Blue Ocean Strategy
BUSI 7980/7986
Fall, 2008
How can you grow in an unattractive
market?
•
In today’s fast-pace world, where do
you find growth opportunities?
Cirque du Soleil
Sprung out of a declining industry
• Other forms of entertainment seemed much
more appealing than the circus
• Traditional entertainment had turned to
computer games
• Animal rights groups were rebelling
•
Cirque du Soleil
•
Created a new market space
The competition was no longer relevant
• The appeal was contrary to tradition
• Cirque du Soleil entered a new frontier
•
What is a Blue Ocean Strategy?
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Characteristics the “the new frontier”
• Traditional strategic efforts probably won’t work
• Untapped market space
• Competition is irrelevant
• The realization that to win in the future must stop
trying to beat the competition
• Rules of the game are waiting to be set
• Another very simple example: Leggs egg
What is a Red Ocean?
•
•
The traditional market place
Must always swim successfully by outcompeting rivals
Red oceans will always exist…they are a part
of business life
• Most businesses won’t look outside of the red
oceans because of the risk involved
•
What is a Blue Ocean Strategy?
•
Characteristics the “the new frontier”
• Traditional strategic efforts probably won’t work
• Untapped market space
• Competition is irrelevant
• The realization that to win in the future must stop
trying to beat the competition
• Rules of the game are waiting to be set
• Another very simple example: Leggs egg
What is a Red Ocean?
•
•
The traditional market place
Must always swim successfully by outcompeting rivals
Red oceans will always exist…they are a part
of business life
• Most businesses won’t look outside of the red
oceans because of the risk involved
•
Red verses
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Compete in existing
market
Beat the competition
Exploit existing
demand
Make the value-cost
trade off
Choose between
differentiation and
low cost
Blue
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•
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Create uncontested
market space
Make competition
irrelevant
Create and capture
new demand
Break the value-cost
trade-off
Pursue differentiation
and low cost
Blue oceans are not new
•
No industry stands still
Change inspires blue oceans
• Focusing on a red ocean is like war
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Limited terrain and the need to beat the enemy
to succeed
New business launches
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Most are expansions in present
businesses—86%
Most of the profitability existed in the
businesses aimed at blue oceans
Why do we need blue oceans?
•
Technological changes have flattened
the playing field—quality and efficiency
are not an advantage
Supply exceeds demand
• Globalization has compounded the
problem
• Business environment of the past no longer
exists
•
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Some successes of past were actually
changes in industry rather than one
company (eg. HP)
Value Innovation: the Cornerstone of Blue
Ocean
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VI means making the competition
irrelevant—leaping into value for
customers
Equal emphasis on value and innovation
Innovation without value is usually
technology driven
• Value without innovation is generally
incremental and not sufficient to stand
alone in the market
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Value innovation
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Defies the value-cost trade off
Red oceans make a choice between
differentiation and low cost
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Blue oceans pursue simultaneously
Look at Cirque du Solei….completely
broke from tradition and looked at a
different market and the addition of
sophistication (theatre aspect)
Cirque du Soleil
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Eliminated costly elements– eliminated
factors an industry competes on
Lifted the price point
Added an entertainment aspect
Blue Ocean
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Drive costs down while simultaneously
driving value up
Looks at the whole system of a company
Market boundaries and industry
structures are not a given—they can be
reconstructed by actions of industry
players
Key issues of Blue Ocean
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Reconstruct market boundaries
Focus on the big picture—not merely
numbers
Look past existing demand
Don’t be bogged down by organizational
hurdles
Include execution in your strategy
Analytical tools
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Traditional strategy uses five forces and
generic strategies
Comfort in “tools”
Blue ocean suggests entrepreneurial
behavior and risk reduction
The Strategy Canvas
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Looks at the state of the known market
place
Where the competition is investing
• What they are competing on in products,
services and deliveries
• What customers receive from the
competitive offerings
•
The value curve
•
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A graphic depiction of a company’s relative
performance across its industry’s factors of
competition
• plotting all together shows the makeup of the
industry
To fundamentally shift the strategy canvas
• Reorient from competitors to alternatives
• From customers to non-customers
Four Actions Framework:
to create new value curve
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Which factors should be reduced well below the
industry’s standards?
Which factors that the industry takes for granted
should be eliminated?
Which factors should be created that the industry
has never offered?
Which factors should be raised well above the
industry’s standard?
Which factors should be reduced well
below the industry’s standards?
