Blue Ocean Strategy


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Kim and Mauborgne's blue ocean metaphor elegantly summarizes their vision of the kind of expanding, competitor-free markets that innovative companies can navigate. Unlike "red oceans," which are well explored and crowded with competitors, "blue oceans" represent "untapped market space" and the "opportunity for highly profitable growth." The only reason more big companies don't set sail for them, they suggest, is that "the dominant focus of strategy work over the past twenty-five years has been on competition-based red ocean strategies"-i.e., finding new ways to cut costs and grow revenue by taking away market share from the competition. With this groundbreaking book, Kim and Mauborgne-both professors at France's INSEAD, the second largest business school in the world-aim to repair that bias. Using dozens of examples-from Southwest Airlines and the Cirque du Soleil to Curves and Starbucks-they present the tools and frameworks they've developed specifically for the task of analyzing blue oceans. They urge companies to "value innovation" that focuses on "utility, price, and cost positions," to "create and capture new demand" and to "focus on the big picture, not the numbers." And while their heavyweight analytical tools may be of real use only to serious strategy planners, their overall vision will inspire entrepreneurs of all stripes, and most of their ideas are presented in a direct, jargon-free manner. Theirs is not the typical business management book's vague call to action; it is a precise, actionable plan for changing the way companies do business with one resounding piece of advice: swim for open waters.

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Blue Ocean Strategy

  1. 1. Book Summary W. Chan Kim Renee Mauborgne 1
  2. 2. Sameer Mathur Indian Institute of Management, Lucknow Marketing Professor 2013 – Marketing Professor 2009 – 2013 Ph.D. and M.S. (Marketing) 2003 – 2009 2
  3. 3. 2 Contents Part One: Blue Ocean Strategy 1. Creating Blue Oceans 2. Analytical tools and Frameworks Part Two: Formulating Blue Ocean Strategy 3. Reconstruct Market Boundaries 4. Focus on Big Picture, Not the numbers 5. Reach beyond Existing demand
  4. 4. Contents Part Three: Executing Blue Ocean Strategy 7. Overcome key organizational hurdles 8. Build Execution into strategies 9. Conclusion: The sustainability and Renewal of Blue Ocean Strategy 3
  5. 5. Chapter 1: Creating Blue Oceans This chapter talks about the new market spaces which replaces red ocean strategy with blue oceans. It also talks about the imperative of making a new ocean besides analysing its impact on any industry. 5
  6. 6. Red Oceans vs. Blue Oceans Imagine a market universe composed of two sorts of oceans: red oceans and blue oceans. Red oceans represent all the industries in existence today. Blue oceans denote all the industries not in existence today. In RED oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known BLUE oceans, in contrast, are defined by untapped market space, demand creation, and the opportunity for highly profitable growth 6
  7. 7. 7 Red Ocean Blue Ocean
  8. 8. Red Oceans vs. Blue Oceans Blue Ocean Red Ocean 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 Blue ocean strategy is a market-creating strategy Industry boundaries defined and accepted Companies try to outperform rivals; cutthroat competition As market space gets crowded, prospects for profit and growth reduced Red ocean strategy is a market-competing strategy
  9. 9. The Rising Imperative of Creating Blue Oceans Supply is exceeding demand in most industries global competition is intensifyingProblems: Accelerated communization of products and services Increasing price wars Shrinking profit margins Red oceans becoming bloodier, need to be concerned with creating blue oceans
  10. 10. The Impact of Creating Blue Oceans
  11. 11. Value Innovation Value innovation is the cornerstone of blue ocean strategy. We call it value innovation because instead of focusing on beating the competition, you focus on making the competition irrelevant by creating a leap in value for buyers and your company, thereby opening up new and uncontested market space Innovation without value tends to be technology-driven, market pioneering, or futuristic, often shooting beyond what buyers are ready to accept and pay for 11
  12. 12. Value Innovation 12
  13. 13. Value Innovation Value innovation occurs only when companies align innovation with utility, price, and cost positions Those that seek to create blue oceans pursue differentiation and low cost simultaneously. 13
  14. 14. Value Innovation: The Cornerstone of Blue Ocean Strategy Competition-based red ocean strategy assumes that an industry’s structural conditions are given and that firms are forced to compete within them Value innovation is based on the view that market boundaries and industry structure are not given and can be reconstructed by the actions and beliefs of industry players 14
  15. 15. Few examples of Blue Oceans The American Wine Industry :Casella Wines The Case of Cirque du Soleil
  16. 16. The 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
  17. 17. Casella Wines 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
  18. 18. Casella Wines Premium wine drinkers trade down Industry criticizes them mercilessly at first
  19. 19. The Circus Industry Supplier power of the star performer were high Alternative form of entertainment was available : Ranging from urban live entertainment to home entertainment Industry was suffering from steadily decreasing audiences and in turn, declining revenue and profit
  20. 20. 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 Because of this, Cirque du Soleil appealed to both circus customers and noncustomers
  21. 21. Example: ‘Cirque du Soleil’ A circus company stuck in a stagnant market space with limited potential for growth as per the traditional strategic analysis of the market. Bargaining power of both the suppliers(performers) and the buyers(the customers) was high along with a negative sentiment against the use of animals. Cirque du Soleil competed against the traditional players in the industry by creating a different form of entertainment all together. 21
