02 Apr Description of the Assignment: Refer to what your instructor wants you to do and/or to submit, as detailed below in the Deli
Description of the Assignment:
Refer to what your instructor wants you to do and/or to submit, as detailed below in the Deliverables section. Include the real-world (authentic) situation, type of task to be accomplished, and the sorts of higher-order thinking (analysis, reasoning, critical thinking, etc.) that were requested and/or shared throughout your course thus far.
Michael Porter wrote a book, Competitive Advantage (New York: The Free Press, 1980), which became the standard text on corporate strategy during the 1980s and 1990s, and remains so even today. In it, he claims that there are three sources of competitive advantage (1980, pp. 35-40):
(1) Overall cost leadership (you make something everybody else makes at lower unit cost)
(2) 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)
(3) 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)
Approach (3), if you think hard about it, is really just a combination of the other two, focused on a specific, often narrow customer base. Porter refers to the first two as “pure strategies.” See Slides 4-10 of the Lesson 10 Power Point for an analysis of these two pure strategies.
The rest of Porter’s book is a framework—the 5 Forces Model and its application—for assessing a business’s competitive situation, and how to direct its energies towards “winning.”
VIDEO: Watch the following video:
https://www.youtube.com/watch?v=PeN1pvahsSA&ab_channel=RuthGuthrie
Finally, the two perspectives are compared in the following video:
https://www.youtube.com/watch?v=V2b99iZviUk
Deliverables
After viewing these videos, address the following questions:
- What is the relationship between Porter’s approach and that of “Blue Ocean” theory? What significant differences are there between them (if there are any)?
- How are these approaches related to Drucker’s concept of “creating a customer”? Justify your position.
- How are each of them related to Drucker’s 5th principle of systematic entrepreneurship (“Aim at market leadership”)? Justify your position.
- Do you prefer one of these approaches over the other? Why or why not?
6-9 Pages minimum, see attachment for detailed requirements and guidlines
Please write your responses to the case above in an essay format. This written assignment is 6-9 pages minimum, not including the title page and references. Use Times New Roman 12-pt font
General Guidelines
Please be sure to address the following requirements when completing your assignment:
· The cover page and reference page/s are not included in the above-stated page requirement. These should be in addition to page requirements.
· Papers need to be formatted in proper APA 7th Edition style.
· Each paper requires a minimum of at least three outside peer-reviewed sources for your references (unless stated otherwise in the guidance above).
o Acceptable/credible sources include: Academic journals and books, industry journals, and the class textbook. To include additional types of sources, please review the “Guidelines for finding and utilizing required references for your paper,” shared below.
· Using your textbook is highly recommended to demonstrate that you have read the required material and/or are connecting new thoughts to the course text/learnings.
Textbook: Drucker, Peter F. (2015). Innovation and entrepreneurship. New York: Routledge.
,
DRU 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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2
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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Entrepreneurial Strategies
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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Entrepreneurial Strategies
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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Entrepreneurial Strategies
…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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Entrepreneurial Strategies
“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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Entrepreneurial Strategies
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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