Blue Ocean Strategy
Accolades
• Over 2 million copies sold
• Translated into over 41 foreign languages – a world record
• Taught as the major theory of strategy at leading business schools
• Gives insights to CEOs, Executives, Heads of State and Prime Ministers
Blue Ocean Strategy
Chapter 1: Creating Blue Oceans
Blue Ocean Strategy
• To improve the quality of our successes we need to study what we did
that made a positive difference & understand how to replicate it.
• Blue Ocean Strategy challenges companies to break out of the red
ocean of bloody competition by creating uncontested market space
that makes the competition irrelevant.
• Instead of dividing up existing - and often shrinking - demand and
benchmarking competition, blue ocean strategy is about growing
demand and breaking away from the competition.
Creating Blue Oceans
• Cirque Du Soleil
• Created By Guy Laliberte in 1984
• Attained levels of revenue that took the Ringling
Brothers and Barnum&Bailey more than 100 years to
achieve
• Revamped the dying circus industry
•
•
•
Industry with little room for growth
Incorporated many different types of entertainment
Very unattractive industry from a strategic standpoint
New Market Space
• Cirque Du Soleil’s Success
• Realized that to beat the competition they had to quit
trying to beat the competition
• Blue Oceans Vs. Red Oceans
• Red Oceans
• Represent the industries in existence today
• Industry boundaries competitive rules of the game are known
and accepted
• Companies try to outperform their rivals to attain a larger share
of the market
• Blue Oceans
• Defined by untapped market space with room for very
profitable growth
• Most are created within red oceans and then expanding
boundaries
• Competition is irrelevant because rules are waiting to be
set
Term Blue Oceans is new, but
existence is not
• Look back 100 years and ask how many of todays industries were unknown
then?
• Automobiles
• Aviation
• Music recording
• Many current multibillion dollar industries today did not exist just thirty
years ago.
• Cell phones
• Coffee bars
• Snowboards
• This trend can be expected to continue, as industries are constantly
evolving.
• 20 years from now what unknown industries will appear?
• A century old Standard Industrial Classification system published by US census was replaced in
1997 by North American Industry Classification Standard.
Red Ocean Principles
• Red Ocean Strategy was heavily influenced by Military Strategy
• Military strategy is about confronting an opponent and fighting over a given
“piece of land”
• To focus on Red Ocean is constraining yourself to the “factors of war”, it is
limited
• Unlike war, the history of the industry shows that the market universe has
never been constant; blue oceans have been continuously created over time
• Red Ocean focus denies distinctive strength of the business world and denies
your capacity to created new market space
Profit and Growth Consequences of Creating Blue Oceans
Rising Imperative of
Creating Blue Oceans
• Accelerated technological advances
• Globalization
• Brands becoming increasingly similar
Accelerated Technological Advances
• Substantially improved
industrial productivity
• In many industries, the
result is that supply
exceeds demand.
Globalization
• Information on products
and prices becoming
instantly and globally
available.
• Niche markets and havens
for monopoly continue to
disappear.
• Supply is on the rise, but
there is no evidence of an
increase in demand
worldwide.
Globalization Results
• The result has been accelerated commoditization of
products and services, increasing price wars, and
shrinking profit margins.
Recent Studies on American Brands
• Reveal that for major
product and service
categories, brands are
generally becoming more
similar.
• People selecting more
based on Price
• Sales price becoming
more important than
brand recognition
From Company and
Industry to Strategic Move
•
How can a company break out of the red
ocean of bloody competition?
•
•
How can it create a blue ocean?
Is there a systematic approach to achieve this
and thereby sustain high performance?
What do companies have
to do with creating blue
oceans?
Q: Are there lasting “excellent” or “visionary”
companies that continuously outperform the market
and repeatedly create blue oceans?
A: In short, no.
Industry role in the
development of blue oceans
•
•
Companies do NOT need to compete head on in a
given industry space
Industries are constantly being created and
expanded
•
Ex. Cirque du Soleil and Under Armour
Strategic Move and its affect
on blue ocean development
•
Strategic move, NOT the company or industry is
the correct unit of analysis for explaining blue
oceans
•
A set of managerial actions and decisions involved in
making a major market-creating business offers.
