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Blue oceans through alliance. How we can find blue oceans in a highly changing and interconnected environment

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Especially in the constantly changing environment organizations have to be cautious and aim to stay aligned with the industry context. Organizations have to play by the rules of the game, meaning that ...

Especially in the constantly changing environment organizations have to be cautious and aim to stay aligned with the industry context. Organizations have to play by the rules of the game, meaning that they have to shape their organization around the environment. However, playing by the rules of the game also inherits the fact that strategist aren’t shaping the organization but the environment is (Wit, de and Meyer, 2010b). Thus between organizations there is little difference in goals and strategies, evidence for this can be found within the generic strategies described by Porter (1985). When every organization is lead by generic strategies and no one is really unique sustainable competitive advantage is narrow.

De Wit and Meyer (2010b) state that “the more innovative the rule breaker, the larger will be the competitive advantage over rivals stuck with outdated business models”. Gaining sustainable competitive advantage thus implies shaping your environment instead of letting the environment shape you. In other words constantly innovating in order to shape a new industry context, which is also referred at as a blue ocean by Kim and Mauborgne (2004, 2005a).

This paper investigates how a blue ocean strategy through alliances provides sustainable competitive advantage in a highly changing and interconnected environment.

I will address blue ocean strategy and its hurdles from a strategic alliance perspective, how strategic alliances in a complex world add value and i will end the paper with a discussion on how strategic alliances strengthen blue ocean strategies.

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    Blue oceans through alliance. How we can find blue oceans in a highly changing and interconnected environment Blue oceans through alliance. How we can find blue oceans in a highly changing and interconnected environment Document Transcript

    • Blue oceans through alliance. How we can find blue oceans in a highly changing and interconnected environment? Author: Kevin Rommen (S4072294) Course: MOR005 - Project Designing Research Contact information: info@kevinrommen.nl / 00 31 (0)6 4390 5126
    • 2 Blue oceans through alliance: how to reach sustainable competitive advantage in a highly changing and interconnected environment Introduction Especially in the constantly changing environment organizations have to be cautious and aim to stay aligned with the industry context. Organizations have to play by the rules of the game, meaning that they have to shape their organization around the environment. However, playing by the rules of the game also inherits the fact that strategist aren’t shaping the organization but the environment is (Wit, de and Meyer, 2010b). Thus between organizations there is little difference in goals and strategies, evidence for this can be found within the generic strategies described by Porter (1985). When every organization is lead by generic strategies and no one is really unique sustainable competitive advantage is narrow. De Wit and Meyer (2010b) state that “the more innovative the rule breaker, the larger will be the competitive advantage over rivals stuck with outdated business models”. Gaining sustainable competitive advantage thus implies shaping your environment instead of letting the environment shape you. In other words constantly innovating in order to shape a new industry context, which is also referred at as a blue ocean by Kim and Mauborgne (2004, 2005a). This paper investigates how a blue ocean strategy through alliances provides sustainable competitive advantage in a highly changing and interconnected environment. I will address blue ocean strategy and its hurdles from a strategic alliance perspective, how strategic alliances in a complex world add value and i will end the paper with a discussion on how strategic alliances strengthen blue ocean strategies. Blue ocean strategy The external drivers of industry development (Wit, de et al., 2010b) have influenced the our world-economy immensely over the last 20 years. The technological, economic and socio-cultural drivers are increasingly driving innovation, expanding our capabilities, rising globalization, offering load of products and services and a huge amount of ‘similar’ organizations. While there are more products and services available the world demand isn’t increasing (Kim et al., 2004 & 2005a) resulting value deprecation of the products and services, which leads to commoditization of these products and services (Kim et al. 2004, 2005a; Pine and Gilmore, 1999). This is substantiated by Pine and Gilmore (1999) in their book on the experience economy, where they explain experience as a new economic offer and means to achieve high profit margins. This commoditization leads to a hardened environment where competitors fight for a piece of the pie through price wars, thereby reducing the profit margins (Kim et al. 2005a). In short, a bloody red ocean with a negative vicious circle.
