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By: W. Chan Kim & Renee MauborgneSummary by: Jesse StarmerCOM 459
Value InnovationValue innovation is created in the region where a company’s actions favorably affect bothits cost structure and its value proposition to buyers. Cost savings are made by eliminatingand reducing the factors an industry competes on. Buyer value is lifted by raising andcreating elements the industry has never offered. Over time, costs are reduced further asscale economies kick in due to the high sales volumes that superior value generates. Costs Value Innovation Buyer Value
Red Ocean Versus Blue Ocean Startegy In the red ocean, differentiation costs because firms compete with the same best-practice principle. Here, the strategic choices for firms are to pursue either differentiation or low cost. In the reconstructionist world, however, the strategic aim is to create new best-practice rules by breaking the existing value-cost trade-off and thereby creating blue ocean. Red Ocean Strategy Blue Ocean Strategy Compete in existing market space. Create uncontested market space. Beat the competition. Make the competition irrelevant. Exploit existing demand. Create and capture new demand. Make the value-cost trade-off. Break the value-cost trade-off. Align the whole system of a firm’s Align the whole system of a firm’s activities with its strategic choice of activities in pursuit of differentiation differentiation or low cost. and low cost.
Red Ocean Versus Blue Ocean StrategyRed Ocean Strategy Blue Ocean Strategy
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 Risk factor each principle attenuatesReconstruct market boundaries Search riskFocus on the big picture, not the numbers Planning riskReach beyond existing demand Scale riskGet the strategic sequence right Business model riskEvaluation principles Risk factor each principle attenuatesOvercome key organizational hurdles Organizational riskBuild execution into strategy Management risk
The Six Principles of Blue Ocean StrategyFormulation Principles Risk factor each principle attenuatesEvaluation principles Risk factor each principle attenuates
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.HighLow Above-the-line Vineyard prestige Wine range Price Use of enological marketing Aging and legacy Wine terminology quality complexity
Four Actions Framework + Eliminate/Reduce/Raise/Create Grid Reduce The four actions framework offers an Which factors should be technique that breaks the trade-off between reduced well below industry standards? differentiation and low cost and to create a new value curve. It answers the four key questions of what industry takes for granted Eliminate A Create Which of the factors New Which factors should be and needs to be eliminated; what factors need Value created that the industry that the industry takes to be reduced below industry standards; what for granted should be Curve has never offered? factors need to be raised above industry eliminated? standards; and what should be created that Raise the industry has never offered. Which factors should be raised well above the industry’s standard? Eliminate Raise The eliminate-reduce-raise-create grid pushesEnological terminology and Price versus budget wines companies not only to ask all four questions in distinctions the four actions framework but also to act on all Retail Store involvement Aging qualities four to create a new value curve. By driving companies to fill in the grid with the actions ofAbove-the-line marketing eliminating, reducing, raising, and creating, the Reduce Create grid provides four immediate benefits: it pushes Wine complexity Easy drinking them to simultaneously pursue differentiation and low costs; identifies companies who are only Wine range Ease of selection raising and creating thereby raising costs; makes Vineyard prestige Fun and adventure it easier for managers to understand and comply; and it drives companies to scrutinize every factor the industry competes on.
Four Actions Framework + Eliminate/Reduce/Raise/Create Grid Reduce Four Actions Framework Eliminate Create A New Value Curve Raise Eliminate Raise Reduce CreateThe Eliminate-Reduce-Raise-CreateGrid
Four Steps of Visualizing Strategy The four steps of visualizing strategy builds on the six paths of creating blue oceans and involves a lot of visual stimulation in order to unlock people’s creativity. The four steps include visual awakening, visual exploration, visual strategy fair, and visual communication.1. Visual 2. Visual 3. Visual Strategy 4. Visual Awakening Exploration Fair Communicatio n•Compare your •Go into the field to •Draw your “to be” strategy •Distribute your before-business with your explore the six paths to canvas based on insights and-after strategic profilescompetitors’ by creating blue oceans. from field observations. on one page for easydrawing your “as is” comparison.strategy canvas. •Observe the distinctive •Get feedback on advantages of alternative strategy •Support only those•See where your alternative products and canvases from customers, projects and operationalstrategy needs to services. competitors’ customers, moves that allow yourchange and noncustomers. company to close the •See which factors you gaps to actualize the new should eliminate, •Use feedback to build the strategy. create, or change. best “to be” future strategy.