•
Ex. Hewlett-Packard acquiring Compaq
Strategic Moves Cont.
• The book analyzed 150 strategic moves in over 30
industries in 12 years.
• What they found? Industry and company had no
distinction between organizations in the red/blue ocean.
Myths:
• Public/Private companies play role in which ocean you
live in
• High tech industries have better chance of creating blue
oceans
• New companies can avoid red oceans
• Unattractive industries lead companies to live in the red
oceans
Value Innovation: The Cornerstone
of Blue Ocean Strategy
• The defining characteristic of the strategic move that
separates successful BOS’s from unsuccessful ones.
• Creates value for the buyers in a manner that is
innovative. Both qualities must be present for value
innovation to occur.
• Value- Meets previously unmet needs for consumers
• Innovation- Creates utility and/or secures a strong price
position
• Clashes with the traditional thinking that a business
strategy must be a choice between differentiation
and low-cost. Value innovation provides for both.
Value Innovation in Practice
• Cirque du Soleil- Their methodology
• Created value by combining the sophistication of theater with the fun and
thrills of the circus. Provided consumers with a product that no one else in
the world did.
• Innovated by doing away with traditional but cost-inefficient offerings
typically given by the circus. They identified that it came down to the tent, the
clowns, and the stunts.
• No animals
• Eliminated the three-ring presentation
• No star performers
Contrasting Red and Blue Ocean Strategies
• Red Ocean
• Structuralist- Assumes that an industry’s structure cannot be altered and that
companies are forced to compete within them. Also known as Environmental
Determinism.
• Beat competition, exploit existing demand, choose between differentiation and low cost.
• Blue Ocean
• Reconstructuralist- Considers industry boundaries as things that can be torn
down, expanded, and reconstructed. It’s within this created space that the
Blue Ocean exists.
• Render competition irrelevant, create new demand, choose both differentiation and low
cost
Formulating and Executing Blue Ocean Strategy
• Chapter 2: Introduces the analytical tools and frameworks that are essential for
creating and capturing blue oceans.
• Chapters 3-6: Introduces the principles that drive the successful formulation and
implementation of blue ocean strategy and explain how they, along with the
analytics, are applied in action.
• Chapters 7-8: Turn to the principles that drive effective execution of blue ocean
strategy. Tipping point leadership, organizational risk, fair process, and
management risk are all addressed as new strategies.
• Chapter 9: Discusses the dynamic aspects of blue ocean strategy- the issues of
sustainability and renewal.
Chapter 2: Analytical Tools and Frameworks
The Strategy Canvas
• Action framework for building Blue Ocean Strategy
• Central to the creation of blue oceans.
• Two purposes: captures the current state of play in the known market
space. This lets us understand where the competition is investing and
the factors the industry is competing on. It also shows what the
customers receive from the competitive offerings.
The Strategy Canvas
It compares core
competencies for
competition and their
level of importance for
each player in the
market.
How to use it in BOS?
• Don’t:
Offer a little more for a little less
• Do:
Reorient strategic focus from competitors to alternatives
and from customers to noncustomers of the industry.
The Four Actions Framework
• To create a new value curve
• To break the trade-off between
differentiation and low cost
The Four Actions Framework
2. Reduce
Which factors should be
reduced well below the
industry standard?
1. Eliminate
Which factors that the
industry takes for
granted should be
eliminated?
A New Value
Curve
3. Raise
Which factors should be
raised well above the
industry standard?
4. Create
Which factors should be
created that the industry
has not seen before?
Figure 2-2
The Four Actions Framework
1. Eliminate (competition)
•
•
Factors your industry competes on
Change in what buyers value
2. Reduce (competition)
•
•
Overdesigned products
Over served customers
3. Raise (customers)
•
Eliminate compromises
4. Create (customers)
•
•
New sources of value
New demand
McDonald’s Framework
• Create New Sources of Value:
• Brand
• customer care
• cost structure
• its patent
• target audience
Sustainable – the key test of a core competency measures the ability of
a firm to continually increase the advantage of the competency over
many years.