  22. 22. 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
  23. 23. Chapter 2: Analytical Tools and Frameworks 23
  24. 24. Effective blue ocean strategy should be about risk minimization and not risk taking. This chapter applies strategy canvas framework on US wine industry Strategy canvas captures the offering level that buyers receive across all key competing factors. A high score means that a company offers buyers more, and hence invests more. To fundamentally shift the strategy canvas of an industry, you must begin by reorienting your strategic focus from competitors to alternatives, and from customers to non-customers of the industry 24
  25. 25. 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 company’s relative performance across its industry’s factors of competition
  26. 26. Strategy Canvas
  27. 27. The Strategy Canvas 27
  28. 28. The Strategy Canvas (Yellow Tail) Instead of offering wine as wine, Casella created a social drink accessible to everyone: beer drinkers, cocktail drinkers, and other drinkers of non-wine beverages [yellow tail] leapfrogged tall competitors with no promotional campaign, mass media, or consumer advertising. It didn’t simply steal sales from competitors; it grew the market. [yellow tail] brought non-wine drinkers—beer and ready-to-drink cocktail consumers—into the wine market 28
  29. 29. The Strategy Canvas (Yellow Tail) 29
  30. 30. Strategy Canvas : Cirque du Soleil
  31. 31. Four Actions to create a Blue Ocean
  32. 32. Four Actions Framework There are four key questions to challenge an industry’s strategic logic and business model: 1) Which of the factors that the industry takes for granted should be eliminated? 32
  33. 33. Four Actions Framework 2) Which factors should be reduced well below the industry’s standard? 3) Which factors should be raised well above the industry’s standard? 4) Which factors should be created that the industry has never offered? 33
  34. 34. Four Actions Framework 34
  35. 35. Casella Wines -- Yellow Tail Casella Wines created three new factors in the U.S. wine industry — easy drinking, easy selection, fun and adventure — and eliminated or reduced everything else 35
  36. 36. 4 Actions : Wine Industry
  37. 37. 4 Actions : Cirque du Soleil Eliminate Star Performers Animal shows Aisle concession sales Multiple show arenas Raise Unique venues Reduce Fun and humor Thrill and danger Create Theme Refined environment Multiple productions Artistic music and dance
  38. 38. 3 characteristics of a Good strategy Focus Divergence Compelling taglines Only on the main factors of service/product Tendency to be unique & different from the competitors Clear cut and meaningful tagline 38
  39. 39. Reading the Value Curve Blue Ocean Strategy: When a company’s value curve, or its competitors’, meets the three criteria that define a good blue ocean strategy—focus, divergence, and a compelling tagline that speaks to the market—the company is on the right track 39
  40. 40. Reading the Value Curve A Company Caught in the Red Ocean When a company’s value curve converges with its competitors, it signals that a company is likely caught within the red ocean of bloody competition 40
  41. 41. Reading the Value Curve Over delivery Without Payback When a company’s value curve on the strategy canvas is shown to deliver high levels across all factors and the its position is not strong, the strategy canvas signals that the company may be oversupplying its customers, offering too much of those elements that add incremental value to buyers 41
  42. 42. Reading the Value Curve An Incoherent Strategy When a company’s value curve looks like a bowl of spaghetti—a zigzag with no rhyme or reason, where the offering can be described as “low-high-low-low-high- low-high”—it signals that the company doesn’t have a coherent strategy 42
  43. 43. Reading the Value Curve Strategic Contradictions Are there strategic contradictions? These are areas where a company is offering a high level on one competing factor while ignoring others that support that factor 43
  44. 44. Reading the Value Curve An Internally Driven Company In drawing the strategy canvas, how does a company label the industry’s competing factors? Are the competing factors stated in terms buyers can understand and value, or are they in operational jargon? The kind of language used in the strategy canvas gives insight as to whether a company’s strategic vision is built on an “outside-in” perspective, driven by the demand side, or an “inside-out” perspective that is operationally driven 44
  45. 45. Part 2: Formulating Blue Ocean Strategy 45
  46. 46. Chapter 3: Reconstruct Market Boundaries Challenge: Successfully identify, out of the possibilities that exist, commercially compelling blue ocean opportunities 46
  47. 47. Six Fundamental Assumptions: Keep companies trapped in Red Oceans 1) Define their industry similarly and focus on being the best within it 2) Look at their industries through the lens of generally accepted strategic groups, and strive to stand out in the strategic group they are in 3) Focus on the same buyer group, whether it’s the purchaser, user, or influencer 47
  48. 48. Six Fundamental Assumptions: Keep companies trapped in Red Oceans 4) Define the scope of the products and services offered by their industry similarly 5) Accept their industry’s functional and emotional orientation 6) Focus on the same point in time-and often on current competitive threats-in formulating strategy 48
  49. 49. Path 1:Look Across Alternative Industries Companies compete not only with the other companies in their own industry but also with companies in those other industries that produce alternative products or services 49
  50. 50. Path 1: Look across alternative Industries Cinemas vs. Restaurants – Completely different but solves the same purpose for the person i.e. a good night out Buyers implicitly makes decisions between alternatives and substitutes, often unconsciously 50