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Eliminate factors that companies in the
industry have always competed on
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Sometimes there is a fundamental change
in buyer preference but companies
benchmarking each other may never
perceive
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1960s and 1970s US auto industry
Which factors that the industry takes for
granted should be eliminated?
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Have some of the products been
overdesigned in the race to meet or
exceed competition
Perhaps $$$ spent in advertising that
were unnecessary
Over serving can increase cost structure
Strategy canvas
What do you see as the strategy canvas in the
American beer industry?
• Now, look at the strategy canvas on page 32 of
Yellow tail wine. Compare this to the
strategy canvas for the wine industry on page
26.
• How did Sam Adams step outside the box?
What would the strategy canvas be for Sam
Adams?
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Grid
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Eliminate-reduce-raise-create grid
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Can be used to force companies to put on
paper how they will act on the four
questions in the four action framework
Characteristics of a Good Strategy
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Focus
Divergence
Compelling tagline
Focus-Divergence-Compelling Tagline
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Focus: What is the emphasis of the company?
Don’t have to focus on everything.
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Southwest Airlines: frequency, service and speed
as opposed to lounges, meals, seating classes etc.
Divergence: How are they different from
other companies? Reactive strategists tend to
share same strategic profile
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Southwest Airlines: point to point between
midsized cities as opposed to hub and spoke
Focus-Divergence-Compelling Tagline
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Compelling Tagline: must deliver a
clear message but also a truthful
message
How do you reconstruct market boundaries?
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“Blue Ocean companies” have followed
six basic approaches: six path
framework
Path 1: Look across alternative industries
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Not substitutes (coke verses pepsi)
Look at alternatives…include products and services
that have different functions and forms but same
purpose
• Restaurants/movies: enjoy an evening out
• NetJets: fractional jet ownership
• Fly commercial or purchase a corporate plane
• 1/16th ownership/50 hours per month
• 5500 airports across country
Path 2: Look across strategic groups within
industries
Strategic groups are companies within an
industry that share a similar strategy
• Strategic groups are generally built on price
and performance
• Most companies want to improve their
position within strategic groups
• Don’t usually look outside because don’t
believe they are competing
•
Path 2: Look across strategic groups within
industries
Break out of tunnel vision
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Curves—entered oversaturated market
• Aim is to spend social as well as exercise time
Question to be answered…what makes people
trade up or down
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For curves it offered a “women’s only”
atmosphere
Champion Enterprises allows for inexpensive
prefab homes….with high end finishings
Path 3: Look across the chain of buyers
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Chain of buyers: purchasers may be different
from users and there also may be influencers—
may have different ideas of value (consider
insurance)
Most players in an industry focus on same
buyer—eg: pharmaceutical industry on
physicians
• Blue Ocean concept is to challenge
conventional wisdom as to the target group.
• Can gain insights into redesign
Novo-Nordisk
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Insulin producers usually targeted
doctors
Broke away from competition
• They looked at patient…developed the ease
of insulin injections with a
pen…continually upgraded
• Went from insulin producer to a diabetic
care company
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Bloomberg
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Shifted from purchasers who valued
standardization (IT managers)
To users –2 flat paneled monitors to see all at
once; keyboards with familiar financial terms—
built in analytical capability
• Also, additional information and purchasing
services for down times aimed at enhancing
personal lives (ordering flowers etc.)
UPS
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Handle problems with computers
shipped back to Dell—in the hanger
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Cut down on time away from owner
Path 4: Look Across Complementary
Product/Service offerings
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Usually compete product for product but most
products don’t exist in vacuum
• Offering babysitting services at a gym or movie
theater
• NABI (Hungarian):
• Bus companies competed on lowest bid
• Costs were high—designs outdated and delivery
time late, not to mention quality
• Buses stayed in existence for usually 12 years
Path 4: Look Across Complementary
Product/Service offerings
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NABI realized that the cost of the bus was not
the issue—it was maintenance after purchase
Took attention away from initial cost of a bus
but focused on long term use
Made buses out of fiberglass to cut costs of
preventive maintenance, less cost in fuel
Initial price was higher but average life cycle
cost was considerably lower
Concept
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How is product/service used…look
before and after
Audio equipment to hear CDs
• “Living room” for book stores
• Filter-less coffee pots
• Dyson—no bags (always run out)
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Path 5: Look Across Functional or Emotional
Appeal to Buyers
Swatch from functional to emotional—
fashion statement
• Body Shop from emotional to functional—no
nonsense cosmetics
• Cemex-from functional to emotional, cement
is “building a dream”—positioned as a gift
registry
• Viagra—medical treatment to lifestyle
enhancement
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Path 6: Look across time
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External trends affect business—eg: internet
Most companies adapt incrementally
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Blue Ocean looks at how the trend will change value to
customers
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Value offered tomorrow
To find trends across time
Must be decisive to your business
• Irreversible
• Clear trajectory
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CNN first global real-time news network
Pharmaceutical industries getting into biotech
realizing couldn’t do all themselves
How do you align strategy to focus on the big
picture?
