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In a study of business launches in 108 companies, we found that 86% of those new ventures were line extensions—incremental improvements to existing industry offerings—and a mere 14% were aimed at creating new markets or industries. While line extensions did account for 62% of the total revenues, they delivered only 39% of the total profits. By contrast, the 14% invested in creating new markets and industries delivered 38% of total revenues and a startling 61% of total profits.
In fact, as the exhibit shows, most blue oceans are created from within, not beyond, red oceans of existing industries. This challenges the view that new markets are in distant waters.
Our findings are encouraging for executives at the large, established corporations that are traditionally seen as the victims of new market space creation. For what they reveal is that large R&D budgets are not the key to creating new market space. The key is making the right strategic moves.
Perhaps the most important feature of blue ocean strategy is that it rejects the fundamental tenet of conventional strategy: that a trade-off exists between value and cost.
BRILLIANT STRATEGY, blockbuster product, or breakthrough technology can put you on the competitive map, but only solid execution can keep you there.
when asked if they agreed with the statement “Important strategic and operational decisions are quickly translated into action,” the majority answered no.
our work helping more than 250 companies learn to execute more effectively, we’ve identified four fundamental building blocks executives can use to influence those actions—clarifying decision rights, designing information flows, aligning motivators, and making changes to structure.
spans of control had once again narrowed. In addressing only structure, management had attacked the visible symptoms of poor performance but not the underlying cause—how
Decision Rights • Ensure that everyone in your company knows which decisions and actions they’re responsible for.
By the end of 1984, Caterpillar had lost a billion dollars. By 1988, then-CEO George Schaefer stood atop an entrenched bureaucracy that was, in his words, “telling me what I wanted to hear, not what I needed to know.”
strategy execution When a company fails to execute its strategy, the first thing managers often think to do is restructure. But our research shows that the fundamentals of good execution start with clarifying decision rights and making sure information flows where it needs to go. If you get those right, the correct structure and motivators often become obvious.
Once each side understood the business realities confronted by the other, they cooperated more effectively, acting in the whole company’s best interests—and there were no more year-end surprises.
The top trait—“Everyone has a good idea of the decisions and actions for which he or she is responsible”—exhibited a significant positive correlation with our success indicator in 25 of the 31 data sets, for an index score of 81.
Once executives understand their company’s areas of weakness, they can take any number of actions. “Mapping improvements to the building blocks: Some sample tactics
“We’ve been discussing this problem for several years, and yet you always say that it’s so-and-so’s problem, not mine. Sixty-seven percent of [our] respondents said that they do not think information flows freely across divisions. This is not so-and-so’s problem—it’s our problem. You just don’t get results that low [unless it comes] from everywhere. We are all on the hook for fixing this.”
You can go to www.simulator-orgeffectiveness.com to assemble and try out various five-step organizational-change programs and assess which would be the most effective and efficient in improving execution at your company.
Most companies’ operational and management control systems are built around financial measures and targets, which bear little relation to the company’s progress in achieving long-term strategic objectives. Thus the emphasis most companies place on short-term financial measures leaves a gap between the development of a strategy and its implementation.
a company’s relationship with its customers • its key internal processes • its learning and growth. When performance measures for these areas are added to the financial metrics, the result is not only a broader perspective on the company’s health and activities, it’s also a powerful organizing framework. A sophisticated instrument panel for coordinating and fine-tuning a company’s operations and businesses so that all activities are aligned with its strategy.
the scorecard forces managers to come to agreement on the metrics they will use to operationalize their lofty visions.
Translation vision and strategy: four perspectives
Managing strategy: four processes
Mere awareness of corporate goals, however, is not enough to change many people’s behavior. Somehow, the organization’s high-level strategic objectives and measures must be translated into objectives and measures for operating units and individuals.
just getting managers to think systematically about the assumptions underlying their strategy is an improvement over the current practice of making decisions based on short-term operational results.
In our work, we often see evidence of what we call the 80-100 rule: you’re better off with a strategy that is 80% right and 100% implemented than one that is 100% right but doesn’t drive consistent action throughout the company.
Draft a working strategic principle. Summarize your corporate strategy—your plan to allocate scarce resources in order to create value that distinguishes you from competitors—in a brief phrase. That phrase becomes your working strategic principle.
“The product of a consultant should be results for clients—not reports.”
And this strategic principle has teeth: Bain has always measured partners’ performance according to the results they achieve for their clients, not just on billings to the firm.
Southwest had to decide whether the potential growth from serving the Denver market was worth the higher costs associated with the delays, which would ultimately be reflected in higher ticket prices. The company turned to its strategic principle: would the airline be able to maintain fares competitive with the cost of automobile travel? Clearly, in Denver at least, it couldn’t. Southwest pulled out of Stapleton three years after inaugurating the service there and has not returned.
In our experience, less than 15% of companies make it a regular practice to go back and compare the business’s results with the performance forecast for each unit in its prior years’ strategic plans. As a result, top managers can’t easily know whether the projections that underlie their capital-investment and portfolio-strategy decisions are in any way predictive of actual performance.
Each improvement priority is translated into action items with clearly defined accountabilities, timetables, and key performance indicators (KPIs) that allow executives to tell how a unit is delivering on a priority.
Seasoned executives know almost instinctively whether a business has asked for too much, too little, or just enough resources to deliver the goods. They develop this capability over time—essentially through trial and error. High-performing companies use real-time performance tracking to help accelerate this trial-and-error process.
The recommender has no obligation to act on the input he or she receives but is expected to take it into account—particularly since the people who provide input are generally among those who must implement a decision. Consensus is a worthy goal, but as a decision-making standard, it can be an obstacle to action or a recipe for lowest-common-denominator compromise.
consistency across global brands proved difficult, and cost synergies across the operating units were elusive. Industry insiders joked that “there are seven major tobacco companies in the world—and four of them are British American Tobacco.”
The key is to be clear who has input, who gets to decide, and who gets it done.
The five letters in RAPID correspond to the five critical decision-making roles: recommend, agree, perform, input, and decide.
It’s a common scenario, yet most management teams and boards of directors don’t specify how decision-making authority should change as the company does.
Take salt and pepper mills, for instance. John Lewis, which prides itself on having great selection, stocked nearly 50 SKUs of salt and pepper mills, while most competitors stocked around 20. The company’s buyers saw an opportunity to increase sales and reduce complexity by offering a smaller number of popular and well-chosen products in each price point and style. When John Lewis launched the new range, sales fell. This made no sense to the buyers until they visited the stores and saw how the merchandise was displayed. The buyers had made their decision without fully involving the sales
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When it comes down to a struggle between two functions, there may be good reasons to locate the D in either place—buying or selling, marketing or product development. Here, as elsewhere, someone needs to think objectively about where value is created and assign decision roles accordingly.
If managers suddenly realize that they’re spending less time sitting through meetings wondering why they are there, that’s an early signal that companies have become better at making decisions.