  51. 51. Path 1: (HOME DEPOT) Offer the expertise of professional home contractors at markedly lower prices than hardware stores By delivering the decisive advantages of both alternative industries, and eliminating or reducing everything else, they have transformed the ordinary homeowners into do-it-yourselfers 51
  52. 52. Path 1: (SOUTHWEST AIRLINES) Concentrated on driving as the alternative to flying, provided the speed of air travel at the price of car travel 52
  53. 53. Path 2: Look Across Strategic Groups Within Industries Strategic Group: Group of companies within an industry that pursue a similar strategy Need to understand what factors drive the customers to trade up or down between strategic groups 53
  54. 54. Path 2: Look Across Strategic Groups Within Industries Strategic Groups can generally be ranked in a rough hierarchical order built on 2 dimensions: PRICE & PERFORMANCE 54
  55. 55. Examples of Companies creating Blue Oceans by following this path Sony Walkman – By looking across the low price and mobility of transistor radios & high fidelity of boom boxes Toyota Lexus – Offered the quality of Mercedes Benz, BMW etc. at the price of Cadillac or Lincoln Polo Ralph Lauren – Providing the satisfaction of haute couture and affordable price Path 2: SONY, TOYOTA, POLO 55
  56. 56. Path 3: Look across Chain of Buyers Chain of “buyers” - directly or indirectly involved in the buying decision. Purchasers who pay for the product or service may differ from the actual users There are important influencers as well. 56
  57. 57. Path 3: Look across Chain of Buyers Challenging an industry’s conventional wisdom about which buyer group to target can lead to the discovery of new blue ocean. By shifting its focus upstream from purchasers to users, Bloomberg created a value curve that was radically different from anything the industry had seen before 57
  58. 58. Path 3: Look Across the Chain of Buyers Purchasers, users, and influencers Companies usually focus on a single buyer group Create blue ocean by shifting buyer group 58
  59. 59. Path 3: NOVO NORDISK and STARBUCKS Novo Nordisk • From insulin producers to diabetic care company Starbucks • Selling coffee beans to grocery stores 59
  60. 60. Path 4: Look Across Complementary Product and Service Offerings Few products and services are used in a vacuum. In most cases, other products and services affect their value The key is to define the total solution buyers seek when they choose a product or service. A simple way to do so is to think about what happens before, during, and after your product is used. Babysitting and parking the car are needed before people can go to the movies. 60
  61. 61. Path 4: Look Across Complementary Product & Service Offerings Most products and services are affected by other products or services & many companies fail to notice this The key is to define a solution buyers seek when they choose a product or service. A simple way to do this is to think about what happens Before, During, After 61
  62. 62. Path 4: PHILIPS By thinking in terms of solving the major pain points in customers’ total solution, Philips saw the water problem as its opportunity. The result: Philips created a kettle having a mouth filter that effectively captured the lime scale as the water was poured 62
  63. 63. Path 4: NABI NABI: Hungarian bus company that applied Path 4 to U.S. transit bus industry Competition competed on offering the lowest purchase price for buses. But Designs outdated Delivery times were late Quality was low 63
  64. 64. Path 4: Look Across Complementary Product & Service OSffoelurtiinong:s Adopted fiberglass when making it’s buses Cut costs by being corrosion free Light weight cut fuel consumption and emissions After accidents they didn’t have to replace a whole panel rather they could cut the damaged area and replace it Lighter weight also meant lower powered engines and fewer axles which cut costs And gave more space inside the bus 64
  65. 65. Path 5: Look Across Functional or Emotional Appeal to Buyers Emotionally Oriented Add price without enhancing functionality . Functionally Oriented Blend commodity products with life by adding emotion. Examples: Swatch, The Body Shop, Quick Beauty House 65
  66. 66. Path 5: (QUICK BEAUTY HOUSE, JAPAN) Created a Blue Ocean in the Japanese barbershop industry. Shift from emotional to highly functional Eliminated the time and cost of getting a haircut Re-defined the Japanese barbershop industry 66
  67. 67. 6. Look across time Three principles to assess trend Decisive Irreversible Clear trajectory Example- Apple identified the trend for digital music and realized the fast growing demand for MP3 players and launched Apple’s hit Ipod
  68. 68. Path 6: Look Across Time Three principles are critical to assessing trends across time. To form the basis of a blue ocean strategy, these trends must be decisive to your business, they must be irreversible, and they must have a clear trajectory. Having identified a trend of this nature, you can then look across time and ask yourself what the market would look like if the trend were taken to its logical conclusion 68
  69. 69. Path 6: Look Across Time What companies tend to do: Focus on same point in time Passive actions Projecting trend itself External Threats 69
  70. 70. Path 6: Look Across Time What companies need to do: Look into time Don’t predict future How the trend will bring Value 70
  71. 71. From Head to Head competition to Blue Ocean creation Head to head competition Blue Ocean Creation Industry Focus on rivals within its industry Look across alternative industries Strategic Group Focus on competitive position within strategic group Look across strategic group within industries Buyer Group Focus on better serving the buyer group Redefines the industry buyer group Scope of product or service offering Focus on maximizing the value of product or service offerings within industry bounds Look across complementary product or service offerings Functional Emotional Orientation Focus on improving price performance within the functional emotional orientation of its industry Rethink the functional emotional orientation of its industry Time Focus on adapting external trends as they occur Shape external trends over time
