1

Blue Ocean StrategyBlue Ocean Strategygygy

Business Creativity & InnovationBusiness Creativity & Innovation

Creating uncontested market spaceCreating uncontested market spaceg pg pand make the competition irrelevantand make the competition irrelevant

About the About the FoundersFounders: Chan & Renee: Chan & Renee

W. Chan Kim

Tool 4: Blue Ocean StrategyTool 4: Blue Ocean Strategy

• The Boston Consulting GroupBruce D. Henderson ChairProfessor of Strategy and International Management

Renée Mauborgne

• The INSEAD Distinguished Fellow and Professor of Strategyand International Management

Two worlds …Two worlds …

Red OceanCompete in crowdedcrowded markets

Blue OceanCreate and

capture new market space

Creating Blue OceansCreating Blue Oceans

•• Two types of markets:Two types of markets:

––Red Oceans Red Oceans –– all industries in existence all industries in existence today (known market space)today (known market space)

––Blue Oceans Blue Oceans –– all industries not in all industries not in existence today (unknown market existence today (unknown market space)space)

2

New Market SpaceNew Market Space

•• There is a fairly good understanding of how toThere is a fairly good understanding of how toThere is a fairly good understanding of how to There is a fairly good understanding of how to compete in Red Oceanscompete in Red Oceans

•• Blue Oceans are known to exist, however, there Blue Oceans are known to exist, however, there is little practical guidance on how to create themis little practical guidance on how to create them

•• This book focuses This book focuses on the analytical frameworks the analytical frameworks necessary to create Blue Oceans and thenecessary to create Blue Oceans and thenecessary to create Blue Oceans and the necessary to create Blue Oceans and the managerial strategy needed to sustain themmanagerial strategy needed to sustain them

New Market SpaceNew Market Space

•• In Red Oceans, industry boundaries are definedIn Red Oceans, industry boundaries are definedIn Red Oceans, industry boundaries are defined In Red Oceans, industry boundaries are defined and accepted, and the competitive rules of the and accepted, and the competitive rules of the game are knowngame are known

•• In Blue Oceans, there exists untapped market In Blue Oceans, there exists untapped market space, demand creation, and the opportunity for space, demand creation, and the opportunity for highly profitable growthhighly profitable growthg y p gg y p g

•• Most Blue Oceans are created from within red Most Blue Oceans are created from within red oceans by expanding industry boundariesoceans by expanding industry boundaries

The Continuing Creation of Blue The Continuing Creation of Blue OceansOceans

•• How many of today’s industries wereHow many of today’s industries wereHow many of today s industries were How many of today s industries were unknown unknown 100 100 years ago?years ago?

•• Blue Oceans have continuously been Blue Oceans have continuously been created over timecreated over time

•• The key to strength in the business world The key to strength in the business world y gy gis to create new, uncontested market is to create new, uncontested market spacespace

Two worlds …Two worlds …

Red Ocean Strategy Blue Ocean Strategy

Compete in existing market Create uncontested marketCompete 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 offMake the value-cost trade-off. Break the value-cost trade-off.

Align the whole system of a strategic firm's activities with its choice of differentiation or low cost.

Align the whole system of a firm's activities in pursuit of differentiation and low cost.

VALUE INNOVATION

3

The rising Imperative of Creating The rising Imperative of Creating Blue OceansBlue Oceans

• Supply exceeds demandSupply exceeds demand

•• Accelerated commoditization of products Accelerated commoditization of products

and servicesand services

•• Increasing price warsIncreasing price wars

•• Shrinking profit marginsShrinking profit margins

•• Brands are becoming more similar Brands are becoming more similar

•• select based on priceselect based on price

The Rising Imperative of Creating Blue The Rising Imperative of Creating Blue OceansOceans•• Globalism has made many brands Globalism has made many brands

become increasingly similar and more of a become increasingly similar and more of a

commoditycommodity

•• Technological improvement has caused Technological improvement has caused

supply to outweigh demandsupply to outweigh demand

•• It is now harder than ever to differentiate It is now harder than ever to differentiate

among brandsamong brands

The Impact of Creating Blue The Impact of Creating Blue OceansOceans

•• In a study of the launches of 108In a study of the launches of 108In a study of the launches of 108 In a study of the launches of 108 companies, 86% were line extensions companies, 86% were line extensions (Red Ocean)(Red Ocean)

•• However, these only accounted for 62% However, these only accounted for 62% of total revenues and 39% of total profitsof total revenues and 39% of total profits

•• The other 14% of launches were aimed at The other 14% of launches were aimed at creating blue oceans and accounted for creating blue oceans and accounted for 38% of revenue and 61% of total profit38% of revenue and 61% of total profit