• “The world has changed. Our customers have
changed. We have to change too."
- James R. Cantaloupe, Chairman and CEO, McDonald's, 2003
*http://ezinearticles.com/?McDonalds-Business-Analysis&id=687438
Eliminate-Reduce-Raise-Create Grid
Figure 2-5: The Case of McDonald’s
Eliminate
Raise
Super Size Option
•Health Standards
Reduce
Create
•Calories in burgers
Salad Menu
Characteristics of a Good Strategy
• Focus
• Divergence
• Compelling Tagline
FOCUS
• Identify key factors of competition
• EX. Quality, speed, price, innovation…..
• Choose one factor
• Focus on that one factor
Divergence
• Break out of the common competing Techniques
• Ex. Price war,
• Revolutionize the industry
• Ex. McDonalds and Starbucks used brand divergence
• Make changes to the way things done in the industry.
• Ex. Southwest Airline
Compelling Tagline
• “The speed of a plane at the price of a car–whenever you need it.”
• What is a tagline?
• A short descriptive phrase
• Tagline should be
• Short and Clear
• Truthful
• Updated
• Ex. “I'm lovin' it” replacing "We love to see you smile."
Chapter 3: Reconstruct Market Boundaries
Six Paths Framework
• Six assumptions which many companies build their strategies
around
• Keeps companies trapped in red oceans
• Companies must break these boundaries to form blue oceans
• Managers must look across these boundaries
• Across alternative industries, strategic groups, etc…
Reconstructing Market Boundaries
• Creating Blue Oceans
• Reconstruct market boundaries
• Identify the possibilities that exist
• Look at the six paths framework
• Six paths
• Six basic approaches to remaking market boundaries
• Leading companies to visible blue ocean ideas
Path 1: Look Across Alternative
Industries
• Companies compete with their competitors as well as
alternatives to their product or services
• Substitutes
• Alternatives
-Example: Coca-Cola
• Substitutes: Pepsi, Dr. Pepper
• Alternatives: Tap Water, Freshly squeezed fruit or vegetable
juice, Wine, Milk, Coffee
Path 1: Look Across Alternative
Industries
 Buyers implicitly weigh purchasing alternatives, often
unconsciously
 Sellers rarely think about how their customers make trade-offs
with alternatives
 Space between alternative industries provides opportunities for
value innovation
 By focusing on the key factors that lead buyers to trade across
alternative industries and eliminating or reducing everything
else, you can create a blue ocean of new market space
Examples: Companies Looking Across
Alternative Industries
• Home Depot:
• Expertise of professional home contractors at markedly lower prices
than hardware stores
• They have transformed ordinary homeowners into do-it-yourselfers
• Southwest Airlines:
• Speed of air travel at price of car travel
Coca-Cola
• Coca-Cola looked across alternative industries and entered the
markets of:
• Sporting Events
• Bowling Alleys
• Movie Theaters
• Make themselves available to all thirsty consumers
Path 2: Look Across Strategic
Groups Within Industries
• Unlock Blue Oceans by looking across strategic groups
• Can be ranked in order by two dimensions:
• Price and performance
Creating a Blue Ocean
• Breaking out of a “tunnel vision” focus
• Understanding factors driving customer’s decisions to
trade up or down from one group to another
Examples:
• Toyota Lexus
• High quality luxury, but lower prices
• Sony Walkman
• Inexpensive boom boxes and transistor radios
• Champion Enterprises
• Prefabricated Houses and on site developers
Path 3: Look across the chain of
buyers
• Competitors come together on a common definition of a target
buyer
• There is a chain of buyers
• Buyers are directly or indirectly involved in the buying decision
Three Buyer Categories
1. Purchasers
2. Users
3. Influencers
• Individual companies often target different customer
segments
• -ex: Large vs small customers
• An industry typically comes together at a single buyer
group
• Such as:
• Pharmaceutical industry on influencers: doctors
• Office equipment industry on purchasers: corporate
purchasing department
• Clothing industry sells predominately to users
When someone challenges industries
wisdom about which buyer group to
target can lead to new ocean
discoveries.