  72. 72. 72 Chapter 4: Focus on the Big Picture, Not numbers
  73. 73. Focus on the Big Picture, Not numbers Strategy Canvas Drawing a strategy canvas: visualizes a company’s current strategic position in its marketplace helps the company chart its future strategy draws a company’s and its managers’ focus on the big picture rather than becoming immersed in numbers 73
  74. 74. Focusing on the Big Picture: Drawing your Strategy Canvas Drawing a Strategy Canvas does three things It shows the strategic profile of an industry by depicting very clearly the factors that affect the competition among industry players It shows the strategic profile of current and potential competitors, identifying which factors they invest in strategically It shows the company’s strategic profile-or value curve- depicting how it invests in them in the future
  75. 75. The Four Steps of Visualizing Strategy Visual Awakening Visual Exploration Visual Strateg y Fair Visual Commu nication
  76. 76. 76 Chapter 4: Focus on the Big Picture, Not numbers
  77. 77. Step1: Visual Awakening Compare your business with your Competitors by drawing your “as is” strategy canvas See where your strategy needs to change
  78. 78. Step2: Visual Exploration Go into the field to explore the six paths to create Blue Oceans. Observe the distinctive advantage s of alternative products and services See which factors you should eliminate, create or change
  79. 79. Step3: Visual Strategy Fair Draw your “to be” strategy canvas based on insights from field observations Get feedback on alternative strategy canvases from customers, competitors' customers, and non-customers Use feedback to build the best “to be” future strategy
  80. 80. Step3: Visual Strategy Fair Eliminate-Reduce-Raise-Create Grid: The Case of EFS ELIMINATE Relationshi p Manageme nt RAISE Ease of Use Security Accuracy Speed Market Commentary REDUCE Account Executives Corporate Dealers CREATE Confirmati on Tracking
  81. 81. Step 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 the gaps to actualize the new strategy
  82. 82. Example – EFS Had been struggling for a long time with an ill-defined and poorly communicated strategy 82
  83. 83. Example – EFS Began the strategy process by bringing together upper management from Europe, N. American, Asia, and Australia 2 Teams: Value curve production and emerging online foreign exchange business The experience: Europe vs. America EFS strategy vs. competitors (Clearskies) 83
  84. 84. EFS sent managers out for four weeks to gather information. They had to interview ten people involved in corporate foreign exchange. Also reached outside the industry’s traditional boundaries to other companies that did not yet use corporate foreign exchange. 84 Example – EFS
  85. 85. EFS Findings: What they thought was important turned out not to be what the customer thought was important. Because of these findings, EFS was able to reformulate new strategies. Redid the value curves and formulated new compelling taglines that fit their business model. 85 Example – EFS
  86. 86. Both teams presented their strategy canvases at a visual strategy fair (6 by the online group/6 by the offline group) After all 12 strategies were presented, each judge was given 5 sticky notes and told to put them next to his/her favorite, then explain why they did not choose certain curves. 86 Example – EFS
  87. 87. They realized that 1/3 of what they had thought were key competitive factors were, in fact, marginal to customers. Another 1/3 either were not well articulated or had been overlooked in the visual awakening phase. It then became clear that the executives needed to reassess things such as EFS’s separation of its online & traditional business. 87 Example – EFS
  88. 88. Step 3: Visual Strategy Fair Following the visual strategy fair, the teams were able to draw a value curve that was a truer likeness of the existing strategic profile than anything they had produced earlier. 88
  89. 89. Step 3: Visual Strategy Fair 89
  90. 90. The new value curve exhibited the criteria of a successful strategy, and it displayed more focus than the previous strategy By collapsing its online & traditional businesses into 1 offering, EFS substantially cut the operational complexity of its business model, making systematic execution far easier 90 Example – EFS
  91. 91. Eliminate-Reduce-Raise-Create Grid: The Case of EFS Eliminate Relationship Management Raise Ease of use Security Accuracy Speed Market commentary Reduce Account Executives Corporate Dealers Create Confirmation Tracking 91 Example – EFS
  92. 92. Using the Pioneer-Migrator-Settler (PMS) Map PMS Map- helps visualize, plan, and predict a companies future growth and profit. Pioneers- business that offer unprecedented value and are powerful sources of profitable growth. Their value curves are different form the competitions on a strategy canvas. All pioneers are blue oceans. 92
  93. 93. Using the Pioneer-Migrator-Settler (PMS) Map Migrators- are in between pioneers and settlers. They offer improved value, but not innovative value. Settlers- do not contribute to much future growth and are stuck in a red ocean. Their value curves match the basic shape of the industry. 93
  94. 94. Example PMS Map 94
  95. 95. Visual strategy at the Corporate ULseinvge tlhe Strategy Canvas Samsung Electronics Of Korea Exam ple • In 1998, Samsung Electronics used Strategic Canvas in its key business creation decisions • In 2003, the center completed more than eighty strategic projects and opened more than 10 VIP (Value Innovation Program) branches to meet rising demands Using the Pioneer- Migrator-Settler (PMS) Map A company’s Pioneers are the businesses that offer unprecedented value. Settlers are those whose value curves conform to the basic shape of the industry’s. These are me-too businesses. The potential Migrators lies somewhere in between. These businesses offer improved value, but not innovative value.
