Blue Ocean Strategy Summary

Slide 1: By: W. Chan Kim & Renee Mauborgne Summary by: Jesse Starmer COM 459

Slide 2: Value Innovation Value innovation is created in the region where a company’s actions favorably affect both its cost structure and its value proposition to buyers. Cost savings are made by eliminating and reducing the factors an industry competes on. Buyer value is lifted by raising and creating elements the industry has never offered. Over time, costs are reduced further as scale economies kick in due to the high sales volumes that superior value generates. Costs Value Innovation Buyer Value

Slide 3: Value Innovation

Slide 4: 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.

Slide 5: Red Ocean Versus Blue Ocean Strategy Red Ocean Strategy Blue Ocean Strategy

Slide 6: 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 attenuates Reconstruct market boundaries Search risk Focus on the big picture, not the numbers Planning risk Reach beyond existing demand Scale risk Get the strategic sequence right Business model risk Evaluation principles Risk factor each principle attenuates Overcome key organizational hurdles Organizational risk Build execution into strategy Management risk

Slide 7: The Six Principles of Blue Ocean Strategy Formulation Principles Risk factor each principle attenuates Evaluation principles Risk factor each principle attenuates

Slide 8: 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. High Low Wine range Above-the-line Vineyard prestige Price Use of marketing Aging and legacy Wine enological quality complexity terminology

Slide 9: Strategy Canvas High Low

Slide 10: Four Actions Framework + Eliminate/Reduce/Raise/Create Grid Reduce The four actions framework offers an technique Which factors should be that breaks the trade-off between differentiation reduced well below industry standards? 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 Eliminate A Create New Which factors should be Which of the factors that eliminated; what factors need to be reduced Value created that the industry the industry takes for below industry standards; what factors need to Curve has never offered? granted should be be raised above industry standards; and what eliminated? should be created that the industry has never Raise offered. Which factors should be raised well above the industry’s standard? The eliminate-reduce-raise-create grid pushes Eliminate Raise companies not only to ask all four questions in the Enological terminology and Price versus budget wines distinctions four actions framework but also to act on all four to Retail Store involvement create a new value curve. By driving companies Aging qualities to fill in the grid with the actions of eliminating, reducing, raising, and creating, the grid provides Above-the-line marketing four immediate benefits: it pushes them to Reduce Create simultaneously pursue differentiation and low Wine complexity Easy drinking costs; identifies companies who are only raising and creating thereby raising costs; makes it easier Wine range Ease of selection for managers to understand and comply; and it Vineyard prestige Fun and adventure drives companies to scrutinize every factor the industry competes on.

Slide 11: Four Actions Framework + Eliminate/Reduce/Raise/Create Grid Reduce Four Actions Framework Eliminate Create A New Value Curve Raise Eliminate Raise Reduce Create The Eliminate-Reduce-Raise-Create Grid

Slide 12: 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 1. Visual 1. Visual Strategy 1. 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 profiles competitors’ by creating blue oceans. from field observations. on one page for easy drawing your “as is” comparison. strategy canvas. •Observe the distinctive •Get feedback on •Support only those advantages of alternative strategy •See where your alternative products and canvases from customers, projects and operational strategy needs to services. competitors’ customers, and moves that allow your change noncustomers. company to close the gaps to actualize the new •See which factors you strategy. •Use feedback to build the should eliminate, create, or change. best “to be” future strategy.

Slide 13: Four Steps of Visualizing Strategy 1. Visual 1. Visual 1. Visual 1. Visual Awakening Exploration Strategy Fair Communication

Slide 14: 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

Slide 15: Pioneer, Settler, Migrator Map Pioneers Migrators Settlers Today Tomorrow

Slide 16: 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 Tier Second Tier First Tier Your Market

Slide 17: Three Tiers of Noncustomers

Slide 18: Sequence of Blue Ocean Strategy Buyer utility Is there exceptional buyer utility in your business idea? No-- Rethink Yes An important part of blue ocean strategy is to “get the strategic sequence right.” This Price sequence fleshes out and validates blue Is your price easily accessible to the ocean ideas to ensure their commercial mass of buyers? viability. This can then reduce business model No-- Rethink risk. In this model, potential blue ocean ideas Yes must pass through a sequence of buyer utility, price, cost, and adoption. At each step there Cost are only two options: a “yes” answer, in which Can you attain your cost target to profit case the idea may pass to the next step, or at your strategic price? No-- Rethink “no”. If an idea receives a no at any point, the company can either park the idea or rethink it Yes 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

Slide 19: 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

Slide 20: 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 Simplicity The Six Utility Levers Convenience Risk Fun and Image Environmental friendliness

Slide 21: Buyer Utility Map The Six Stages of the Buyer Experience Cycle 4. 5. 6. 1. 2. 3. Supplements Maintenance Disposal Purchase Delivery Use Customer Productivity The Six Utility Levers Simplicity Convenience Risk Fun and Image Environmental friendliness

Slide 22: 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 Disposal How long does it How long does Does the product Do you need other Does the product Does use of the take to find the it take to get require training or products and require external product create product you the product expert assistance? services to make this maintenance? waste items? need? delivered? product work? Is the product easy to How easy is it to How easy is it to Is the place of How difficult is store when not in If so, how costly are maintain and dispose of the purchase it to unpack use? they? upgrade the product? attractive and and install the product? How effective are the How much time do Are there legal accessible? new product? product’s features and they take? How costly is or How secure is the Do buyers functions? maintenance? environmental How easy are they to transaction have to issues in Does the product or obtain? environment? arrange disposing of the service deliver far delivery product safely? How rapidly can more power or options themselves? If you make a than required by the How costly is yes, how costly purchase? average user? Is in disposal? and difficult is overcharged with bells this? and whistles?

Slide 23: Buyer Experience Cycle Purchase Delivery Use Supplements Maintenance Disposal

Slide 24: 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:

Slide 25: Uncovering Blocks to Buyer Utility Purchase Delivery Use Supplements Maintenance Disposal Customer Productivity: Simplicity: Convenience: Risk: Fun and Image: Environmental Friendliness:

Slide 26: 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 the of 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 ng rici el p Difficult to imitate -lev er Upp Some degree of legal and resource Price Corridor protection Mid-level pricing of the Mass Low degree of legal and resource Lower-l evel pri cing protection Easy to imitate

Slide 27: 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 and Same Different form, function, same form same function objective High degree of legal and resource protection ng rici el p Difficult to imitate -lev per Up Some degree of legal and Price Corridor resource protection of the Mass Mid-level pricing Low degree of legal and Lower-l evel pric ing resource protection Easy to imitate

Slide 28: 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

Slide 29: Profit Model of Blue Ocean Strategy

Slide 30: 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 Iridium CD-i 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? - +/- +

Slide 31: 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?