Four Steps of Visualizing Strategy1. Visual 2. Visual 3. Visual 4. Visual Awakening Exploration Strategy Fair Communication
Pioneer, Settler, Migrator Map A corporate management team pursuing profitable growth can plot the company’s current and planned portfolios on a pioneer-migrator-settler (PMS) map. This strategy can help a company determine which businesses experience the highest and lowest growth and cash flow. These are classified accordingly with the highest growth potential being pioneers, then to migrators, then to the lowest rung, settlers. Pioneers Migrators Settlers Today Tomorrow
Three Tiers of Noncustomers There are three tiers of noncustomers that can be transformed into customers. They differ in their relative distance from your market. The first tier of customers minimally buy an industry’s offering out of necessity. The second tier of noncustomers refuse to use your industries offerings. The third tier are noncustomers who have never thought of your market’s offerings as an option. Third Second Tier Tier First Tier Your Market
Sequence of Blue Ocean Strategy Buyer utility Is there exceptional buyer utility in your business idea? No-- RethinkAn important part of blue ocean strategy is to Yes“get the strategic sequence right.” This Pricesequence fleshes out and validates blue Is your price easily accessible to theocean ideas to ensure their commercial mass of buyers?viability. This can then reduce business No-- Rethinkmodel risk. In this model, potential blue Yesocean ideas must pass through a sequenceof buyer utility, price, cost, and adoption. At Costeach step there are only two options: a “yes” Can you attain your cost target to profitanswer, in which case the idea may pass to at your strategic price? No-- Rethinkthe next step, or “no”. If an idea receives ano at any point, the company can either park Yesthe idea or rethink it until you get a yes. Adoption What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? No-- Rethink Yes A Commercially Viable Blue Ocean Idea
Sequence of Blue Ocean Strategy Buyer utility No-- Rethink Yes Price No-- Rethink Yes Cost No-- Rethink Yes Adoption No-- Rethink Yes A Commercially Viable Blue Ocean Idea
Buyer Utility Map The buyer utility map helps managers look at this issue from the right perspective. It outlines all the levers companies can pull to deliver exceptional utility to buyers as well as the various experiences buyers can have with a product or service. The Six Stages of the Buyer Experience Cycle 1. 2. 3. 4. 5. 6. Purchase Delivery Use Supplements Maintenance Disposal Customer Productivity SimplicityThe Six Utility Levers Convenience Risk Fun and Image Environmental friendliness
Buyer Utility Map The Six Stages of the Buyer Experience Cycle 1. 2. 3. 4. 5. 6. Purchase Delivery Use Supplements Maintenance Disposal Customer ProductivityThe Six Utility Levers Simplicity Convenience Risk Fun and Image Environmental friendliness
Buyer Experience Cycle A buyer’s experience can usually be broken into a cycle of six stages, running more or less sequentially from purchase to disposal. Each stage encompasses a wide variety of specific experiences. At each stage, managers can ask a set of questions to gauge the quality of buyer’s experience. Purchase Delivery Use Supplements Maintenance DisposalHow long does it How long does Does the product Do you need other Does the product Does use of thetake to find the it take to get require training or products and require external product createproduct you the product expert assistance? services to make maintenance? waste items?need? delivered? this product work? Is the product easy to How easy is it to How easy is it toIs the place of How difficult is store when not in If so, how costly are maintain and dispose of thepurchase it to unpack use? they? upgrade the product?attractive and and install the product? How effective are the How much time do Are there legalaccessible? new product? product’s features they take? How costly is orHow secure is Do buyers and functions? maintenance? environmental How easy are theythe transaction have to issues in Does the product or to obtain?environment? arrange disposing of the service deliver far delivery product safely?How rapidly can more power or themselves? Ifyou make a options than required How costly is yes, how costlypurchase? by the average user? disposal? and difficult is Is in overcharged with this? bells and whistles?
Buyer Experience CyclePurchase Delivery Use Supplements Maintenance Disposal
Uncovering Blocks to Buyer Utility Uncovering blocks to buyer utility can identify the most compelling hot spots to unlock exceptional utility. By locating your proposed offering on the thirty-six space of the buyer utility map, you can clearly see how, and whether the new idea not only creates a different utility proposition from existing offerings but also removes the biggest blocks to utility that stand in the way of converting noncustomers into customers. Purchase Delivery Use Supplements Maintenance Disposal Customer Productivity: In which stage are the biggest blocks to customer productivity? Simplicity: In which stages are the biggest blocks to simplicity? Convenience: In which stage are the biggest blocks to convenience? Risk: In which stage are the biggest blocks to reducing risks? Fun and Image: In which stage are the biggest blocks to fun and image? Environmental In which stage are the biggest blocks to environmental friendliness? Friendliness:
Uncovering Blocks to Buyer Utility Purchase Delivery Use Supplements Maintenance DisposalCustomer Productivity:Simplicity:Convenience:Risk:Fun and Image:EnvironmentalFriendliness:
Price Corridor of the Mass This tool helps managers find the right price for an irresistible offer, which, by the way, isn’t necessarily the lower price. The tool involves two distinct buy interrelated steps. The first step involves identifying the price corridor of the mass which deals with customer price sensitivity and pricing strategies of products offered outside the group of traditional competitors. The second step deals with specifying a level within the price corridor which factors in legal protection and exclusive assets.Step 1: Identify the price corridor Step 2: Specify a price level within theof the mass. price corridor.Three alternative product/service types: Different form and Same Different form, function, same form same function objective High degree of legal and resource protection g icin l pr Difficult to imitate er- leve Upp Some degree of legal and resource Price Corridor protection Mid-level pricing of the Mass Lower-le Low degree of legal and resource v el pricin protection g Easy to imitate
Price Corridor of the Mass Step 1: Identify the price Step 2: Specify a price level corridor of the mass. within the price corridor.Three alternative product/service types: Different form Same Different form, and function, form same function same objective High degree of legal and resource protection ing l pric eve Difficult to imitate er-l Upp Price Some degree of legal and Corridor of Mid-level pricing resource protection the Mass Lower-le Low degree of legal and vel pric ing resource protection Easy to imitate
Profit Model of Blue Ocean Strategy The profit model of blue ocean strategy shows how value innovation typically maximizes profit by using the three levers of strategic price, target cost, and pricing innovation. The Strategic Price The Target Profit The Target Cost Streamlining and Cost Partnering Innovations Pricing Innovation
Blue Ocean Idea Index The blue ocean idea index is a simple but robust test demonstrating how the sequence of utility, price, cost, and adoption form an integral whole to ensure commercial success through blue ocean strategy. DoCoMo Philips Motorola I-mode CD-i Iridium 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? - +/- +
Blue Ocean Idea Index 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?