When executives develop corporate strategy, they nearly always begin by analyzing the industry or environmental conditions in which they operate. They then assess the strengths and weaknesses of the players they are up against. With these industry and competitive analyses in mind, they set out to carve a distinctive strategic position where they can outperform their rivals by building a competitive advantage. To obtain such advantage, a company generally chooses either to differentiate itself from the competition for a premium price or to pursue low costs. The organization aligns its value chain accordingly, creating manufacturing, marketing, and human resource strategies in the process. On the basis of these strategies, financial targets and budget allocations are set.
The underlying logic here is that a company’s strategic options are bounded by the environment. In other words, structure shapes strategy. This “structuralist” approach, which has its roots in the structure-conduct-performance paradigm of industrial organization economics1, has dominated the practice of strategy for the past 30 years. According to it, a firm’s performance depends on its conduct, which in turn depends on basic structural factors such as number of suppliers and buyers and barriers to entry. It is a deterministic worldview in which causality flows from external conditions down to corporate decisions that seek to exploit those conditions.
Even a cursory study of business history, however, reveals plenty of cases in which firms’ strategies shaped industry structure, from Ford’s Model T to Nintendo’s Wii. For the past 15 years, we have been developing a theory of strategy, known as blue ocean strategy, that reflects the fact that a company’s performance is not necessarily determined by an industry’s competitive environment.2 The blue ocean strategy framework can help companies systematically reconstruct their industries and reverse the structure-strategy sequence in their favor.
Blue ocean strategy has its roots in the emerging school of economics called endogenous growth3, whose central paradigm posits that the ideas and actions of individual players can shape the economic and industrial landscape. In other words, strategy can shape structure. We call this approach “reconstructionist.”
While the structuralist approach is valuable and relevant, the reconstructionist approach is more appropriate in certain economic and industry settings. Indeed, today’s economic difficulties have heightened the need for a reconstructionist alternative. The first task of an organization’s leadership, therefore, is to choose the appropriate strategic approach in light of the challenges the organization faces. Choosing the right approach, however, is not enough. Executives then need to make sure that their organizations are aligned behind it to produce sustainable performance. Most executives understand the mechanics of making the structuralist approach work, so this article will focus on how to align an organization behind the reconstructionist approach to deliver high and sustainable performance.
What Is the Right Strategic Approach for You?
There are three factors that determine the right approach: the structural conditions in which an organization operates, its resources and capabilities, and its strategic mind-set. When the structural conditions of an industry or environment are attractive and you have the resources and capabilities to carve out a viable competitive position, the structuralist approach is likely to produce good returns (see the exhibit “Choosing the Right Strategic Approach”). Even in a not-so-attractive industry, the structuralist approach can work well if a company has the resources and capabilities to beat out the competition. In either case, the focus of strategy is to leverage the organization’s core strengths to achieve acceptable risk-adjusted returns in an existing market.
But when conditions are unfavorable and they are going to work against you whatever your resources and capabilities might be, a structuralist approach is not a smart option. This often happens in industries characterized by excess supply, cutthroat competition, and low profit margins. In these situations, an organization should adopt a reconstructionist approach and build a strategy that will reshape industry boundaries.
Even when an industry is attractive, if existing players are well-entrenched and an organization does not have the resources and capabilities to go up against them, the structuralist approach is not going to produce high performance. In this scenario, the organization needs to build a strategy that creates a new market space for itself.
When structural conditions and resources and capabilities do not distinctively indicate one approach or the other, the right choice will depend on the organization’s strategic mind-set. An organization with an innovative bent and sensitivity to the risks of missing future opportunities will be more successful in adopting a reconstructionist approach. Firms with a bias toward defending current strategic positions and a reluctance to venture outside familiar territory would do better with a structuralist approach.
The Three Strategy Propositions
Whichever approach is chosen, a strategy’s success hinges on the development and alignment of three propositions: (1) a value proposition that attracts buyers; (2) a profit proposition that enables the company to make money out of the value proposition; and (3) a people proposition that motivates those working for or with the company to execute the strategy. Where the two approaches diverge is in the alignment of the propositions.