Novo Nordisk
• Danish insulin producer
• Created blue ocean in insulin industry
• Changed focus from influencers (doctors) to users (patients)
• Created NovoPen, first user friendly insulin delivery solution
• Novo Nordisk’s blue ocean strategy shifted the industry
landscape.
• It changed the company from an insulin producer to diabetes
care industry.
Bloomberg
• Until 1980’s Reuters and Telerate dominated online financial information
industry
• Reuters and Telerate focused on purchasers (IT managers)
• Bloomberg redesigned system catered to traders
• Made a system that was easy to use:
• Keyboards labeled in financial terms
• Two flat panel monitors to see all information
• Built in analytic capability to run “what it” scenarios
Other Industries Blue Ocean
Changes
• Canon
• Shifted from corporate purchasers to users
• Made small desktop copier industry
SAP
• Shifted focus of business application software from
functional user to corporate purchaser
• Created successful real-time integrated software business
• Coca Cola focuses heavily on the purchasers and users of
the product.
Path 4: Look Across Complementary
Product and Service Offerings
• Before, During, After
-Example: Movie theatre
• Key: Find the Total Solution
• Example: Coca-Cola
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
NABI
• Discovered it was costs that came after initial bus was purchased
• Maintenance over it’s 12 year cycle
• Repairs after accidents
• Fuel usage
• Wear and tear
• Rusting
• Rising demand for cleaner air
NABI Finds Total Solution
• Normally made of steel
• Heavy
• Corrosive
• Hard to replace parts after accidents
• NABI adopted fiberglass when making it’s buses
• Solution that killed 5 birds with one stone
Fiberglass 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
Other Examples
• The British Teakettle
• Barnes & Nobles
• Virgin Entertainment
• Dyson
Path 5: Competition in Industries
• Two bases of appeal: functional/rational, emotional
• Rarely intrinsically one or the other
• Challenge orientation of industry
QB House
• Japanese Barber Shop industry
• 57,000 visitors (1996) to 3.5 million (2002)
• Created “no-nonsense” haircuts
• Reduced extra service, time, and costs
• Improved savings and hygiene
Cemex
• Cement production industry in Mexico
• Launched Patrimonio Hoy program
• Created Supertanda
• “Sold a dream”
• Achieved differentiation while cutting costs
• Increased usage of PET recycling
• Less energy/resources, preserves fossil fuels
Path 6
• By looking at external trends with the right perspective, it can
show you how to create blue ocean opportunities.
• Key insights into blue ocean strategy arise from business
insights into how the trend will change value to customers and
impact the company’s business model.
3 Principles that are critical to
assessing trends across time
• 1. Must be decisive to your business
• 2. Must be irreversible
• 3. Must have a clear trajectory
The Euro
• Has been evolving along a constant trajectory as it has been
replacing Europe’s multiple currencies.
• It is decisive, irreversible, and clearly developing a trend in
financial services.
• These are the principles upon which blue oceans can be
created as the European Union continues to enlarge.
Apple & iTunes
• Trend of illegally downloading music
• This trend was underscored by the fast growing demand for
MP3 players
• Apple capitalized on this decisive trend with a clear
trajectory by launching the iTunes online music store in
2003.
• Partnered with 5 major music companies
• They created a marketplace where you are legally allowed
to only download the specific songs.
• Broke key customer annoyance
• Apple’s iTunes is unlocking a blue ocean in digital music,
with the added advantage of increasing the attractiveness
of its already hot iPod player.
Cisco Systems
• Cisco Systems created a new market space by thing across
time trends.
• Started with a decisive and irreversible trend that had a clear
trajectory
• The growing demand for high-speed data exchange
• Created high-speed value for customers in a seamless
networking environment.
• 80% of all traffic on the Internet goes through Cisco’s
products.
From Head-to-Head Competition to
Blue Ocean Creation
• Through reconstructing existing market elements
across industry and market boundaries, they will be
able to free themselves from head-to-head competition
in the red ocean.