Typically managers spend time filling in
boxes and running numbers rather than
thinking outside the box.
Focusing on big picture
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Focus strategy toward blue ocean
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Strategy canvas helps visualize current position
but also helps chart future direction
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Four steps to visualizing strategy
• Visual Awakening: how do you compare to your
competition
• Visual Exploration: look at distinctive advantages of
alternative products/services—how can you eliminate,
change, create
• Visual Strategy Fair—what “could you be” get
feedback
• Visual Communications—Look at before and after—
support only moves that close gap
Visual Awakening
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Take a critical look at where you are
Compare this with your competitors
If your strategy canvas is the
same…what is the value?
Sears didn’t do this until it was too late
• WalMart on the other hand looked to see
how they could be different
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Visual Exploration
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Go out in the field and find out how
people use or don’t use products or
services
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Someone familiar needs to do this
Look at customers as well as non
customers
Propose a new strategy based on what
you observed
Visual Strategy Fair
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Brainstorming about what you can
be..always with $$ behind and expertise
How add value
How become more focused
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Always including a compelling tagline!
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Visual Communications
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Communicate to employees—before and
after strategies..in writing
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Explain why need to change, eliminate etc.
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Whirlpool in late 1980s teleconferences
worldwide with all employees to talk about
changes
The soul never thinks without an image
How do you maximize the size of the Blue Ocean?
BO principle: Reach beyond
existing demand
Reach Beyond existing Demand
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Conventional strategy practices
Focus on existing customers
• Drive for finer segmentation
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The more intense the competition,
greater on average the customization of
offerings—often risk too-small target
market
Blue oceans look to noncustomers
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Build on commonalities of what buyers
value
Think non customers before customers
• Commonalities before differences
• Desegmentation before finer segmentation
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Look to the noncustomers
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3 Tiers
• 1st: Sit on edge of market…minimally
purchase industry’s offering out of
necessity—but would jump ship if
opportunity arises (can’t find anything
better or a better fit)
• 2nd: Refuse to use industry’s offerings
(country club…social member but won’t
spring for golf membership)
• 3rd: Never even thought of ever indulging!
First-tier
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Example:
Want quality food…quick…but want it
fresh: sandwiches at the Fresh Market
(book gave example of Pret A Manger)
• Come in, look, pick (could even pre-pay)
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What are the key reasons to jump ship?
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Look for commonalities in responses
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Perhaps long lines
Second-tier
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These customers are refusing
• Either do not use or can’t afford
• Needs are dealt with elsewhere or ignore
Example: French Outdoor advertising
• …viewed as transitory and expensive
• Repeat visits low, not a popular form
• Many companies refused
• Low value added OR
• Luxury couldn’t afford
Second-tier
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Looked for stationary downtown locations to
advertise…people could read and therefore
message come across better
• Company provided street furniture to
municipalities-- maintained and used as
venue for advertising
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Must determine: why are these customers
refusing and look to the commonality of
responses
Third-tier
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Not even considered as potential
customers by anyone in industry
Example: Won’t go to dentist for teeth
whiting—considered extravagant
• Most companies would be amazed at the
ocean of latent demand
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Third tier
Book looked at defense industry—building
aircraft that would suit Air Force, Marines
and Navy…
• Built plane that could meet all demands…
• But had to map out what each wanted first
• Not enough to maximize the size of the
ocean…must create a sustainable win-win
outcome
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Next need to build a robust business model to
ensure a healthy profit
Get the strategic sequence right
Build strategy in the sequence of:
Buyer Utility—is there an exceptional utility
in the idea (compelling reason)
• Price—can the masses afford (compelling
reason to pay the price)
• Cost—can you attain cost target to be
profitable—don’t let cost drive prices
• Adoption—what are the adoption hurdles
(will there be resistance)
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Buyer Utility: Don’t fall in technology trap
Unless makes buyers’ lives more simple, more
convenient, more productive, less risky, more
fun or fashionable—won’t attract the masses
• Remember focused, divergent, compelling
• Value innovation is not the same as
