Blue Ocean Strategy-Intro

BACHELOR OF INNOVATION
Creating Blue Oceans
The Book and the Authors
JOHN ABBOTT
JOHN ABBOTT
Prof Chan Kim
Prof Renee Mauborgne
Accolades
Over 2 million copies sold Translated into over 41 foreign languages a world record
Taught as the major theory of strategy at leading business schools Gives insights to CEOs, Executives, Heads of State and Prime Ministers
New Market Space
Red oceans and blue oceans make up market universe Red oceans: all industries in existence = known market space Blue oceans: all industries not in existence = unknown market space
Red Oceans vs. Blue Oceans

Red oceans
Industry boundaries defined and accepted Competitive rules of game known Companies try to outperform rivals; cutthroat competition As market space gets crowded, prospects for profit and growth reduced Products become commodities Red ocean strategy is a market-competing strategy
Blue oceans
Undefined market space, demand creation, opportunity for highly profitable growth Most are created from within red oceans by expanding existing industry boundaries Rules of game waiting to be set Competition irrelevant Blue ocean strategy is a market-creating strategy
The Rising Imperative of Creating Blue Oceans
Supply is exceeding demand in most industries global competition is intensifying Problems:

Accelerated commodization of products and services Increasing price wars Shrinking profit margins
Red oceans becoming bloodier, need to be concerned with creating blue oceans
The Continuing Creation of Blue Oceans
Blue oceans have been around for some time; a feature of business life Industries never stand still, constantly evolving Significant expansion of blue oceans over years So why the focus on red ocean strategy?
Corporate strategy influenced by military strategy Need to create new market space that is uncontested
The Impact of Creating Blue Oceans
From Company and Industry to Strategic Move
Are there lasting visionary companies that continuously outperform the market and create blue oceans? Found success of these model companies was a result of industry sector performance, not companies themselves Strategic move used as unit of analysis (rather than company or industry) Strategic move: the set of managerial actions and decisions involved in making a major market-creating business offering
Value Innovation: The Cornerstone of Blue Ocean Strategy

Creators of blue oceans follow value innovation Value Innovation
Equal emphasis on value and innovation Defies value-cost trade-off of competition-based strategy Successful value innovation:
Drives down costs while driving up buyers value Uses a whole-system approach Follows reconstructionist view
Red Ocean Vs. Blue Ocean

Compete in existing market space Beat the competition Exploit existing demand Make the value-cost trade-off Align the whole system of a firms activities with its strategic choice of differentiation or low cost
Create uncontested market space Make the competition irrelevant Create and capture new demand Break the value-cost trade-off Align the whole system of a firms activities in pursuit of differentiation and low cost
Formulating and Executing Blue Ocean Strategy

Six Principles of Blue Ocean Strategy
Reconstruct market boundaries Focus on the big picture, not the numbers Reach beyond existing demand Get the strategic sequence right Overcome key organizational hurtles Build execution into strategy
The remaining chapters will give you the principles and generalized frameworks to succeed in blue oceans
Take Aways
Red ocean strategy is a market-competing strategy, while blue ocean strategy is a market-creating strategy As red oceans are becoming bloodier, we need to create more blue oceans The only way to beat the competition is to stop trying to beat the competition!
The Six Principles of Blue Ocean Strategy

This figure highlights the six principles driving the successful formulation and execution of blue ocean strategy and the risks that these principles attenuate.
Formulation Principles
Reconstruct market boundaries Focus on the big picture, not the numbers
Risk factor each principle attenuates

Search risk Planning risk Scale risk
Reach beyond existing demand

Get the strategic sequence right
Business model risk
Evaluation principles
Overcome key organizational hurdles Build execution into strategy
Risk factor each principle attenuates

Organizational risk Management risk
Points of view
Business often look at the industry from a structuralist (supply) point of view What if we looked at the industry from a reconstructionist (demand) point of view?
Market boundaries are not viewed as given, but could be reconstructed to unlock new demand
Generic Strategies vs. Value Innovation

Red Ocean Strategy
High
High
Blue Ocean (VI) Strategy
V1
V1 Quality
Quality
Low
LC
Low
High
Cost
C1
Low
High Cost
C1
Low
Structuralist
Reconstructionist
Example: A highly competitive Industry
The American Wine Industry
What the industry offers
Premium Wines
Polarised Strategic Groups
Budget Wines
Massive Choice
American Wine Industry

3rd largest in world: worth $20 billion
Californian makes 66% - the rest is from Italy, France, Spain, Chile, Argentina, Australia
Exploding number of new wines new vineyards in Oregon, Washington, New York
Customer base stagnant

31st in the world in per capita consumption!
American Wine Industry
Top 8 producers had 75% of the market; 1600 had the remaining 25% $ millions spent in marketing - Titanic battles intense competition Sever price pressure The dominant growth strategy was towards premium wines more complexity, better image, more prestigious vineyards, number of medals won at wine festivals.
What wine customers said