Chapter 4: Focusing on the Big Picture
The Big Picture
• Focus on the Big Picture, Not the numbers
• Use the strategy canvas
• Blue Ocean strategies have three qualities
• Focus
• Divergence
• Compelling tagline
Difficulty of the Canvas
• Drawing the strategy canvas is not an easy task
• Four Steps
• Visual Awakening
• Visual Exploration
• Visual Strategy Fair
• Visual Communication
European Financial Services
• European Financial Services (EFS) is 150 year old service that adopted
this method of developing strategy.
• Because of the strategy it yielded a 30% revenue boost in the first
year.
Step 1: Visual Awakening
• Problems
• Its common mistake to discuss changes in strategy before resolving difference
of opinion about the current state of play.
• Executives are reluctant to accept the need for change
• Compare side by side with your competitors by drawing your “as is”
strategy
• See where your strategy needs to be changed.
Step 2: Visual Exploration
• Explore the six paths to creating a blue ocean.
• 1. Look across alternative industries
• 2. Look across strategic group within industry
• 3. Redefine the industry buyer group.
• 4. Look across to complementary products and service offerings.
• 5. Rethink the functional-emotional orientation of its industry.
• 6. Participate in shaping external trends over time.
Step 2: Visual Exploration cont.
• Observe the advantages of alternative products and services.
• See what factors your should eliminate, create, or change.
• EFS sent managers to find information about how to create a blue
ocean.
Step 3: Visual Strategy Fair
• EFS held a visual strategy fair where both teams presented their strategy canvases
• Attendees ranged from noncustomers to senior corporate executives
• 12 strategies were presented and after each judge was given 5 sticky notes to
place next to their favorite and explain why they did not vote for the other value
curves
Visual Strategy Fair Results
• Results:
• 1/3 of what they thought were key competitive factors,
were marginal to customers
• 1/3 were not well articulated or had been overlooked in
the visual awakening phase
• Executives needed to reassess assumptions, such as EFS’s
separation of its online and traditional business
• Following the 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.
• By collapsing its online and traditional businesses into one
compelling offering, EFS substantially cut the operational
complexity of its business model, making systematic execution
far easier.
EFS Eliminate-Raise-Reduce-Create Grid
Eliminate
Raise
Relationship Management
Ease of use
Security
Accuracy
Speed
Market Commentary
Reduce
Create
Account executives
Corporate dealers
Confirmation
Tracking
Step 4: Visual Communication
• EFS gave every employee a one-page picture showing its new and old
strategic profiles so that everyone could see where to focus their
efforts to create a compelling future.
• The new picture became a reference point for all investment
decisions.
• Only ideas that would help EFS move from the old to the new value
curve were approved.
Visualizing Strategy at the Corporate Level
When businesses presents their strategy canvases to one another, they
deepen their understanding of the other businesses in the corporate
portfolio.
• Creation of the Value Innovation Program (VIP) Center
• Various business units come together to typically discuss strategy
canvases.
PMS Map
• A visualizing strategy can help managers see future growth and
profits.
• Company’s are sorted into three different categories.
• Pioneers- Blue ocean strategist most powerful source of profitable growth. Value curve diverges from
competition.
• Settlers- Have a “me to” approach to business, stuck in the red ocean. Value curve conforms to the basic
shape of the industry.
• Migrators- “more for less business approach, offer improved value but no innovative value. The try to extend
the industries value curve
Innovation!!
•The more settlers the better
opportunity to value-innovate
and create a blue ocean.
PMS MAP
• Shift your future growth to pioneers
• Settlers generate cash but marginal
growth.
• Pioneers have much growth potential
as a offset of growth.
• Managers should manage their
portfolios wisely with a balance
between profitable growth and cach
flows.