  96. 96. Overcoming the Limitations of Strategic Planning It should be more conversational than solely documentation-driven It should be more about building the big picture than about number-crunching exercises It should have a creative component instead of being strictly analysis-driven It should be more motivational, invoking willing commitment, than bargaining driven, producing negotiated commitment
  97. 97. Chapter 5: Reach Beyond Existing Demand 97
  98. 98. Reach Beyond Existing Demand First-Tier Noncustomers These soon-to-be noncustomers are those who minimally use the current market offerings to get by as they search for something better. Upon finding any better alternative, they will eagerly jump ship. In this sense, they sit on the edge of the market 98
  99. 99. Reach Beyond Existing Demand First-Tier Noncustomers What are the key reasons first-tier noncustomers want to jump ship and leave your industry? Look for the commonalities across their responses. Focus on these, and not on the differences between them. You will glean insight into how to de-segment buyers and unleash an ocean of latent untapped demand 99
  100. 100. Reach Beyond Existing Demand Second Tier Noncustomer These are refusing noncustomers, people who either do not use or cannot afford to use the current market offerings because they find the offerings unacceptable or beyond their means. Their needs are either dealt with by other means or ignored 10
  101. 101. Reach Beyond Existing Demand Second Tier Noncustomer What are the key reasons second-tier noncustomers refuse to use the products or services of your industry? Look for the commonalities across their responses. Focus on these, and not on their differences. You will glean insight into how to unleash an ocean of latent untapped demand 101
  102. 102. Reach Beyond Existing Demand Third Tier Noncustomer The third tier of noncustomers is the farthest away from an industry’s existing customers. Typically, these unexplored noncustomers have not been targeted or thought of as potential customers by any player in the industry. That’s because their needs and the business opportunities associated with them have somehow always been assumed to belong to other markets 102
  103. 103. Reach Beyond Existing Demand Go for the Biggest Catchment Focus on the tier that represents the biggest catchment at the time Explore whether there are overlapping commonalities across all three tiers of noncustomers. It expands the scope of latent demand you can unleash you should first reach beyond existing demand to noncustomers and desegmentation opportunities as you formulate future strategies 103
  104. 104. Reach Beyond Existing Demand Go for the Biggest Catchment You should be aware when your competitors succeed in attracting the mass of noncustomers with a value innovation move, many of your existing customers may be attracted away because they too may be willing to put their differences aside to gain the offered leap in value You must profit from it to create a sustainable win-win outcome 104
  105. 105. 105 Example: (PRET MANAGER) Having Identified need of healthy, inexpensive, fast, fresh lunch with sit-down facilities by observing commonalities across first tier of non-customers & came up with Pret Manager
  106. 106. 106 Example: (JCDecaux) JCDecaux- Observed the commonalities in the second tier non-customers and realized that the low rate of repeat visits, low value addition, less exposure time, lack of stationary downtown locations in outdoor advertising using billboards were the reasons for many companies to not opt for outdoor advertising. So it came up with the idea that municipalities could offer stationary downtown locations, such as bus stops, where people tended to wait a few minutes and hence had time to read and be influenced by advertisements.