    • 3 Blue oceans through alliance: how to reach sustainable competitive advantage in a highly changing and interconnected environment Instead of fighting for a piece of the pie, struggling with competitors and battling as rivals blue ocean strategy proposes a different approach. Blue ocean strategy is about creating new markets, otherwise know as blue oceans, where there are no competitors to fight with. It is not technical innovation that thrives a blue ocean strategy, nor is it a specific industry or organization that explains the creation of blue oceans. This view is aimed at creating superior value for the customer and organization through bot differentiation and low-cost at the same time. (Kim et al., 2004, 2005a) Blue ocean strategy isn’t new and surely isn’t something that is limited to new players in an industry as would be expected. It is even true that most blue oceans are found within red oceans, just by expanding existing industry boundaries (Kim et al., 2005a). Examples provided by Kim et al (2004) include among others Ford, Apple, Cirque du Soleil, Dell and IBM and show that the principle can be related back to at least 1905. The question arises how in this day and age, where the environment is extremely complex, how blue oceans can be found, created and protected? Blue ocean strategy & strategic alliances “Strategic alliances are cooperative arrangements between two or more firms to improve their competitive position and performance by sharing resources” (Ireland, Hitt and vaidyanath, 2002, p. 413) is on the one hand to general but on the other hand it clearly defines the goal behind a strategic alliance; which is gaining competitive advantage (Dyer, Kale and Singh, 2001; Ireland et al., 2002; Dyer and Singh, 1998). Dyer and Singh subdivides this in 4 potential sources: relation- specific assets, knowledge-sharing routines, complementary resources/capabilities, and effective governance. In this paper we’ll use strategic alliance in the broadest sense of the word, as it is our goal to analyze strategic alliances in a blue ocean strategy and not the other way around. Also we won’t be differentiating between alliance contexts, like joint ventures, buyer-seller relationships or channel partnerships (Spekman, Forbes, T.M., Isabella, L.A. and MacAvoy, 1998) De Wit and Meyer (2010a) divide relational actors into eight different groups which each fulfill a different role towards an organization. Organizations either can, must or want to interact with these actors. Four groups can be clearly divided in horizontal relation, industry insiders and industry outsiders, and vertical relations, suppliers and buyers. Through the ‘september distinction’ we can list the other groups: socio-cultural actors, economic actors, political/legal actors and technological actors which all have a position within the broader environment of the organization. Because blue ocean strategy strives for differentiation and low-cost at the same time (Kim et al., 2004, 2005a) the horizontal relationships, vertical relationships and even the other actors can be opportunities for a strategic alliance. In this increasingly complex environment, due to accelerating
    • 4 Blue oceans through alliance: how to reach sustainable competitive advantage in a highly changing and interconnected environment globalization, it’s difficult for organizations to have all resources available to compete effectively in this highly changing and interconnected environment (Ariño, A. and Torre, J. de la., 1998). Strategic alliances can be a valuable tool for organizations to seek competitive advantage especially in a highly changing environment; it helps organizations, for example. to cut overhead costs, increase responsiveness, improve flexibility and efficiency (Lorenzoni and Baden-Fuller, 1995), cope with uncertainties, minimize transaction costs, reduce resource dependence (outside their control) and repositioning in dynamic markets (Das and Teng, 1996, 2000; Spekman, Forbes, T.M., Isabella, L.A. and MacAvoy, 1998; Young-Ybarra & Wiersema, 1999) and lastly it helps organizations to combine, exchange or invest in resources/capabilities, knowledge and assets (Dyer et al., 1998). Central toward blue ocean strategy is creating and capturing new demands, reaching towards uncontested market space (Kim et al., 2004, 2005a, 2005b). Especially in creating new markets strategic alliances can provide the resources, knowledge and capabilities to shape these dynamic environments. Collaboration can create value when complementary resources are aligned with each other (Ireland et al., 1995), a starting point to create and capture new demand. This is strengthened through research by Ahuja which found that social capital increases the possibility of radical breakthroughs in technology (2000). Creating blue oceans is often done by established players