It is too confusing and complex
Wine descriptions and terminology The shopping experience The lack of clear guidance on what to buy and drink
Thus, massively intimidating for noncustomers (the large majority of the US population who were not wine drinkers)
What are people looking for in a wine?
Segmentation of Market and Brands

Low Involvement Easy Going Glass with friends Least care choosing a wine Not wine preferrers Price is a strong influencer Enjoyers Everyday enjoyment To relax/unwind Stick with limited list of known brands Choose in-store Not interested in wine language Influenced by major brand advertising Lindemans M/F: 50/50 Age: 35-49 Aspirationals Image important Wine preferrers (sic) Varietal knowledge Interested in some wine language Enjoy trying new wines Appreciators Want to discover wine Knowledge of wine regions Frequently buy >$10 wines Join wine clubs Dont stick to known brands
High Involvement Connoisseurs Sophisticated drinker Discerning wine tastes Dont decide in store Have a cellar Less influenced by specials/ promotions
Ideal wine is Visit wineries / complex & read wine articles interesting Rosemount Estate M/F: 30/70; Age: 30-40 Wolf Blass M/F: 70/30; Age: 35-50
Actively pursue wine knowledge

Penfolds Age: 40+
Brand: Demographic:
Strategy Canvas
The strategy canvas is both a diagnostic and an action framework for building a compelling blue ocean strategy. It captures the current state of play in the known market space. This allows you to understand where the competition is currently investing, the factors the industry currently competes on in products, service, and delivery, and what customers receive from the existing competitive offerings on the market. The horizontal axis captures the range of factors the industry competes on an invests in. The vertical axis captures the offering level that buyers receive across all these key competing factors. The value curve then provides a graphic depiction of a companys relative performance across its industrys factors of competition.
High
Premium Wines
Budget Wines
Low
Price Wine range Vineyard prestige Use of Above-the-line enological marketing Aging and legacy Wine quality complexity terminology
Four Steps of Visualizing

1. Visual Awakening
Compare your business with your competitors by drawing your as is canvas See where your strategy needs to change
2. Visual Exploration
Go into the field to explore the six paths to creating blue oceans
3. Visual Strategy Fair

Draw your to be canvas based on insights from field observations
4. Visual Communication
Distribute your before-and-after strategic profiles on one page for easy comparison Support only those projects and operational moves that allow your company to close gaps and actualize the new strategy
Observe the distinctive advantages of alternative products and services

See which factors you should eliminate, create or change
Get feedback on alternative strategy canvases from customers, competitors customers, and noncustomers
Use feedback to build the best to be future strategy
Four Actions to create a Blue Ocean

Raise
What factors should be raised well beyond the industry standard?
Eliminate
What factors should be eliminated that the industry has taken for granted?
Create
What factors should be created that the industry has never offered?
Reduce
What factors should be reduced well below the industry standard?
Four Actions Framework + Eliminate/Reduce/Raise/Create Grid

The four actions framework offers an technique that breaks the trade-off between differentiation and low cost and to create a new value curve. It answers the four key questions of what industry takes for granted and needs to be eliminated; what factors need to be reduced below industry standards; what factors need to be raised above industry standards; and what should be created that the industry has never offered.
Reduce
Which factors should be reduced well below industry standards?
Eliminate
Which of the factors that the industry takes for granted should be eliminated?
A New Value Curve
Create
Which factors should be created that the industry has never offered?
Raise
Which factors should be raised well above the industrys standard?
Eliminate Enological terminology and distinctions
Raise Price versus budget wines
Retail Store involvement Aging qualities
Above-the-line marketing Reduce Wine complexity Create Easy drinking
Wine range
Ease of selection
The eliminate-reduce-raise-create grid pushes companies not only to ask all four questions in the four actions framework but also to act on all four to create a new value curve. By driving companies to fill in the grid with the actions of eliminating, reducing, raising, and creating, the grid provides four immediate benefits: it pushes them to simultaneously pursue differentiation and low costs; identifies companies who are only raising and creating thereby raising costs; makes it easier for managers to understand and comply; and it drives companies to scrutinize every factor the industry competes on.
ERRC Grid yellow tail

The Case of ye llow tail Eliminate Enological terminology & distractions Aging qualities Above-the-line marketing Raise Price versus budget wines Retain store involvement
Reduce Wine complexity Wine Range Vineyard prestige
Create Easy drinking Ease of sele ction Fun & adventure
To Be Canvas
Eliminate Reduce Raise
Create
Yellow Tail
Only 2 types initially Chardonnay and Shiraz Fruity, soft on palette, sweet-ish great for those who had not drunk wine before Same bottle for red and white low logistics costs Simple vibrant packaging lower case letters/kangaroo Un-intimidating They were selling The essence of a great land Australia ie they were not selling the wine Australian clothing for the retail staff they enthusiastically promoted a wine they could understand.
Value Innovation of [yellow tail]

Utility proposition
retailers)
Creating of a social drink that is accessible to anyone
Easy drinking, ease of selection, sense of fun and (customers, distributors and adventure Limit number of SKUs Price to move at volume
Price proposition
Targeted at the mass of customers