  107. 107. 107 Example: (DENTAL WHITENING) Dental whitening – It was an assumption that tooth whitening was a service provided exclusively by dentists and not by oral care consumer-product companies. Consequently, oral care companies never looked at the needs of these noncustomers. When they did, they found an ocean of latent demand waiting to be tapped & the capability to deliver safe, high-quality, low-cost tooth whitening solutions, and the market exploded
  108. 108. Chapter 6. Get the Strategic Sequence Right • Companies need to build their strategy following what is called the Sequence of Blue Ocean Strategy. • The sequence goes: • Buyer Utility, Price, Cost, Adoption 108
  109. 109. Buyer Utility Does your offering unlock exceptional utility? There is no blue ocean potential without this point Options include: • Park the idea • Rethink it • Reach an affirmative Price Companies don’t want to rely solely on price to create demand Is your offering priced to attract the mass of target buyers for a compelling ability to pay for your offering? These first two steps address the revenue side of a company’s business model Cost Can you produce your offering at the target cost and still earn a healthy profit margin? Don’t let cost drive prices When target costs cannot be met, forgo the idea because the blue ocean will not be profitable Adoption Sequence 109
  110. 110. Chapter 6: Get the strategic sequence right Sequence of Blue Ocean Strategy NO_RETHINK What are the adoption hurdles in actualizing the business idea? Are you addressing them upfront? 110 Can you attain your cost target to profit at your strategic price? Is your price easily accessible to the mass of buyers? Is there exceptional buyer utility in your business idea? YES YES YES Buyer Utility Cost Adoption Price NO_RETHINK NO_RETHINK YES NO_RETHINK A COMMERCIALLY VIABLE BLUE OCEAN
  111. 111. 111 Example: PHILIPS CD-I Philips’ CD-I (All in one: video machine +music system + game player + teaching tool) But couldn’t provide consumers with the understanding of the product and hence NO COMPELLING REASON TO BUY IT  Sales never took off
  112. 112. The Buyer Utility Map 112
  113. 113. 113 Chapter 6: Get the strategic sequence right The Six Stages of Buyer Experience Cycle
  114. 114. 114 Chapter 6: Get the strategic sequence right The Six Utility Levers The way in which companies can unlock exceptional utility for the buyers Customer Productivity (the most commonly used lever) Simplicity Convenience Risk Fun & Image
  115. 115. Uncovering Blocks to Buyer Utility This shows how a company can identify the most compelling hot spots to unlock exceptional utility: 115
  116. 116. Questions to Ask? When testing for exceptional utility ask: Where are the greatest blocks to utility across the buyer experience cycle for your customers and non customers? Does your offering effectively eliminate these blocks? When a company’s offering passes this test, it is ready to move to the next step 116
  117. 117. Questions to Ask? From Exceptional Utility to Strategic Pricing To secure a strong revenue stream for your offering, you have to set the right strategic price. Many companies may take the reverse course and test the product in different situations before deciding to low their pricing. It is crucial to know how the company will set its pricing strategy from the start. 117
  118. 118. 118 Get the strategic sequence right From Exceptional Utility to Strategic Pricing Two reasons for change: Companies are discovering that volume generates higher returns than it used to For eg. In software industry, Producing the first copy of the Windows XP operating system cost Microsoft billions of dollars, whereas subsequent copies involved no more than the nearly trivial cost of a CD. This makes volume key.
  119. 119. 119 Get the strategic sequence right From Exceptional Utility to Strategic Pricing To a buyer, the value of a product or service may be closely tied to the total number of people using it. For eg. online auction service managed by eBay. People will not buy a product or service when it is used by few others. Either you sell millions at once, or you sell nothing at all.
  120. 120. 120 Get the strategic sequence right From Exceptional Utility to Strategic Pricing Excludability is a function both of the nature of the good and of the legal system. A good is excludable if the company can prevent others from using it Intel, for example, can exclude other microprocessor chipmakers from using its manufacturing facilities through property ownership laws Lack of excludability reinforces the risk of free riding
  121. 121. Pricing Companies have to start at day one finding the right pricing strategy to bring in the customers and retain them over time Word of mouth is a huge brand building tool 121
  122. 122. Pricing Price Corridor of the Mass This a tool that has been created to help managers find the right price for an irresistible offer This irresistible offer by the way does not always have to be the lowest labeled price for that particular line of product The tool involves two distinct but interrelated steps 122
  123. 123. 123 Get the strategic sequence right Price Corridor of the Mass To help managers find the right price for an irresistible offer
  124. 124. Step 1: Identify Price Corridor How do companies determine a strategic price? Answer: Understand the price sensitivities of the people who will be comparing your product to many other products in other industries 124
  125. 125. Step 1: Identify Price Corridor Companies must categorize products that fall into two categories Different form, same function Different form and function, same objective 125
  126. 126. Step 1: Identify Price Corridor Different form, same function Example: Ford’s Model T vs. the horse-drawn carriage Different form and function, same objective Example: Cirque du Soleil vs. restaurant/bar 126