within their current core business (Kim et al. 2004, 2005a). Though relatively new entrants can also be the creator of a blue ocean strategy as well, which comes with a disadvantage because “the creation of blue oceans, in other words, is a product of strategy, and as such is very much a product of managerial action.” (Kim et al., 2004, p. 81). Though managerial action can be imitated, especially by established players where efficiency and effectivity is high. Theoretically they have the resources and capabilities to follow, and even outrun the smaller companies due to their experience. So it’s important for new players to create as much barriers as possible, especially barriers with social complexity and causal ambiguity make imitation hard. When organizations created a new value curve and made their strategic moves they have found their blue ocean (Kim et al., 2005a). They have an uncontested market space without competitors, at least for a while. Competitors could, and probably will, choose to pursue the same strategy, while they probably cannot create a blue ocean themselves they do have a life long experience in red ocean competing. Kim et al. (2005b, p. 188) discuss several economic and cognitive barriers which are: “(1) Value innovation does not make sense to a company’s conventional logic, (2) blue ocean strategy may conflict with other companies’ brand image, natural monopoly: (3) the market cannot support a second player, (4) patents or legal permits block imitation, (5) high volume leads
    • 5 Blue oceans through alliance: how to reach sustainable competitive advantage in a highly changing and interconnected environment to rapid cost advantage for the value innovator thereby discouraging followers from entering the market, (6) network externalities discourage imitation, (7) imitation often requires significant political, operational and cultural changes and (8) companies that value-innovate earn brand buzz and a loyal customer following that tends to shun imitators”. However, it’s inevitable for competitors to arrive in ‘your’ blue ocean as they want a piece of the pie. Thus the barriers for imitation cannot be high enough. This is especially true because Kim et al. (2005) describe possible/potential barriers which don’t automatically apply or occur in every situation. From an imitation perspective strategic alliances provide barriers which have to be understood by the competition. These barriers are, as described by Dyer et al. (1998), that the competitor cannot to ascertain how returns are generated due to causal ambiguity, cannot quickly replicate resources due to time compression diseconomies have an influence on, cannot imitate practices or investments due to the interconnectedness of the assets, cannot find the necessary strategic alliances to provide complementary resources and capabilities and cannot create the same socially complex environment. These are significant barriers which strengthen blue ocean strategy and are difficult to overcome in a dynamic environment. Blue ocean strategy pursues differentiation and low cost within the complete system of activities in order to break the trade-off between cost and value (Kim et al. 2004), a viewpoint which especially shows how blue ocean strategy challenges the status quo. This connects perfectly with strategic alliances for they stimulate co-specialization (Wit, de et al. 2010a). Here each organization is specialized and contributes more to the whole than if it was one organization. This improves the change & innovation lifecycle and cuts down costs. Also alliances prevent competencies from becoming rigidities (Floyd & Wooldridge, 1999; Leonard-Barton, 1992), which constrains the organizations in changing and executing a blue ocean strategy. These strategic alliances also prevent organizations from becoming unwieldy in this highly changing environment. Organizations can pursue the search for a blue ocean and don’t have to be limited due to their own size. Strategic alliances thus reduce risk and increase flexibility which can make it a preferred alternative towards acquisitions (Harrison, Hitt, Hoskisson & Ireland, 2001). Tiers of non-customers are an important opportunity for creating blue oceans, as every organization aims to find their customer base they forget to look at this from the exact opposite way (Kim et al., 2005b). Why aren’t we selling our products to the people who aren’t buying it, and can we change our product so we will be selling our products to them in the future? Kim et al. (2005b) describe multiple tiers within non-customers depending on the distance from the current market. Through a channel partnership strategic alliances can add value in reaching non- customers. This soft approach, which build upon current brand image of that channel, makes it easier and thus less costly to ‘wheel in’ new customers.