The Profit and Growth The Profit and Growth Consequences of Blue OceansConsequences of Blue Oceans

Launches With Red OceansLaunches With Red Oceans

62%

86%

38%

14%

revenue impactrevenue impact

Business LaunchBusiness Launch

Launches With Blue OceansLaunches With Blue Oceans

39% 61%Profit ImpactProfit Impact

4

From Company and Industry to From Company and Industry to Strategic MoveStrategic Move

•• The company is not the appropriate unit ofThe company is not the appropriate unit ofThe company is not the appropriate unit of The company is not the appropriate unit of analysis for exploring blue oceansanalysis for exploring blue oceans

•• Blue Oceans focus on the strategic move rather Blue Oceans focus on the strategic move rather than the company or industrythan the company or industry

•• This book focuses on 150 strategic moves made This book focuses on 150 strategic moves made from 1880 to 2000 in various industriesfrom 1880 to 2000 in various industriesfrom 1880 to 2000 in various industriesfrom 1880 to 2000 in various industries

•• Blue Oceans were found to be created by new Blue Oceans were found to be created by new and old companies, attractive and unattractive and old companies, attractive and unattractive industries, and both private and public industries, and both private and public companiescompanies

Value Innovation: The Cornerstone Value Innovation: The Cornerstone of Blue Ocean Strategyof Blue Ocean Strategy

•• Value creation alone improves value but is not sufficient Value creation alone improves value but is not sufficient ppto make you stand out in the marketplaceto make you stand out in the marketplace

•• Innovation alone will often create a product that buyers Innovation alone will often create a product that buyers are not willing to pay forare not willing to pay for

•• Value innovation occurs only when companies align Value innovation occurs only when companies align innovation with utility, price, and cost positionsinnovation with utility, price, and cost positions

•• Value innovation:Value innovation:•• Value innovation:Value innovation:–– Make the competition irrelevantMake the competition irrelevant–– Create a leap in value for both buyers and your Create a leap in value for both buyers and your

companycompany–– Open up new and uncontested market spaceOpen up new and uncontested market space

Unlocking nonUnlocking non--customer customer demanddemand

UtilityCreate new

buyerutilities

PriceSet a price that attracts a mass

of buyers

CostSet the structure

based on a target

Value Innovation

y g

Generic Strategies vs. Value InnovationGeneric Strategies vs. Value Innovation

Red Ocean Strategy Blue Ocean Strategy

High

V1

Quality

High

Quality

•

•

V1

LowC1

CostHighHigh LowLow

Low

Cost

•

C1

Structuralist Reconstructionist

5

Minimizing Risks and Maximizing Minimizing Risks and Maximizing Opportunities in Formulating and Executing Opportunities in Formulating and Executing Blue Ocean StrategyBlue Ocean Strategy

Formulation Risks

Search Risk

Planning Risk

Scale Risk

Business Model Risk

Core/Formulation Principles

Reconstruct market boundaries

Reach beyond existing demand

Get the strategic sequence right

Focus on the big picture, not the numbers

Execution Risks

Business Model Risk

Organizational Risk

Management Risk

Get the strategic sequence right

Execution Principles

Overcome key organizational hurdles

Build execution into strategy

© Kim & Mauborgne 2006

BOS Logic: The Core PrinciplesBOS Logic: The Core Principles

Reconstruct Market Reconstruct Market BoundariesBoundariesBoundariesBoundaries… overcome believes.

Reach beyondexisting Demand… go for uncontested space. COST

Get the strategic sequence right… value [innovation] first.

VIVI

VALUE

BOS Logic: Reconstruct market boundaries

Industry Focuses on rivals within its Looks across alternative industries

Boundaries of Competition

Head-to-HeadCompetition

Creating New Market Space

Industry industry

Strategic Group Focuses on competitive position within strategic group

Buyer Group Focuses on better serving the buyer group

Scope of Product and Focuses on maximizing the value of product and service offerings

industries

Looks across strategic groups within its industry

Redefines the buyer group of the industry

Looks across to complementary product and service offerings that

Service Offerings of product and service offerings within the bounds of its industry

Functional-emotional Orientation of an

Industry

Focuses on improving price-performance with the functional-emotional orientation of this industry

Time/Trends Focuses on adapting to external trends as they occur

p ggo beyond the bounds of its industry

Rethinks the functional-emotional orientation of its industry

Participation in shaping external trends over time

BOS Logic: The Core Principles

Reconstruct Market Boundaries… overcome believes.

Reach beyondReach beyondexisting Demandexisting Demand… go for uncontested space

COST

space.Get the strategic sequence right… value [innovation] first.