Let’s first flesh out our definition of strategy. The value and profit propositions set out the content of a strategy—what a company offers to buyers and how it will benefit from that offering. The people proposition determines the quality of execution. The three strategy propositions correspond to the traditional activity system of an organization: The outputs of an organization’s activities are value for the buyer and revenue for itself, and the inputs are the costs to produce them and the people to deliver them. Hence, we define strategy as the development and alignment of the three propositions to either exploit or reconstruct the industrial and economic environment in which an organization operates.
Unless a company creates a complete set of consistent propositions, it is unlikely to produce a high-performing and sustainable strategy. If, for instance, the value and profit propositions are strong, but the people proposition doesn’t motivate employees or other constituencies, the organization may experience temporary but unsustainable success. This is the classic case of execution failure. Likewise, an organization that offers a motivating people proposition but lacks a strong value or profit proposition will find itself mired in poor performance. This is formulation failure.
Each proposition may need to address more than one group of stakeholders, as when successful strategy execution rests on the buy-in of not only an organization’s employees but also groups outside it, such as supply chain partners. Similarly, a company in a business-to-business industry may have to formulate two value propositions: one for the customer and another for the customer’s customers.
Now let’s consider where the two approaches diverge. Under the structuralist approach, an organization’s entire system of activities, and thus its strategy propositions, needs to be aligned with the distinctive choice of pursuing either differentiation or low cost, each being an alternative strategic position in an industry. A strategy is unlikely to be successful, for instance, if the value and profit propositions are aligned around differentiation but the people proposition is targeted at low cost. Under a reconstructionist strategy approach, high performance is achieved when all three strategy propositions pursue both differentiation and low cost. This alignment in support of differentiation and low cost enables a company to open new market space by breaking the existing value-cost trade-off. It allows strategy to shape structure. It is also alignment that leads to more sustainable strategy, for either approach. While one or two strategy propositions can be imitated, imitating all three, especially the people proposition, is difficult (see the exhibit, “Achieving Strategy Alignment”).
It is the responsibility of an organization’s top executives to make sure that each proposition is fully developed and all three are aligned. They alone are suited to this type of broad strategy work; executives with a strong functional bias—marketing, manufacturing, human resources, or other functions—tend to miss the larger strategy picture. The marketing team, for example, may dwell too much on the value proposition and pay insufficient heed to the other two. Similarly, executives with a manufacturing bias may neglect buyer needs or may treat people as a cost variable. If an organization’s leadership is not mindful of these tendencies, it is unlikely to develop a full set of properly aligned strategy propositions.
While managers are well-informed about the ways in which structure shapes strategy,4 there is little knowledge of how to align the three propositions so that strategy can shape structure. In the next section of this article, we look at the city-state of Dubai to show how blue ocean strategy alignment enables an organization to reconstruct the environment. Dubai has redefined the role and activities of its government, yielding one of the fastest-growing economies in the world for two decades.
Achieving Blue Ocean Strategy Alignment
Dubai’s success would have been unthinkable 30 years ago. Cement structures were virtually absent in its unforgiving desert. Job opportunities were dismal, and medical services were poor. People lived in huts thatched with palm fronds and tended sheep in relentless heat.
Yet strategic decisions by the emirate’s leaders allowed Dubai to overcome seemingly insurmountable structural disadvantages. It has been an island of stability in a politically turbulent region. Only 5% of its revenues now come from oil and natural gas—down from 30% a decade ago. Indeed, Dubai is arguably the only Arab economy that has achieved substantial integration into the global economy outside the hydrocarbon sector and has emerged as a premier tourist and business destination across the globe. Although Dubai, like the rest of the world, is being buffeted by the global financial crisis, and its future depends on how it deals with that crisis, its reconstructionist blue ocean strategic move—aligning the three propositions around differentiation and low cost—has so far brought the emirate unprecedented profitable growth.
Dubai’s value proposition has targeted foreign investors whose money fuels the state’s economic development. Its profit proposition has allowed the government to benefit and extract revenues from those investors. Dubai’s people proposition has motivated its own citizens and its external partners—foreign expatriates—to buy into the country’s value and profit propositions and support its strategy.