    • 6 Blue oceans through alliance: how to reach sustainable competitive advantage in a highly changing and interconnected environment Hurdles in executing a blue ocean strategy Even if the blue ocean is found, a new business model is created managers claim that the execution of this strategy is an enormous challenge. Organizations face four hurdles which prevent them from successfully implementing the blue ocean strategy. These hurdles are: (1) cognitive: employees don’t really want to change they’re routined and comfortable. A problem solved by Kim et al. (2005b) through experience, seeing is believing. However firms active mostly as suppliers in the supply chain don’t have the tangibility which is emphasized. When, from a bottom-up perspective, organizations at the end of the supply chain engage in strategic alliances with their suppliers this hurdle becomes easier to overcome. When the final product/brand is admirable and an alliance is set it will be easier to change the routines of the employees. (2) Limited resources: the greater the change the more money this will cost and companies mostly don’t have adequate resources available. A problem which is approached through “simply” being creative with your resources. Organizations should concentrate on multiplying the value of and freeing resources through hot spots, cold spots and horse trading (Kim et al., 2005b). Kim et al. (2005b) propose this as a solution, but i see this to be more a nifty workaround instead of concrete solution. Strategic alliances, however, provide a more solid base in leveraging the necessary resources. Vertical strategic alliances within the supply chain, or horizontal strategic alliances with industry in- and outsiders can cut overhead costs, improve efficiency and flexibility, minimize transaction cost (Lorenzoni and Baden-Fuller, 1995; Das et al., 1996, 2000; Spekman et al., 1998; Young-Ybarra et al., 1999) and thus the availability of resources grows. (3) Motivation: how to get key players motivated and get them to break with the status quo. So when you’ve got the people aware of the problem, you still have to motivate them in order act upon it. From this point of view strategic alliance cannot provide added value. Even more the solution provided by Kim and Mauborgne (2005b) is powerful within strategic alliances and necessary for success when strategic alliances is a fundamental part of blue ocean strategy. (4) Politics: even when a strategy is ground-breaking through either inter- or intra- organizational politics everything can be shot down. (Kim et al., 2005b). Unfortunately this happens in every organization, and as such also within strategic alliances. According to Kim and Mauborgne (2005b) you should have a consiglieri which knows the territory and paves they way; an occupation or unit (group of occupations) which is widely spread within strategic alliances and respectively better know a an alliance manager (Dyer et al., 2001) or strategic centre (Lorenzoni et al., 1995). Walking that political line will take effort, even when you play by that book, but when that road doesn’t lead you anywhere in strategic alliances there’s a way out. When the power
    • 7 Blue oceans through alliance: how to reach sustainable competitive advantage in a highly changing and interconnected environment relationship is either mutual independence, unbalanced independence or unbalanced dependence (Wit, de et al., 2010) and you’re the “stronger” than your adversary you can force the organization to comply or substitute the organization. Though do keep in mind that this is an last resort, as you’ll probably weaken the relationship. This is equal to the power versus authority relationship described by Simon (1997). Conclusion & Discussion The top 500 global businesses have on average some 60 alliances each, which was back in 2001 (Dyer et al., 2001). Expected is that this number has been growing since then, and will keep growing as also the environment keeps changing at this high pace. Even though many of the strategic alliances fail. They apparently have the power to create added value, at least that is the view of top-level managers. They see strategic alliances as a primary growth vehicle (Ireland et al., 2002). Deriving from that managers want to create added value, thus see the need improving their offering and innovation their products, or in other words searching for new uncontested market space. We could argue that strategic alliances and blue ocean strategy are an ideal combination where there is mutual interdependence towards each other; thus where blue ocean strategy offers strategic alliances a structure for developing strategic alliances and strategic alliances provide blue ocean strategy with new barriers to imitation, easier access to resources, prohibits competencies changing into rigidities, stimulates differentiation and lowers costs. While this previous statement might go a bit far, i’ve definitely shown that strategic alliances can be useful within blue ocean strategy. Especially within a highly changing and interconnected environment, where product life cycles decline and organizations don’t have the necessary resources available, strategic alliances add value