Creating Blue Oceans

BLUE OCEAN STRATEGY

The Book and the Authors

Prof Renee Mauborgne

© JOHN ABBOTT

Prof Chan Kim

© JOHN ABBOTT

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

New Market Space• Red oceans and blue oceans make up market

universe

• Red oceans: all industries in existence

= known market space• Blue oceans: all industries not in existence

= unknown market space

Red Oceans

•Red oceans refers to–Industry boundaries defined and accepted–Competitive rules of game known–Companies try to outperform rivals;

cutthroat competition–As market space gets crowded, prospects

for profit and growth reduced–Products become commodities–Red ocean strategy is a market-competing

strategy

Blue Oceans

•Blue oceans refers to– Undefined market space, demand creation,

opportunity for highly profitable growth– Most are created from within red oceans by

expanding existing industry boundaries– Rules of game waiting to be set– Competition irrelevant– Blue ocean strategy is a market-creating

strategy

The Rising Imperative of Creating Blue Oceans

• Supply is exceeding demand in most industries• global competition is intensifying• Problems:

– Accelerated commodization of products and services– Increasing price wars– Shrinking profit margins

• Red oceans becoming bloodier, need to be concerned with creating blue oceans

Two worlds …Two worlds …

Red OceanCompete in crowded markets

Blue OceanCreate and

capture new market space

The Continuing Creation of Blue Oceans

• Blue oceans have been around for some time; a feature of business life

• Industries never stand still, constantly evolving• Significant expansion of blue oceans over years• So why the focus on red ocean strategy?

– Corporate strategy influenced by military strategy– Need to create new market space that is uncontested

The Impact of Creating Blue Oceans

From Company and Industry to Strategic Move

• Are there lasting visionary companies that continuously outperform the market and create blue oceans?

• Found success of these model companies was a result of industry sector performance, not companies themselves

• Strategic move used as unit of analysis (rather than company or industry)

• Strategic move: the set of managerial actions and decisions involved in making a major market-creating business offering

Value Innovation: The Cornerstone of Blue Ocean Strategy

• Creators of blue oceans follow value innovation

• Value Innovation– Equal emphasis on value

and innovation– Defies value-cost trade-off

of competition-based strategy

– Successful value innovation:

• Drives down costs while driving up buyers’ value

• Uses a whole-system approach

• Follows reconstructionist view

Red Ocean Vs. Blue Ocean • Compete in existing

market space• Beat the competition• Exploit existing demand• Make the value-cost

trade-off• Align the whole system

of a firm’s activities with its strategic choice of differentiation or low cost

• Create uncontested market space

• Make the competition irrelevant

• Create and capture new demand

• Break the value-cost trade-off

• Align the whole system of a firm’s activities in pursuit of differentiation and low cost

Formulating and Executing Blue Ocean Strategy

• Six Principles of Blue Ocean Strategy– Reconstruct market boundaries– Focus on the big picture, not the numbers– Reach beyond existing demand– Get the strategic sequence right– Overcome key organizational hurtles– Build execution into strategy

Take Aways

• Red ocean strategy is a market-competing strategy, while blue ocean strategy is a market-creating strategy

• As red oceans are becoming bloodier, we need to create more blue oceans

• “The only way to beat the competition is to stop trying to beat the competition!”

Points of view

•Business often look at the industry from a structuralist (supply) point of view

•What if we looked at the industry from a reconstructionist (demand) point of view?

–Market boundaries are not viewed as given, but could be reconstructed to unlock new demand

Generic Strategies vs. Value Innovation

High

Low

V1

C1

Cost

Quality

HighHigh

High

LowLow

Low

Quality

Cost

•

•

D

LC

V1

C1

Red Ocean Strategy Blue Ocean (VI) Strategy

Structuralist Reconstructionist

Four Steps of VisualizingFour Steps of Visualizing

1. Visual Awakening

2. Visual Exploration

3. Visual Strategy Fair

4. Visual Communication

•Compare your business with your competitors’ by drawing your “as is” canvas

•See where your strategy needs to change

•Go into the field to explore the six paths to creating blue oceans

•Observe the distinctive advantages of alternative products and services

•See which factors you should eliminate, create or change

•Draw your “to be” canvas based on insights from field observations

•Get feedback on alternative strategy canvases from customers, competitors’ customers, and non-customers

•Use feedback to build the best “to be” future strategy

•Distribute your before-and-after strategic profiles on one page for easy comparison

•Support only those projects and operational moves that allow your company to close gaps and actualize the new strategy

What factors should be

eliminated that the industry has taken

for granted?

