Creating Blue Oceans
Hilary Becker, Ph.D.
Carleton University
* These slides are based on the work of Kim and Mauborgne in their book Blue
Ocean Strategy, Harvard Business Press 2005.
Cirque du Soleil
• Why do blue oceans exist?
– Business and markets never stands still
• Achieved rapid growth in declining market
• Found new market space
• Customer focus
– Eliminated animal acts
– Introduced Theater ideas and storyline
• Offer fun and thrill of circus with
sophistication of theater.
Cirque du Soleil
Cirque du
Soleil
Circus
Theater
Markets
BLUE
OCEANS
RED
OCEANS
All unknown markets or
markets not in existence today
Established markets. All known
markets in existence
-Industry boundaries are
undefined
-Industry boundaries are
defined
-Competitive rules unknown
and companies look for
demand creation
-Competitive rules known and
companies compete on
traditional methods
Blue Oceans
• Created (generally) from expansion of red
oceans.
– Management ideas, opportunities, SWOT,
Environmental scan, R&D, Technology
• No Competition – No competitors
• Traditional focus of strategic management based
on red ocean strategies
–
–
–
–
analyze underlying economic structure,
determining strategic position/strategy
Benchmarking industry
Convergence to target market
Examples in past 30 years
•
•
•
•
•
•
•
•
Mutual funds
Cell phones
Biotechnology
Coffee bars (Starbucks)
Home video, VCD, DVD
CD, MP3, IPOD
Minivans
Snowboards/In-line
skates
• Internet
•
•
•
•
•
•
•
Bacardi Rum
CNN
Microsoft
Southwest Airlines
Cirque du Soleil
Bacardi Rum
Big Screen
TV/LCD/Plasma
• Celebrity
Clothing/Perfume Lines
New Business Launches
Launches from Red Oceans
86%
14%
62%
39%
38%
61%
Launches from Blue Oceans
Business
launch
Revenue
Impact
Profit
Impact
Driving Forces of Blue Ocean
•
Globalization
– Firms looking to expand beyond local borders to gain efficiencies and
increase profitability
– Decline of trade barriers, niche markets and monopolies
– Development of economic free trade zones and clustering (European Union,
Caribbean Common Market).
– Increasing supply without increasing demand is forcing companies to look
for new markets/opportunities
•
Technology & Telecommunications
– Decreased cost, increased efficiency, greater flexibility
– Increased communications
• Allows foreign companies to effectively manage international operations (Favors
creation of IJV)
– Improved industrial productivity
– Limited competitive advantage for technological advances (shorter time
horizon)
•
Organizational Structure
– Flatter, flexible and mobile
– Strategic Alliances and JV
– Bureaucracy: Persists but at a different level
•
Focus on Environment
– Sustainable Development (Balanced Scorecard)
Driving Forces of Blue Ocean
• Accounting & Finance
– Harmonization of Accounting Principles
– Importance of International Monetary Management
• Managing Foreign Exchange
• Human Resources
– Work Teams (multiculturalism)
•
•
•
•
Flexibility
Increased training and cross-training
Communication
Coordination of Activity
• Management
– Geocentric: view entire world as one organization
– Polycentric: view host country cultures are different and
allow operations to be managed more autonomously
– Ethnocentric: view home-country standards to be superior.
Results
• Accelerated commoditization of products
and services
– As products become standardized, selection
is based more on prices
• Increasing price wars
• Shrinking profit margins
Strategic Moves to succeed
• Research has shown that a move to Blue Ocean has
identified commonalities in strategic moves.
• Strategic move: The set of managerial actions and
decisions involved in making a major market-creating
business offering.
• Commonality seems to exist in strategic moves by all firms
finding blue oceans.
• However, there was not commonality in types of firms:
– small/large
– Young/mature
– Low/hi tech
- attractive/unattractive industries
- private/public
- diverse national origins
• The basis of Blue Ocean Strategy is in developing Value
Innovation.
Value Innovation
• Instead of focusing on competition, focus on making
the competition irrelevant by creating a leap in value
for buyers, and opening uncontested market space.
• Value without innovation – red ocean strategy of
value creation on incremental scale (new bells or
whistles)
• Innovation without value – red ocean technology
innovation (often beyond what consumers are ready
to accept or pay for).
• Value innovation occurs when companies align
innovation with utility, price and cost positions
thereby defying the traditional Cost-Value Tradeoff.
• Focus on differentiation and low cost simultaneously
Value Innovation
Costs
Simultaneous pursuit of
Differentiation and Low
Costs.
Value
Innovation
*****
Buyer value
Blue Ocean vs. Red Ocean
Formulating and Executing Blue
Ocean Strategy
• General belief (red ocean) that going
beyond existing industry space is low odds
of success.
• Most business strategy is red ocean
focused.
– Based on 6 principles
• Decreasing search risk, planning risk, scale risk,
business model risk, organizational risk and
management risk.