  127. 127. Step 1: Identify Price Corridor Listing all these alternatives shows managers which buyers can be poached Identify the price bandwidth that captures the largest groups of target buyers: the Price Corridor of the Mass 127
  128. 128. Step 2: Specify a Price Level How high of a price can managers set within the corridor? They must assess Degree to which the product is protected legally through patents or copyrights Degree to which the company owns some exclusive asset or core capability 128
  129. 129. Step 2: Specify a Price Level Level of patent and asset protection determines which price bound to choose Upper Middle Lower 129
  130. 130. Step 2: Specify a Price Level Companies should pursue mid- to lower-boundary pricing if: Their blue ocean has high fixed costs and marginal variable costs Their attractiveness depends heavily on network externalities Their cost structure benefits from steep economies of scale and scope 130
  131. 131. From strategic pricing to Target Costing Target Costing addresses the profit side of the business Model To maximize profit potential a company should start with Strategic Price, then deduct desired profit margin from the price to arrive at Target Cost Price-minus costing, and not cost-plus pricing, is essential if you are to arrive at a cost structure that is both profitable and hard for potential followers to match 131
  132. 132. From strategic pricing to Target Costing important strategic plans companies use to meet their Target Cost Streamlining Operations and Introducing Cost Innovations Partnering Changing Price Model of the Industry 132
  133. 133. Profit Model of Blue Ocean Strategy The Strategic Price The Target Profit The Target Cost Streamlining and Cost Innovations Partnering Pricing Innovation 133
  134. 134. Blue Ocean Idea (BOI) Index Philips CD-I Motorola Iridium DoCoMo i-mode Japan Utility Is there exceptional utility? Are there compelling reasons to buy your offering? _ _ + Price Is your price easily accessible to the mass of buyers? _ _ + Cost Does your cost structure meet the target cost? _ _ + Adoption Have you addressed adoption hurdles up front? _ -/+ + 134
  135. 135. Chapter 7 Overcome Key Organization Hurdles 135 Executing Blue Ocean Strategy
  136. 136. The Four Organizational Hurdles to Strategy Execution 136 Cognitive Hurdle An organization wedded to the status quo Resource Hurdle Limited resources Motivational Hurdle Unmotivated staff Political Hurdle Opposition from powerful vested interests
  137. 137. Builds on the rarely exploited corporate reality that in every organization, there are people, acts, and activities that exercise a disproportionate influence on performance 137 Tipping Point Leadership
  138. 138. Organizational Hurdles Tipping Point Leadership Allows you to quickly and cost effectively overcome the 4 hurdles to executing blue oceans 138
  139. 139. Mounting the challenge is about conserving resources and cutting time by focusing on identifying and then leveraging the factors of disproportional influence in an organization. 139 Tipping Point Leadership
  140. 140. The hardest battle is simply to make people aware of the need for a strategic shift and to agree on its causes. Tipping point leadership does not rely on numbers. It zooms in on the act of disproportionate influence: making people see and experience harsh reality first hand. “Seeing is believing.” 140 1. Break Through the Cognitive Hurdle
  141. 141. Two ways: 141 1. Break Through the Cognitive Hurdle 1. Make Employees Come Face-to-Face with the Worst Operational Problems 2. Meet with Disgruntled Customers
  142. 142. 142 2. Jump the Resource Hurdle Redistribute Resources to Your Hot Spots (Activities that have low resource input but high potential performance gains) Redirect Resources from Your Cold Spots (Activities that have high costs but low performance impact)
  143. 143. 143 2. Jump the Resource Hurdle Engage in Horse Trading (Trading excess resources for another unit’s excess to fill remaining resource gaps.
  144. 144. 144 2. Jump the Resource Hurdle
  145. 145. Zoom in on Kingpins - Key Influencers in the organization - Can create a ripple effect by touching and motivating employees to embrace the new strategy 145 3. Jump the Motivational Hurdle
  146. 146. Fishbowl management, where kingpins’ actions and inaction are made transparent to others -Creates an intense performance culture. -Raises the stakes of inaction. 146 3. Jump the Motivational Hurdle
  147. 147. Atomize to Get the Organization to Change Itself -Relates to the framing of the strategic challenge -Employees need to know that it is attainable, or the change will not likely succeed. 147 3. Jump the Motivational Hurdle
  148. 148. Secure a Consigliores on Your Top Management Team A politically adept but highly respected insider who knows in advance all the land mines to be encountered by a strategic change Leverage Your Angels and Silence Your Devils Angels- those who have the most to gain from the strategic shift. Devils- those who have the most to lose from a strategic shift. 148 4. Knock Over the Political Hurdle
  149. 149. Chapter 8: Build Execution into Strategy 149
  150. 150. Chapter 8: A company must equal everyone from the top to the front lines. Everyone in an organization must support and be aligned with strategy. To build trust and commitment and to inspire voluntary cooperation build execution into strategy from the start & reach to fair process in making and executing of strategy 150
  151. 151. The Power of Fair Process Fair process is the managerial expression of the procedural justice theory procedural justice psychology of justice study of process Why Does Fair Process Matter? 151
  152. 152. The Power of Fair Process Intellectual and Emotional Recognition Theory: When individuals feel recognized for their intellectual worth, they are willing to share their knowledge By using fair process employees will be to engage in voluntary cooperation 152