Overcoming the Limitations of Strategic
Planning
• Ideal Strategic Planning:
• Collective wisdom building
• Conversational
• Building the big picture
• Creative component
• Motivational/invoking willing commitment
• Existing Strategic Planning:
• Top-down or bottom-up planning
• Solely documentation-driven
• Number-crunching exercises
• Strictly analysis-driven
• Bargaining-driven/producing negotiated commitment
Chapter 5: Reach Beyond Existing Demand
Introduction
• Focus on maximizing size of Blue Ocean being created
• Companies must challenge two conventional strategies
• Focus on existing customers
• Drive for finer segmentation
• Finer segmentation often creates smaller target markets
Maximizing Size of Blue Oceans
• Companies must focus on noncustomers
• Build commonalities in buyer’s value
• Example: Callaway Golf
• Focused on why people weren’t playing golf
• Found it was too difficult to hit the ball
• Introduced their product Big Bertha
The Goal
• The Goal: Find insight to get noncustomers to become customers
• Example: Coca Cola
The Three Tiers
• First: Buyers who minimally purchase your industry offering=Necessity
• Second: Buyers who have seen what’s offered but don’t use. Example: Callaway
• Third: Have never thought of your market or industry offerings
Graphic Representation
First-Tier Noncustomers
•
Soon-to-be noncustomers are those who minimally use the current market offerings to get by as they search for something better
•
Upon finding better alternative, they eagerly jump ship
• Tend to sit on the edge of the market
Market Results
• Market grows stagnant as soon-to-be noncustomers increase
• This develops an opportunity for untapped demand waiting to be released
Key Commonalities
• First-tier noncustomer had three commonalities
• Wanted lunch
• Wanted it fresh and healthy
• Wanted it at a reasonable price
The Lesson
• Noncustomers tend to offer far more insight on how to unlock and
grow a Blue Ocean than relatively content-existing customers
Second-Tier Noncustomers
• Refusing noncustomers
• Don’t use/can’t afford current market offerings
• Find them unacceptable or beyond their means
Third-Tier Noncustomers
• Farthest from your current customers
• These are unexplored noncustomers
• Customers have not been targeted or seen as potential customers by
any player in the industry
• Tooth whitening example
Go for the Biggest Catchment
• No set rule on which tier of noncustomers to focus on
• Focus tier that represents the biggest catchment at the time
• Explore if there are overlapping commonalities across all three tiers
Go for the Biggest Catchment
• Companies focus on retaining existing customers and seek further market segmentation
• This strategy is not likely to create a Blue Ocean
• The point is to challenge the existing, taken for granted strategic orientations
Maximizing Scale of Blue Ocean
• Reach beyond demand to noncustomers
• De-segment opportunities to formulate new strategies
• If no strategies are found, move on to exploit differences among existing customers
Central Idea
• It is not enough to maximize the size of the Blue Ocean you are
creating
• A profit must be reached to create a win-win outcome
Chapter 6: Get the Strategic Sequence Right
The Right Strategic Sequence
• Buyer Utility
• Price
• Cost
• Adoption
Steps
• Utility- is there a reason to buy it?
• If no, Park idea or rethink
• Price- price should not determine purchase
• Should still attract buyers
• These two address revenue side of a business model and ensure a
leap in buyer value
• Buyer Value=Utility-Price
Steps cont.
• Cost- can you produce the product at target cost and still have a
healthy profit margin?
• Strategic Price= Price easily accessible to the mass of target buyers
• Cost should not drive prices, change idea or innovate
• Adoption hurdles- done in the beginning to ensure success
• Key because of significant departure from red oceans
Buyer Utility Map
• Outlines levers companies can pull to deliver
exceptional utility to buyers as well as experiences can
have with the product or service
• Identify range of spaces product of service may fill
Six Stages of the Buyer Experience Cycle
• From purchase to disposal
• Each stage managers can ask a set of questions to gauge quality of
experience
1. Purchase- how long to find? Placement? Secure transaction
environment? Timely?
2. Delivery- Time? Unpack/Install difficulty? Arrange delivery/difficulty?
3. Use- Training? Storage? Effective? Bells and whistles?
4. Supplements- Need other parts/costs? Time? Pain?
5. Maintenance- Required? Upgrade easy? Cost?
6. Disposal- Create waste? Disposal easiness? Legal issues? Cost?
The Six Utility Levers
Utility Levers: the ways companies can unlock exceptional utility for
buyers.
The Utility Levers
• Customer productivity
• Simplicity
• Convenience
• Risk
• Fun and image
• Environmental friendliness
The Price Corridor of the Mass
Identify the Price Corridor of the Mass
• Different form, Same function:
• Many companies that create blue oceans attract customers from other
industries who use a product or services that performs the same function as
the new one but takes a very different physical form.