through social capital which stimulates the creation of new demands, adding more imitation barriers for potential competitors, by lowering costs through co-specialization, preventing organizations from becoming unwieldy institutions and even can weaken different hurdles faced in blue ocean strategy. While Kim et al. (2005b) provide workaround to these hurdles, the strategic alliance can provide a more than that especially when limited resources are available. Within this paper we propose different positions in which strategic alliances can strengthen blue ocean strategy. However, we should not forget that forming strategic alliances is an unstable and difficult operation, a subject which is further researched by Das et al. (2000). Still top level managers see these alliances as a primary growth vehicle (Ireland et al., 2002), so knowledge and experience in this area will continue to evolve. A positive direction for blue ocean strategy through strategic alliances
    • 8 Blue oceans through alliance: how to reach sustainable competitive advantage in a highly changing and interconnected environment Solutions provided in this paper could in a empirical (real-life) situation contradict each other. In order to really assess which choices need to be made in specific situations further research is needed, eventually following with the construction of a framework. In this research different forms of strategic alliances should be incorporated, i.e. if the relationship is tight/loose and the kind of strategic alliance that is made (joint venture, channel partnership, buyer-seller relationship). References Ahuja, G. (2000). “The duality of collaboration: Inducements and opportunities in the formation of interfirm linkages,” Strategic Management Journal, 21, 317–343. Ariño, A. and Torre, J. de la. (1998). “Learning from failure: Towards an evolutionary model of collaborative ventures,” Organization Science 9, 306–32. Barney, J.B. (1991). “Firm Resources and Sustained Competitive Advantage,” Journal of Management, 17(1), 99-120. Das, T.K. and Teng, B.S. (1996). “Risk types and interfirm alliance structures,” Journal of Management Studies, 33, 827–843. Das, T.K. and Teng, B.S. (2000). “Instabilities of strategic alliances: An internal tensions perspective,” Organization Science 11, 77–101. Dyer, J.H., Kale, P. and Singh, H. (2001). “How to make strategic alliances work,” Sloan Management Review 23I(4), 37-43. Dyer, J.H., Singh, H. (1998). “The relational view: cooperative strategy and sources of interorganizational competitive advantage,” Academy of Management Review 23(4), 660-679. Floyd, S.W. and Wooldridge, B. (1999). “Knowledge creation and social networks in corporate entrepreneurship: The renewal of organizational capability,” Entrepreneurship: Theory & Practice, 23 (3), 123–143. Harrison, J.S., Hitt, M.A., Hoskisson, R.E. and Ireland, R.D. (2001). “Resource complementarity in business combinations: Extending the logic to organizational alliances,” Journal of Management 27, 679–690. Ireland, R.D., Hitt, M. and Vaidyanath, D. (2002). “Alliance management as a source of competitive advantage,” Journal of Management 28(3), 413-446. Kim, W.C. and Mauborgne, R. (2004). “Blue Ocean Strategy,” Harvard Business Review 82(10), 76-84. Kim, W.C. and Mauborgne, R. (2005a). “Blue Ocean Strategy: from theory to practice,” California Management Review 47(3), 105-121. Kim, W.C. and Mauborgne, R. (2005b). Blue Ocean Strategy: How to create uncontested market space and make the competition irrelevant. Boston: Harvard Business School Publishing Corporation.
    • 9 Blue oceans through alliance: how to reach sustainable competitive advantage in a highly changing and interconnected environment Leonard-Barton, D. (1992). “Core capabilities and core rigidities,” Strategic Management Journal, 13, 111–125. Lorenzoni, G. and Baden-Fuller, C. (1995). “Creating a strategic centre to manage a web of partners,” California Management Review 37(3), 146-162. Pine, B.J. and Gilmore, J.H. (2005). Welkom in de beleveniseconomie. In Pine, B.J. and Gilmore, J.H., De beleveniseconomie (p. 17-46). Den Haag: Sdu Uitgevers bv. * This book was originally published in English under the name “The experience economy” Porter, M.E. (1985). Competitive advantage: Creating and Sustaining Superior Performance. New York: The Free Press. Simon, H.A. (1997). Administrative Behavior (4th ed.). New York: The Free Press. Spekman, R.E., Forbes, T.M., Isabella, L.A. and MacAvoy, T.C. (1998). “Alliance management: A view from the past and a look to the future,” Journal of Management Studies 35, 747–772. Wit, B. de and Meyer, R. (2010a). Network level strategy. In Wit, B. de and Meyer, R., Strategy, process, content, context. An international perspective (4th ed., p. 365-386). Hampshire: Cengage Learning EMEA. Wit, B. de and Meyer, R. (2010b). The industry context. In Wit, B. de and Meyer, R., Strategy, process, content, context. An international perspective (4th ed., p. 423-442). Hampshire: Cengage Learning EMEA. Young-Ybarra, C. and Wiersema, M. (1999). “Strategic flexibility in information technology alliances: The influence of transaction cost economics and social exchange theory,” Organization Science 10, 439–459.