technology innovation
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Test of exceptional utility
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A buyer’s experience can usually be
broken into a cycle of six stages from
purchase to disposal
Test for exceptional utility:
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Does company offering remove the greatest
blocks to utility across entire buyer
experience
Buyer experience cycle
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Purchase: how to, place, security, speed
Delivery: how long, how difficult, how to do
(self arrangement), how costly
Use: need for training, ease of storage,
effectiveness of features, how does it compare
to competition
Supplements: complimentary products? If so
cost, time, ease
Maintenance: external maintenance, ease,
cost
Disposal: waste, ease, environmental issue,
cost
Buyer Utility Map
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Utility levers:
• How a company can unlock exceptional
utility for buyers
• Greatest blocks often represent the most
pressing opportunities
Look across levers…the more blocks
uncovered the better…go back and refine
The map highlights differences between ideas
truly new and those that are only revisions
Purchase
Customer
Productivity
Simplicity
Convenience
Risk
Fun &Image
Environmental
Friendliness
Delivery
Use
Supplements
Maintenance
Disposal
Uncovering blocks
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Customer Productivity: where is the
biggest block to customers
Simplicity: where are the biggest blocks
to simplicity
Convenience: where are the biggest
blocks to convenience
Risk: same
Fun and Image: same
Environmental Friendliness: same
Strategic pricing
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People must be attracted and willing to pay
Know from the start what people will be willing to
pay—don’t start at one level and drop price later
To some the value of a product may be tied to
number using it (eg: eBay)
• Must earn reputation from beginning
• Curves
• Starbucks
• Price must not only attract buyers but retain them
also
Identify price corridor of the mass
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Challenge to pricing:
Understanding price sensitivities of people
comparing products to yours outside the
industry
• How then:
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Look at products of different forms but same
function
Products of different forms and functions but
same overall objective
Different form, same function
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Ford priced Model T against horse
drawn carriage..not other cars (price
point lower)
Different form and function, same objective
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Cirque du Soleil lured customers from
all other areas of entertainment—
including bars and restaurants--objective, an evening out
Specify level within price corridor
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Determine how high can price without inviting
imitation products as competitors
Dependent on:
• Degree it is protected legally (patents or
copyrights)
• Degree company owns core assets or
capabilities
• Example: Dyson patent and hard to imitate
bagless vacuum
Companies should choose mid to lower
pricing if
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High fixed cost and marginal variable
costs
Attractiveness depends on network
externalities
Cost structure benefits from steep
economies of scale and scope
Strategic Pricing to Target Costing
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To maximize profit potential..start with strategic
price..deduct desired profit margin and arrive a
target cost
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Price-minus costing not cost plus pricing
• Profitable and hard for followers to match
• Must drill down and be creative
• Eg: can raw materials be replaced by
unconventional, less expensive
• Sometimes partnering helps
The next step is Adoption
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Any new business idea needs adoption
for employees
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Must address their concerns
Same goes for business partners
General public—environmentalist
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McDonald and Styrofoam
Overcoming organizational obstacles
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First need to show employees why there
is a need for change
Second—you generally end up cutting
resources
Third—you have to motivate the key
players
Overcome politics—don’t let yourself be
shot down
You need a champion
And a leader that is willing to do
what is needed
Execution
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Engagement—involved in decision
Explanation—understand why final
decisions are made
Expectation clarity—explain the new
rules of the game
Sustainability and Renewal of Blue Ocean
Strategy
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Like all strategy, it is a dynamic process
Soon imitators appear
When do you reach out to create a new
blue ocean?
Barrier to Imitation
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Sustainability can be traced to these barriers:
• Sometimes value innovation defies
conventional logic
• Brand image conflicts prevents companies
from imitating blue ocean (imitation might
invalidate current practices)
• Natural monopoly blocks imitation—can’t
support more than one in market
Barrier to Imitation
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Patents
Initial high volume results in cost
advantages
Network externalities block (more
customers of eBay the more attractive to
others)
Imitation requires substantial changes
Loyal followers
When to value innovate again?
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Continually map and monitor value
curves
If it begins to converge with
competition, it is time to reach out
As rivalry intensifies supply exceeds
demand and a red ocean emerges