Eliminate

What factors should be reduced

well below the industry standard?

Reduce

What factors should be created that the industry has never

offered?

Create

What factors should be raised well beyond the

industry standard?

Raise

Four Actions to create a Blue Ocean

Four Actions Framework + Eliminate/Reduce/Raise/Create Grid

Eliminate

Enological terminology and distinctions

Aging qualities

Above-the-line marketing

Raise

Price versus budget wines

Retail Store involvement

Reduce

Wine complexity

Wine range

Vineyard prestige

Create

Easy drinking

Ease of selection

Fun and adventure

The four actions framework offers an technique that breaks the trade-off between differentiation 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 eliminated; what factors need to be reduced below industry standards; what factors need to be raised above industry standards; and what should be created that the industry has never offered.

The eliminate-reduce-raise-create grid pushes companies not only to ask all four questions in the four actions framework but also to act on all four to create a new value curve. By driving companies to fill in the grid with the actions of eliminating, reducing, raising, and creating, the grid provides four immediate benefits: it pushes them to simultaneously pursue differentiation and low costs; identifies companies who are only raising and creating thereby raising costs; makes it easier for managers to understand and comply; and it drives companies to scrutinize every factor the industry competes on.

A New

Value Curve

Reduce

Eliminate Create

Raise

Which factors should be reduced well below industry standards?

Which factors should be created that the industry has never offered?

Which factors should be raised well above the industry’s standard?

Which of the factors that the industry takes for granted should be eliminated?

ERRC Grid yellow tailThe Case of yellow tail

Eliminate

Enological terminology & distractionsAging qualities

Above-the-line marketing

Raise

Price versus budget winesRetain store involvement

Reduce

Wine complexityWine Range

Vineyard prestige

Create

Easy drinkingEase of selectionFun & adventure

Example of yellowtail

• Eliminate

• Reduce

• Raise

• Create

Yellow Tail• Only 2 types initially – Chardonnay and Shiraz• Fruity, soft on palette, sweet-ish – great for those who had not

drunk wine before• Same bottle for red and white – low logistics costs• Simple vibrant packaging – lower case letters/kangaroo• Un-intimidating• They were selling “The essence of a great land … Australia” – ie

they were not selling the wine• Australian clothing for the retail staff – they enthusiastically

promoted a wine they could understand.

Value Innovation of [yellow tail]

Utility proposition(customers, distributors and retailers)

•Creating of a social drink that is accessible to anyone

•Easy drinking, ease of selection, sense of fun and adventure

•Limit number of SKUs

•Price to move at volume

Price proposition •Targeted at the mass of customers

•Priced against the alternative (6-pack)

Cost structure•Elimination of working capital tied up in aging wines

•Fast product turnover

ExamplesExamples

Results• No 1 imported wine (outsells France and Italy)

• Fastest growing imported wine in the history of the USA industry

– New consumers of wine

– Jug drinkers trade up

– Premium wine drinkers trade down

• Industry criticizes them mercilessly at firstNow wine press blurb gives it a “best buy”

for value; winning wine awards.