VIVI

VALUE

6

BOS Logic: Reach beyond existing demand

Core Customer Noncostumer

Soon-to-be-NC Refusing Customer

Three Tiers of CustomersThree Tiers of Customers

There is a universe of There is a universe of noncustomers which can be noncustomers which can be turned into customers to offer a big turned into customers to offer a big

1st

2nd

3rdblue ocean market.blue ocean market.

1st tier: “Soon1st tier: “Soon--toto--be” be” noncustomers who are on the noncustomers who are on the edge of your marketedge of your market

2nd tier: “Refusing” 2nd tier: “Refusing” noncustomers whononcustomers whononcustomers who noncustomers who consciously choose against consciously choose against your marketyour market

3rd tier: “Unexplored” 3rd tier: “Unexplored” noncustomers who are in noncustomers who are in markets distant from yoursmarkets distant from yours

•• Three tiers of nonThree tiers of non--customers:customers:–– 11: buyers who purchase your industry offerings out of : buyers who purchase your industry offerings out of

necessity; will jump ship if given an opportunity.necessity; will jump ship if given an opportunity.

Three Tiers of CustomersThree Tiers of Customers

ecess ty; ju p s p g e a oppo tu tyecess ty; ju p s p g e a oppo tu ty–– 22: buyers who purchase alternative offerings that serve the : buyers who purchase alternative offerings that serve the

same function same function –– 33: people who don’t consume even the alternatives to your : people who don’t consume even the alternatives to your

offeringsofferings

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

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

BOS Logic: The Core Principles

Reconstruct Market Boundaries… overcome believes.

Reach beyondexisting Demand… go for uncontested space. COST

Get the strategic Get the strategic sequence rightsequence right… value [innovation] first.

VIVI

VALUE

7

BOS Logic: Get the Strategic Sequence right

Buyer utilityIs there exceptional buyer

utility in your business idea?

YESNo Rethink

PriceIs your price easily accessible to

the mass of buyers?

CostCan you attain your cost target to

profit at your strategic price?

YES

YES

No Rethink

No Rethink

AdoptionWhat are the adoption hurdles in actualizing your business idea?

Are you addressing them up front?

A commercially viable Blue Ocean Strategy

YES

YES

No Rethink

Four Actions Framework: Key to Value CurveFour Actions Framework: Key to Value CurveReduceWhat factors should be reduced well below the industry standard?

The key to discovering a new value curve lies in answering four basic questions standard?questions

Creating

curve

Creatingnew markets:A new valuecurve

Eliminate

What factors that the industry has taken for granted should be eliminated?

Create/AddWhat factors that the industry has never offered should be created or added?

RaiseWhat factors should be raised well above the industry standard?

Cirque du Soleil example

high

Strategy CanvasStrategy Canvas

low

Industry Variables

Four Steps of VisualizingFour Steps of Visualizing1. 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

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

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

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

•Support only those projects and operational moves that allow your

•See which factors you should eliminate, create or change

customers, and non-customers

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

company to close gaps and actualize the new strategy

8

The Case of Cirque du SoleilThe Case of Cirque du Soleil

•• Cirque du Soleil achieved rapid growth inCirque du Soleil achieved rapid growth inCirque du Soleil achieved rapid growth in Cirque du Soleil achieved rapid growth in a declining industry with low profit a declining industry with low profit potentialpotential

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

•• httphttp://www.youtube.com/watch?v=M4lAPI://www.youtube.com/watch?v=M4lAPI5BAuk5BAuk

Example: Cirque du SoleilExample: Cirque du Soleil

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

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

Example: Cirque du SoleilExample: Cirque du Soleil

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

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

•• They also did away with the traditional They also did away with the traditional y yy yhighhigh--priced concessions and vendors priced concessions and vendors thereby cutting coststhereby cutting costs

Example: Cirque du SoleilExample: Cirque du Soleil

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

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

9

EliminateEliminate--ReduceReduce--RaiseRaise--CreateCreate

EliminateEliminateSt P f

RaiseRaiseU iStar Performers

Animal showsAisle concession salesMultiple show arenas

Unique venues

ReduceReduce CreateCreateFun and humorThrill and danger

ThemeRefined environmentMultiple productionsArtistic music and dance

Ringling Brothers

The Strategy Canvas The Strategy Canvas of Cirque du Soleilof Cirque du Soleilhi

Smaller Regional Circus

offe

ring

leve

l

Cirque du Soleil

loPrice

Fun & Humor Unique VenueAisle Concessions

Multiple Show Arenas Thrills & DangerAnimal Shows

Star Performers

Theme

Refined Viewing Environment

MultipleProductions

Artistic Music & Dance

© Kim & Mauborgne 2006

The Strategy Canvas The Strategy Canvas of Cirque du Soleilof Cirque du Soleilhi ReduceEliminate Raise Create