• Different form and function, Same objective:
• Listing the croups of alternative products and services allows mangers to see
the full range of buyers they can poach from other industries as well as from
nonindustrial.
• This provides a straightforward way to identify where the
mass of target buyers is and what prices these buyers are
prepared to pay for the products and services currently in
use.
• Southwest Airlines has a prices corridor of the mass
covered the group of people paying, on average, $400 to by
an economy-class short-haul ticket to about $60 for the
cost of going the same distance by car.
Specify a Level Within the Price Corridor
1) Degree to which the product or services is protected legally through
patents or copy rights
2) Degree to which the company owns some exclusive asset or core
capability, such as an expensive production plant, that can block
imitation.
From Strategic Pricing to Target Costing
To maximize the profit potential of a blue ocean idea, a company
should start with the strategic price and then deduct its desired profit
from the price to arrive at the target cost.
From strategic pricing to target costing
• Addresses the profit side of the business model
• Strip out costs
• Model T – Assembly line
• Three principal levers to hit the cost target
First Principal Lever
• Streamlining operations
• Introducing cost innovations from manufacturing to distribution
• Swatch
Second Principal Lever
• Partnering with other companies
• Trying to carry out all activities themselves
• Fast and effective securing of capabilities
• Sometimes these first two levers are not enough to hit target cost
Third Principal Lever
• Changing the pricing model of the industry
• Videotapes– from selling to renting
• Even after target cost is met, pricing innovation may still be pursued
Stakeholders
No matter the business model success isn’t guaranteed in a blue
ocean idea. Fear and resistance may arise from:
• Employees
• Business Partners
• The General Public
Employees
Explain the changes to the employees, address potential threats and
how those will be resolved.
Example:
• Merrill Lynch announcing online brokerage service.
Business Partners
Those that have a vested interest want to know how the
implementation of a new business idea will effect current revenues
from existing offerings.
Example:
• Southwest offering international flights
The General Public
Hesitation among the general public can be triggered by a product that
is very new and innovative; therefore threatening social or political
norms.
Example:
• Monsanto producing genetically modified foods.
Blue Ocean Idea Index
Utility
Price
Cost
Adoption
Philips
CD-I
Motorola
Iridium
DoCoMo i-mode
Japan
Is there exceptional
utility? Are there
compelling reasons to
buy your offering?
-
-
+
Is your price easily
accessible to the mass
of buyers?
-
-
+
Does your cost
structure meet the
target cost?
-
-
+
Have you addressed
adoption hurdles up
front?
-
+/-
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Chapter 7: Overcome key organizational hurdles
The Four Organizational Hurdles to Strategy
Execution
Cognitive Hurdle
An organization wedded to
the status quo
Resource Hurdle
Limited resources
Political Hurdle
Opposition from powerful
vested interests
Motivational Hurdle
Unmotivated staff
New York Police Department in the Early
1990s
• Murder-rate at all-time high
• New Yorkers under siege
• Frozen police budget
• Officer moral was at rock bottom
• Budget cuts, dilapidated equipment, and corruption within the department
Tipping Point Leadership in Action
• Bill Bratton turned NYC into the safest large city in the U.S.
• Felony crime fell 39%
• Murder-rate fell 50%
• Theft-rate fell 35%
• Public confidence in the NYPD jumped from 37% to 73%
• Crime rates continued to fall after Bratton left
Tipping Point Theory
• Beliefs and energies of critical mass of people create an epidemic
movement toward an idea
• Concentration, not diffusion
• Focus on identifying and leveraging the factors of disproportionate
influence in an organization
Key Questions Answered by Tipping Point
Leaders
• What factors or acts exercise a disproportionately positive influence
on…
• Breaking the status quo?
• Getting the maximum bang out of each buck of resources?
• Motivating key players to aggressively move forward with change?
• Knocking down political roadblocks that often trip up even the best
strategies?