The Case of Cirque du SoleilThe Case of Cirque du Soleil

• Cirque du Soleil achieved rapid growth in a Cirque du Soleil achieved rapid growth in a declining industry with low profit potentialdeclining industry with low profit potential

• Cirque du Soleil created uncontested new market Cirque du Soleil created uncontested new market space that made the competition irrelevant space that made the competition irrelevant

• If you don’t know them you can see some atIf you don’t know them you can see some at• http://www.youtube.com/watch?v=M4lAPI5BAukhttp://www.youtube.com/watch?v=M4lAPI5BAuk

Example: Cirque du SoleilExample: Cirque du Soleil

• Instead of simply trying to outpace the Instead of simply trying to outpace the competition, Cirque du Soleil offered people both competition, Cirque du Soleil offered people both the fun and thrill of the circus and the intellectual the fun and thrill of the circus and the intellectual sophistication of the theatersophistication of the theater

• Because of this, Cirque du Soleil appealed to both Because of this, Cirque du Soleil appealed to both circus customers and noncustomerscircus customers and noncustomers

Example: Cirque du SoleilExample: Cirque du Soleil

• Each show, like a theater production, had its own Each show, like a theater production, had its own unique theme and storylineunique theme and storyline

• This allowed customers to return to the show This allowed customers to return to the show more frequentlymore frequently

• They also did away with the traditional high-They also did away with the traditional high-priced concessions and vendors thereby cutting priced concessions and vendors thereby cutting costscosts

Example: Cirque du SoleilExample: Cirque du Soleil

• Cirque du Soleil effectively combined the best of Cirque du Soleil effectively combined the best of both the circus and the theater while eliminating both the circus and the theater while eliminating everything elseeverything else

• This allowed them to achieve both differentiation This allowed them to achieve both differentiation and low costand low cost

Eliminate-Reduce-Raise-CreateEliminate-Reduce-Raise-Create

EliminateEliminate

Star Performers

Animal shows

Aisle concession sales

Multiple show arenas

RaiseRaise

Unique venues

ReduceReduce

Fun and humor

Thrill and danger

CreateCreate

Theme

Refined environment

Multiple productions

Artistic music and dance

The Strategy Canvas The Strategy Canvas of Cirque du Soleilof Cirque du Soleil

hi

offe

ring

leve

l

loPrice

Fun & Humor Unique VenueAisle Concessions

Multiple Show Arenas Thrills & DangerAnimal Shows

Star Performers

Theme

Refined Viewing Environment

MultipleProductions

Artistic Music & Dance

Cirque du Soleil

ReduceEliminate Raise Create

© Kim & Mauborgne 2006

Ringling Brothers

Smaller Regional Circus

Key Takeaways • Three tiers of non-customers:

– 1: buyers who purchase your industry offerings out of necessity; will jump ship if given an opportunity.

– 2: buyers who purchase alternative offerings that serve the same function

– 3: people who don’t consume even the alternatives to your offerings

• Non-customer demand is unlocked by providing new buyer utilities, at a price that attracts a mass of buyers, given target costs.

• Buyers could be not only end-users, but also other participants in a value chain (e.g. distributors)

Purple Ocean Strategy

• Purple Ocean Strategy Just as Blue Ocean Strategy states that a Red ocean Strategy (Competitive Strategy) does not guarantee success for the firm

• Purple Ocean strategy also claims that Blue Ocean Strategy cannot guarantee the business success in the long run since the Blue Ocean strategy will finally turn Red.

Purple Ocean strategy

• The Purple Ocean strategy believes that in today’s business world organizations require both innovative ideas as well as a series of strategies to compete with rivalry and remain functional in the long term.

• Consequently, the name Purple Ocean strategy was initially adopted following the secondary colour generated by combining red and blue colours.

Green Ocean Strategy • Green Ocean Strategy is not about greening or

saving the environment. • Discipline of strategy that concentrates on

how to maximize both fixed, internal and human resources.

• Instead of copying or benchmarking against the competition, the focus is to be more realistic in relation to what the business can actually commit or deliver.

Green Ocean Strategy

• Using the analogy of beach and ocean, before one reaches the blue part of the ocean, there is the green.

• So it makes more sense that if a business can stay within the Green Ocean, where the water is clearer and nearer the shore, then this would be less risky, more practical, and eminently more desirable.

Conclusion

• While traditional competition-based strategies (red ocean strategies) are necessary, they are not sufficient to sustain high performance.

• Companies need to go beyond competing to seize new profit and growth opportunities.