Ringling Brothers

offe

ring

leve

l

Cirque du Soleil

Smaller Regional Circus

loPrice

Fun & Humor Unique VenueAisle Concessions

Multiple Show Arenas Thrills & DangerAnimal Shows

Star Performers

Theme

Refined Viewing Environment

MultipleProductions

Artistic Music & Dance

© Kim & Mauborgne 2006

The Case of Yellow TailEliminate-Reduce-Raise-Create Grid:

Eliminate RaiseEnological terminology and distinctions

Aging qualities

Above-the-line marketing

Price versus budget wines

Retail store involvement

ReduceWine complexity

CreateEasy drinking

Wine range

Vineyard prestige

Ease of selection

Fun and adventure

Source: Blue Ocean Strategy, Kim and Mauborgne

10

Source: Blue Ocean Strategy, Kim and Mauborgne

Value Curve for US Wine Industry Value Curve for US Wine Industry vsvsYellow TailYellow Tail Expensive wines

Yellow tailCheap wines

High

3838

Price

Use of technicalwine terminology

Above-the-linemarketing

Agingquality

Vineyardprestige

Winecomplexity

Winerange

Easydrinkability

Ease ofselection

Fun andadventure

Low

Strategy CanvasValue

Innovation

Costs

EliminateEnological terminology and distinctions

Aging qualities

Above-the-line marketing

RaisePrice versus budget wines

Retail store involvement

Reduce Create

Four Actions Framework

Buyer ValueWine complexity

Wine range

Vineyard prestige

Easy drinking

Ease of selection

Fun and adventure

ERRC Grid

Source: Blue Ocean Strategy, Kim and Mauborgne

Cost per room 100 000 FF ↔ 270 000 FF

From Formule 1’s perspective:

The Case of Accor's The Case of Accor's FormuleFormule 1 1 Budget HotelBudget Hotel

Cost per room 100,000 FF ↔ 270,000 FFCost of staff 20-23% of sales vs. 23-25% Profit Margins > 2x industry averageOccupancy rates > 3x industry average

From customers’ perspective:H i 2* h t lHygiene > average 2* hotelBed quality > average 2* hotelSilence > average 2* hotelPrice 100 FF ↔ 200 FF of industry

Source: HBR: Value Innovation Logic, Kim and Mauborgne

11

The value curve of Formule 1 in the French Low Budget Hotel Industry

Results of Formule Results of Formule 11’s Strategy’s Strategy

HighSouthwest

The Strategy Canvas of Southwest The Strategy Canvas of Southwest AirlinesAirlines

The value curve of Southwest Airline

Average Airline

Southwest

Car Transport

LowPrice

Meals

LoungesSeating

Class

choices

Hub

connectivity Friendly

service

Speed Frequent point-

to-point

departure

Strategy Canvas of Personal Finance Strategy Canvas of Personal Finance Software IndustrySoftware Industryhi

Quicken

Personal Finance Software

offe

ring

leve

l

The Pencil

lo

Price Speed AccuracyOptional FeaturesEase of Use

© Kim & Mauborgne 2006

3. Draw the Strategy Canvas: 1 on left, 4 on right

Factors of Competition / Value Factors:

Blue Ocean Strategy1. List 8 to 12 important Factors of Competition2. Enter top 2 or 3 in each ERRC Grid QuadrantExerciseExercise

•• 11. List Factors of . List Factors of CompetitionCompetition

•• 22. Top . Top 2 2 or or 3 3 in ERRC in ERRC G id Q ad antsG id Q ad ants

1. Eliminate: 3. Raise:

Grid QuadrantsGrid Quadrants

Rev: 2006.02.21

2. Reduce: 4. Create:

12

8

Project Name:

Very High

10

9

ExerciseExercise3.3. Write on Write on

Worksheet: Worksheet: 7

6

5

4

3

2

1

0

Medium

Low

Very Low

HighE left, C rightE left, C right

4.4. Draw “As Is”Draw “As Is”

5.5. Draw “To Be”Draw “To Be”

Valu

e Fa

ctor

s

ExamplesExamples

ExamplesExamples ExamplesExamples

13

References

• W. Chan Kim, Renée Mauborgne, Blue Ocean Strategy, 2005,H d B i S h l PHavard Business School Press.

• http://www.blueoceanstrategy.com

• HANDELSBLATT, Donnerstag, 06. Oktober 2005, Mit Nichtkunden neue Märkte findenMit Nichtkunden neue Märkte finden.

• http://www.hotelformule1.com

Assignment:Choose a real product that is already on theChoose a real product that is already on the

market (it can be either one of the above or your own preferences of product), brainstorm the value

factors of the product and develop the Strategy Canvas

Thank you