Break Through the Cognitive Hurdle
• Hardest battle is to make people aware of the need for a strategic
shift and to agree on its causes
• Common way was to point to numbers and then set and achieve
better results
• Not a good idea
• Tipping point leaders focus on the act of disproportionate influence
• Make people experience the need for change in two ways
Jump the Resource Hurdle
• Most leaders face limited resources
• Trim their goals and demoralize the work force
• They fight for more resources from the bank and shareholders
• Tipping point leaders concentrate on multiplying the value of
resources they have
• Three factors of disproportionate influence that can be leveraged to
free up resources while multiplying value
• Hot Spots
• Cold Spots
• Horse trading
Jumping the Motivational Hurdle
• For a new strategy to become a movement, people must not only
recognize what needs to be done, but they must also act on that
insight in a sustained and meaningful way.
• How can you motivate the mass of employees fast and at low cost?
• Focus on three factors of
influence in motivating
employees:
• Kingpins
• Fishbowl Management
• Atomization
Overcoming Politics in the Workplace
• “Inescapable reality of corporate and public life”
• Higher chance of change = strings pulled tighter
• 3 disproportionate influence factors to overcome politics
3 Influence factors
• Angels- most to gain from strategic shift
• Devils – most to lose from strategic shift
• Consigliere- politically adept and highly respected insider
Challenge Conventional Wisdom
• Traditionally told to convert the mass of people during change
• Instead transform the extremes
• Focus on acts with disproportionate influence
Chapter 8: Build Execution into Strategy
6th Principle
• “To build people’s trust and commitment deep in the ranks and
inspire their voluntary cooperation, companies need to build
execution into strategy from the start.”
• Attitudes and Behavior
• Must appeal to employees “Hearts and Minds” for strategy to hold.
• Risk: Distrust, Noncooperation, Sabotage
Overview
• Main idea:
• Management must include employees in execution from the start and
allowing them to help (create/build) the strategy so they will follow it with
their “Hearts & Minds”.
• What Fair Process is and its importance.
• The Effects of Poor Process.
• Incorporating it into Blue Oceans Strategy.
Poor Process Can Ruin Strategy
Execution
Fair Process
• How does implementing fair process allow for building execution into
strategy?
• Based on the principles of procedural justice as explored in
psychology.
• Term that explains the phenomenon where the strict adherence to an
outcome determining system is considered equally as important as the quality
of the ruling reached through said system. Satisfaction and commitment to
the ruling increases when procedural justice was followed.
• Creates confidence and builds people’s trust. Which principles
provide for this?
Three E Principles
• These elements must be present for fair process to emerge. Any
combination not including all three is insufficient.
• Engagement- Involving low level employees in the strategic development
process. Allows for the refinement of strategies and invests the strategy
executors into the strategy itself.
• Explanation- Explaining why certain strategic decisions were made to those
involved. Creates confidence in the strategy by increasing people’s
understanding of it and builds trust in management.
• Expectation (clarity)- Setting clear objectives and milestones, as well as
creating a system of evaluation for strategy executors. The clarity of the
objectives here is more important than their subjective fairness.
Why Does Fair Process
Matter?
-It all comes down to Intellectual and Emotional recognition
Intellectual Recognition
-Recognizing individuals ideas that are sought after and given thoughtful
reflection.
-When individuals feel recognized for their intellectual worth, they are
willing to share their knowledge.
Emotional Recognition
-Treating individuals with full respect and dignity and appreciating them
for their work
-When individuals are treated with emotional recognition they feel
emotionally tied to the strategy and inspired to give their all.
Violation of Fair Process
-If individuals are NOT treated as though their knowledge is value, they will feel
intellectual indignation and will NOT share their ideas and expertise.
-They will reject others intellectual worth and work as well.
-If emotional worth is not recognized will feel angry and not invest their energy into
their actions.
-They will drag their feet and apply counter-efforts, like sabotage, as in Elco’s Chesters
plant.
Fair Process and Blue Ocean Strategy
• Blue Ocean Strategy
• Commitment, Trust, and Voluntary cooperation
• Why companies have been successful in Blue ocean industries and why companies have
failed
• Fair Process
• How do we create Commitment, trust and voluntary cooperation?
• People tend to be committed to the strategy even when the outcome is not
certain