  153. 153. The Power of Fair Process If individuals are not treated as though there knowledge is valued they may not share their ideas and best thinking Employees may also begin to reject other’s intellect as well 153
  154. 154. Attitudes and Behaviors toward Fair Process Fair Process Engagement Explanation Expectation clarity Trust and Commitment “I feel my opinions count.” Voluntary Cooperation “I’ll go beyond the call of duty.” Exceed Expectations Self-initiated Strategy Formulation Process Attitudes Behavior Strategy Execution 154
  155. 155. 3 E Principles of Fair Process Engagement Involving individuals in the strategic decisions that affect them • Ask for input • Allow employees to question the ideas or assumptions of others • Communicates management’s respect for individuals and their ideas • Creates better strategic decisions from management and greater commitment from everyone involved Explanation Everyone involved should understand why the final strategic decisions are made • People are confident that managers have considered all opinions and made decisions based on the overall interest of the company • Employees can trust managers intentions • Managers can receive feedback from employees allowing for enhanced learning of the decision Expectation Clarity Once the strategy has been set into action, managers must clearly communicate the new rules and procedures Employees should know what standards they will be judged on and what penalties they will receive for failure Are the new goals, targets, and responsibilities for our employees clearly understood? 155
  156. 156. The Tale of Two Plants Chester Failed to Engage Employees Consulting firm ordered not to disturb employees 156
  157. 157. The Tale of Two Plants Chester Failed to Explain Employees were not explained why new system was being implemented Failed to clarify Expectations Did not elaborate on how new system worked, and what employees jobs were 157
  158. 158. The Tale of Two Plants High Park Engaged Employees Introduced consultants to employees, held company meetings. Explained why new process was being implemented Clearly stated employee Expectations in new system 158
  159. 159. The Tale of Two Plants RESULTS: Management at Chester violated the three E’s, unlike High Park Chester plant employees lose trust in management and is met with resistance to the new strategy High Park strategy is implemented, Employees gain trust in management and shift from being the worst employees to the best 159
  160. 160. Fair Process and Blue Ocean Strategy Intangible capital Companies who have created blue oceans are quick to praise their employees who show commitment, trust and voluntary cooperation Companies who have this intangible capital stand apart in speed, quality and consistency of their execution and to implement strategic shifts at low cost 160
  161. 161. Fair Process and Blue Ocean Strategy Obtaining Intangible Capital What not to do? What to do? 161
  162. 162. Fair Process and Blue Ocean Strategy What not to do? Money and Power? This will simply fall short of inspiring human behavior beyond self interest. Don’t separate strategy formulation from execution This is a hallmark of questionable implementation and mechanical flow through at best! 162
  163. 163. Fair Process and Blue Ocean Strategy What to do? Implement Fair process Build execution into strategy making from the start People tend to be committed to support the resulting strategy even when it is viewed as not favorable or at odd with their unit People realize that small self sacrifices are essential in building a strong company 163
  164. 164. Chapter 9 Conclusion: The Sustainability and Renewal of Blue Ocean Strategy 164
  165. 165. Chapter 9 “Creating blue oceans is not a static achievement but a dynamic process. Once a company creates a blue ocean and its powerful performance consequences are known, sooner or later imitators appear on the horizon. The question is, how easy or difficult is your blue ocean strategy to imitate?” 165
  166. 166. Barriers to Imitation A value innovation does not make sense based on conventional strategic logic Brand image conflict can prevent companies from attempting to imitate a blue ocean strategy Natural monopoly can block imitation if the size of the market cannot support another player 166
  167. 167. Barriers to Imitation Copyrights, patents or other legal block imitation The high volume generated by a large value innovation leads to rapid cost advantages, placing potential imitators at a sever disadvantage 167
  168. 168. Barriers to Imitation Network externalities. The more customers you have the more attractive you become Because imitation often requires companies to make substantial changes to their existing business practices A huge leap in value often earns brand buzz and a loyal following in the marketplace 168
  169. 169. When to Value-Innovate Again Monitor value curves on strategy canvas and dominate the blue ocean as long as possible Hold on when there is still a huge profit stream to be collected from your current offerings 169
  170. 170. When to Value-Innovate Again Focus on lengthening, widening and deepening your rent stream to operational improvements and geographic expansion to achieve maximum economies of scale and market coverage Reach out for another blue ocean when your value curve begins to converge with those of the competition 170
  171. 171. When to Value-Innovate Again A blue ocean strategy brings with it considerable barriers to imitation. Some of these are operational, and others are cognitive When imitators persist, monitor value curves and focus on lengthening, widening, and deepening your share through operational and geographical expansion until value-innovation is your last resort 171
  172. 172. Over 1 Million views from more than 100 countries Prof. Sameer Mathur Top 1% most viewed Over 250 presentations on Marketing