Six Principles of Blue Ocean
Strategy - Summary
• Formulation Principles
– Reconstruct market
boundaries
– Focus on big picture, not
numbers
– Reach beyond existing
demand
– Get the strategic sequence
straight
• Execution Principles
– Overcome key
organizational hurdles
– Build execution into
strategy
• Risk Factors
– Decrease search risk
– Decrease planning risk
– Decrease scale risk
– Decrease business model
risk
• Risk Factor
– Organizational risk
– Management risk
Four Guiding Formulation
Principles
• Identify paths to systematically create
uncontested market space and make the
competition irrelevant (search risk)
• Design strategic planning to go beyond
incremental improvements to create value
innovations (planning risk)
• Maximize the blue ocean to create the greatest
market of new demand. (scale risk)
• Design strategy to allow companies to provide a
leap in value to buyers and build viable business
model to produce and maintain profitable growth
for itself. (business model risk).
Two Guiding Execution Principles
• Mobilize the organization to overcome key
organizational hurdles that block
implementation of a blue ocean.
(Organizational risk)
• Motivating people to act on and execute a
blue ocean strategy (management risk).
The Blue Ocean
Analytical Tools and Framework
Red Ocean
• Governed by existing framework of strategic
management
–
–
–
–
Porter 5 Forces model
Three Generic Strategies
Value Chain management
Offer better solutions than rivals to existing problems
defined by industry
• Effective Blue Ocean seeks to minimize risk not
maximize risk
• Take notes from Entrepreneurs, learn and apply
to new situations
– Create entrepreneurial framework within
organizational structure (Ex. 3M – Post-it Notes)
Wine Industry
• Intense competition (8 main competitors)
– Leverage distribution, shelf space and
marketing driven
• Downward pressure on prices
• Increasing bargaining power of distribution channel
and flat demand
• What to do?
– Develop a strategy canvas
• Analytical framework that is central to value
innovation and creating a blue ocean.
Strategy Canvas
• Purpose:
– Capture current state of play in market space
– Develop an action Framework
• Wine industry
– 7 principle factors
Price per bottle
Refined Image
Marketing
Aging of wine
Legacy of vineyard Complexity and
sophistication
Range of wines
Low
Range
Complexity
Legacy
Aging
Marketing
Terminology
Price
Strategy Canvas
High
Strategy Canvas - Analysis
• Convergence in values, but at different
levels between premium (differentiation)
and (low cost)
• Look for uncontested market space.
• Re-orient strategic focus from competitors
to alternatives, from customers to noncustomers.
• Casella Wines – Yellow Label
Four Actions Framework
• Reconstruct buyer value
• 4 Key Questions:
– Which of the factors that industry takes for granted should be
eliminated?
• Environmental Scan – factors companies have long competed on.
– Which factors should be reduced well below the industry’s
standards?
• Which products or services have been overdesigned?
– Which factors should be raised well above the industry’s
standards?
• Uncover and eliminate the compromises the industry has forced on
customers.
– Which factors should be created that the industry has never
offered?
• Helps to discover new sources of value for buyers and to create
demand.
Four Actions Framework
Reduce
Which factors to
Reduce?
Eliminate
Which factors to
Eliminate?
A New Value
Curve
Raise
Which factors to
Raise?
Create
Which factors to
Create?
Eliminate-Reduce-Raise-Create Grid
• Key to creating Blue Oceans.
• Four immediate benefits
– Simultaneously pursue differentiation and low-cost
strategies to break Value-Cost Tradeoff.
– Flags companies that are focused on raising and
creating (thus increasing cost structure and overengineering products and services)
– Easily understood and communicated
– Drives company to scrutinize every factor the industry
competes upon.
Yellow Tail
• Developed a fun new drink not pretentious
– Reduced aging (less capital cost)
– Ease of selection by reducing wine offerings
(Chardonnay and Shiraz)
– Removed technical jargon from bottles
– Simple, eye catching non-traditional label
– Wine boxes were simple and used for display
– Advertising in stores with clerk outfits
• Offered a LEAP IN VALUE to customers.
ERRC Grid – Yellow Tail
Eliminate
Raise
- Terminology and distinction -Price vs. budget wine
-Aging quality
-Retail store
- Above the line marketing
environment
Reduce
-Wine complexity
-Wine range
-Vineyard Prestige
Create
-Easy drinking
-Ease of selection
-Fun and adventure
Low
Fun
Easy
Selection
Easy
drinking
Range
Complexity
Legacy
Agin
g
Marketing
Terminology
Price
Yellow Tail – Strategic Canvas
High
Characteristics of a Good Strategy
• Focus
– The company does not diffuse efforts across all key
factors of competition
• Divergence
– The shape of the value curve diverges from that of its
competition
– Company does not act reactively
• Compelling Tagline
– Strategic profile is clear and concise to customers.
– Used to develop marketing campaign
Reading the Value Curves
(6 Ways)
• Blue Ocean Strategy
– Whether 3 criteria for good blue ocean strategy are
met (focus, divergence, tagline), this is a litmus test
for commercial viability of blue ocean.
• Company caught in Red Ocean
– Companies value curve converges with competitors
– Company is attempting to compete head to head with
competitors (slower growth and potential)
• Overdelivery without Payback
– If value curve is higher across all factors, Does
Market share and profitability reflect investment?
Reading the Value Curves
(6 Ways)
• An Incoherent Strategy
– All over the map, it signals it does not have a
cohesive and coherent strategy, likely based upon
independent sub-strategies (divisional or functional
silos).
• Strategic Contradictions
– Offering high level on one competing factor while
ignoring others that support that factor. (ex. Self serve
gasoline at higher prices)
• Internally Driven Companies
– How does it label its factors (If highly technical, built
on internal perspective rather than external
perspective).