Priced against the alternative (6-pack)
Cost structure
Elimination of working capital tied up in aging wines Fast product turnover
Results
No 1 imported wine (outsells France and Italy)

Fastest growing imported wine in the history of the USA industry
New consumers of wine
Jug drinkers trade up Premium wine drinkers trade down
Industry criticizes them mercilessly at first
Now wine press blurb gives it a best buy for value; winning wine awards.
The Case of Cirque du Soleil
Cirque du Soleil achieved rapid growth in a declining industry with low profit potential Cirque du Soleil created uncontested new market space that made the competition irrelevant If you dont know them you can see some at
http://www.youtube.com/watch?v=M4lAPI5BAuk
Example: Cirque du Soleil
Instead of simply trying to outpace the competition, Cirque du Soleil offered people both the fun and thrill of the circus and the intellectual sophistication of the theater Because of this, Cirque du Soleil appealed to both circus customers and noncustomers
Each show, like a theater production, had its own unique theme and storyline This allowed customers to return to the show more frequently They also did away with the traditional highpriced concessions and vendors thereby cutting costs
Cirque du Soleil effectively combined the best of both the circus and the theater while eliminating everything else This allowed them to achieve both differentiation and low cost
Eliminate-Reduce-Raise-Create
Eliminate Star Performers Animal shows Aisle concession sales Multiple show arenas Reduce Fun and humor Thrill and danger Raise Unique venues
Create Theme Refined environment Multiple productions Artistic music and dance
The Strategy Canvas of Cirque du Soleil

hi
Ringling Brothers
Eliminate
Reduce
Raise
Create
Cirque du Soleil
offering level
lo
Price
Smaller Regional Circus
Animal Shows Star Performers
Multiple Show Arenas
Thrills & Danger Fun & Humor
Theme
Multiple Productions Refined Viewing Environment Artistic Music & Dance

Kim & Mauborgne 2006
Aisle Concessions
Unique Venue
Key Takeaways
Three tiers of non-customers:
1: buyers who purchase your industry offerings out of necessity; will jump ship if given an opportunity.
2: buyers who purchase alternative offerings that serve the same function
3: people who dont consume even the alternatives to your offerings
Non-customer demand is unlocked by providing new buyer utilities, at a price that attracts a mass of buyers, given target costs.
Buyers could be not only end-users, but also other participants in a value chain (e.g. distributors)
Comparison of approaches
Red Ocean Strategy Blue Ocean Strategy
Exercise
1. List Factors of Competition 2. Top 2 or 3 in ERRC Grid Quadrants
Clearly define the group of noncustomer that you are going after.
Examples
Exercise
3. Write on Worksheet: E left, C right Draw As Is Draw To Be
4. 5.
Examples

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BACHELOR OF INNOVATION

Creating Blue Oceans

The Book and the Authors

Prof Chan Kim

Prof Renee Mauborgne

New Market Space

Red Oceans vs. Blue Oceans

The Rising Imperative of Creating Blue Oceans

Supply is exceeding demand in most industries global competition is intensifying Problems:

The Continuing Creation of Blue Oceans

The Impact of Creating Blue Oceans

From Company and Industry to Strategic Move

Value Innovation: The Cornerstone of Blue Ocean Strategy

Red Ocean Vs. Blue Ocean

Formulating and Executing Blue Ocean Strategy

The Six Principles of Blue Ocean Strategy

Risk factor each principle attenuates

Reach beyond existing demand

Business model risk

Risk factor each principle attenuates

Generic Strategies vs. Value Innovation

Blue Ocean (VI) Strategy

Example: A highly competitive Industry

The American Wine Industry

What the industry offers

American Wine Industry

Customer base stagnant

American Wine Industry

What wine customers said

What are people looking for in a wine?

Segmentation of Market and Brands

Actively pursue wine knowledge

Four Steps of Visualizing

3. Visual Strategy Fair

Observe the distinctive advantages of alternative products and services

Four Actions to create a Blue Ocean

Four Actions Framework + Eliminate/Reduce/Raise/Create Grid

Which factors should be reduced well below industry standards?

A New Value Curve

Which factors should be raised well above the industrys standard?

Eliminate Enological terminology and distinctions

Raise Price versus budget wines

Retail Store involvement Aging qualities

Above-the-line marketing Reduce Wine complexity Create Easy drinking

ERRC Grid yellow tail

Reduce Wine complexity Wine Range Vineyard prestige

Create Easy drinking Ease of sele ction Fun & adventure

Value Innovation of [yellow tail]

Targeted at the mass of customers

Elimination of working capital tied up in aging wines Fast product turnover

No 1 imported wine (outsells France and Italy)

Industry criticizes them mercilessly at first

The Case of Cirque du Soleil

Example: Cirque du Soleil

Example: Cirque du Soleil

Example: Cirque du Soleil

The Strategy Canvas of Cirque du Soleil

Smaller Regional Circus

Animal Shows Star Performers

Multiple Show Arenas

Thrills & Danger Fun & Humor

Multiple Productions Refined Viewing Environment Artistic Music & Dance

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