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Creating Blue Oceans

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The Book and the Authors

JOHN ABBOTT

Prof Chan Kim

JOHN ABBOTT

Prof Renee
Mauborgne

Accolades

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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

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New Market Space

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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

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Red oceans

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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

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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

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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

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The Impact of Creating Blue Oceans

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From Company and Industry

to Strategic Move

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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

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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

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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

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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!

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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
Reach beyond existing demand
Get the strategic sequence right

Evaluation principles
Overcome key organizational hurdles
Build execution into strategy

Risk factor each principle

attenuates
Search risk
Planning risk
Scale risk
Business model risk

Risk factor each principle

attenuates
Organizational risk
Management risk

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Points of view

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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

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Blue Ocean (VI) Strategy

High

High

V1

V1
Quality

Quality

LC

Low

Low
High

C1

Low

C1

High

Cost

Cost

Structuralist

Reconstructionist

Low

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Example: A highly competitive Industry

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The American
Wine Industry

What the industry offers

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Premium Wines

Budget Wines

Polarised
Strategic Groups

Massive Choice

American Wine Industry

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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

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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.

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What wine customers said

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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?

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Segmentation of Market and Brands

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Low Involvement

High Involvement

Easy Going

Enjoyers

Aspirationals

Glass with friends

Everyday
enjoyment
To relax/unwind
Stick with limited
list of known
brands
Choose in-store
Not interested in
wine language

Image important
Wine preferrers
(sic)
Varietal
knowledge
Interested in some
wine language
Enjoy trying new
wines

Want to discover
wine
Knowledge of
wine regions
Frequently buy
>$10 wines
Join wine clubs
Dont stick to
known brands

Influenced by
major brand
advertising

Visit wineries /
read wine articles

Ideal wine is
complex &
interesting

Least care
choosing a wine
Not wine
preferrers
Price is a strong
influencer

Brand:
Demographic:

Lindemans
M/F: 50/50 Age:
35-49

Rosemount Estate
M/F: 30/70; Age:
30-40

Appreciators

Wolf Blass
M/F: 70/30; Age:
35-50

Connoisseurs
Sophisticated
drinker
Discerning wine
tastes
Dont decide in
store
Have a cellar
Less influenced
by specials/
promotions
Actively pursue
wine knowledge

Penfolds
Age: 40+

Strategy Canvas

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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
Above-the-line
Vineyard prestige
Use of
enological marketing Aging and legacy Wine
quality
complexity
terminology

Four Steps of Visualizing

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1. Visual
Awakening

2. Visual
Exploration

3. Visual Strategy 4. Visual

Fair
Communication

Compare your
business with your
competitors by
drawing your as is
canvas

Go into the field to

explore the six paths
to creating blue
oceans

Draw your to be
canvas based on
insights from field
observations

Observe the
distinctive advantages
of alternative products
and services

Get feedback on
alternative strategy
canvases from
customers,
competitors
customers, and noncustomers

See where your

strategy needs to
change

See which factors

you should eliminate,
create or change

Use feedback to
build the best to be
future strategy

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

Four Actions to create a Blue Ocean

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Raise
What factors
should be raised
well beyond the
industry standard?

Eliminate

Create

What factors
should be
eliminated that the
industry has taken
for granted?

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.

Eliminate
Enological terminology and
distinctions
Aging qualities

Raise
Price versus budget wines
Retail Store involvement

Above-the-line marketing
Reduce
Wine complexity

Create
Easy drinking

Wine range

Ease of selection

Vineyard prestige

Fun and adventure

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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?

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 yellow tail
Eliminate

Raise

Enological terminology & distractions

Aging qualities
Above-the-line marketing

Price versus budget wines

Retain store involvement

Reduce

Create

Wine complexity
Wine Range
Vineyard prestige

Easy drinking
Ease of selection
Fun & adventure

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To Be Canvas
Eliminate

Reduce

Raise
Create

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Yellow Tail

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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]

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Creating of a social drink that is accessible to anyoneI

Easy drinking, ease of selection, sense of fun and
adventure
Limit number of SKUs
Price to move at volume

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Utility proposition
(customers, distributors and
retailers)

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

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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

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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

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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

Example: Cirque du Soleil

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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

Example: Cirque du Soleil

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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

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Eliminate
Raise
Star Performers
Unique venues
Animal shows
Aisle concession
sales
Multiple show arenas
Reduce
Fun and humor
Thrill and danger

Create
Theme
Refined environment

The Strategy Canvas

of Cirque du Soleil
Eliminate

hi

Raise

Reduce

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Create

Ringling Brothers

offering level

Cirque du Soleil

Smaller Regional Circus

lo
Price

Animal Shows
Star Performers

Multiple Show
Arenas

Aisle Concessions

Thrills & Danger

Fun & Humor

Theme

Unique Venue

Multiple
Productions
Refined Viewing
Environment

Artistic Music
& Dance
Kim & Mauborgne 2006

Key Takeaways

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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

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Exercise

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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.

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Examples

Exercise
3.

Write on
Worksheet:
left, C right

4.

Draw As Is

5.

Draw To Be

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Examples

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