at cost leadership. Consider this…
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“Blue ocean” theory tells us that we should find a niche or ecosystem where there are no competitors.
What would Drucker say about this?
Porter’s theory, according to the supporters of “blue ocean” strategy, tells how to survive in a “red ocean,” i.e., an environment in which there are many competitors.
In this week’s discussion, you will have engaged the dialogue between these two perspectives.
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Entrepreneurial Strategies
When Drucker advised the entrepreneur to “hit ‘em where they ain’t,” he could be supporting either a “blue ocean” or a “differentiation” strategy. Consider this…
Something to consider:
Is the “Blue Ocean” strategy is just a special case of Porter’s “differentiation” strategy?
The final judgment is yours to make. And be sure to have an argument to support your position.
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Entrepreneurial Strategies
Tips for start-ups (odds and ends from final reading assignments):
Most investment banks prefer to fund teams (at least two members) of entrepreneurs
It’s a hedge against risk in case one of them gets hit by a bus.
Choosing a co-founder and building the first core staff have lasting impact on the future and ultimate success of the business.
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It is especially important to have the right people on your team from the start
Start-ups often fail because of hiring the first people for the wrong reasons, for examples:
He is my brother-in-law, and was willing to work for nothing
My wife knows a little bit of accounting, so I’ll let her deal with Quickbooks
My nephew needed a job…
Etc., etc.
When you start your business, don’t make this error. It will cost you plenty, down the road.
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Thanks and Good Luck!
It has been a pleasure to work with all of you!
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References
Porter, Michael. (1980). Competitive advantage. New York: The Free Press
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