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Blue Ocean Strategy Tools and Frameworks

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Blue Ocean Strategy Tools and Frameworks



Contents16

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Red vs. Blue

Value Innovation

Strategy Canvas

Four Actions Framework

ERRC Grid

Six Paths Framework

PMS Map

3

4

6

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3 Tiers of Noncustomers

Sequence of BOS

Buyer Utility Map

Four Hurdles to Execution

Tipping Point Leadership

Fair Process


Red Ocean vs. Blue Ocean Strategy

Red Ocean Strategy Blue Ocean Strategy

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.

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.

VS

Make the competition irrelevant.


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Value InnovationValue innovation, the cornerstone of blue ocean strat-egy, is the simultaneous pursuit of differentiation and low cost, creating a leap in value for both buyers and the company. Because value to buyers comes from the offering’s utility minus its price, and because value to the company is generated from the offering’s price minus its cost, value innovation is achieved only when the whole system of utility, price, and cost is aligned.

Break the value-cost tradeoff by answering the following questions:

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

· Which factors should be reduced well below the industry’s standard?

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

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


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COST

Value Innovation

BUYER VALUE

Value Innovation

Cost savings are made by eliminating and reducing the factors an industry competes on.

Buyer value is lifted by raising and creating factors the industry has never offered.


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Strategy Canvas


The strategy canvas is both a diagnostic and an action framework for building a compelling blue ocean strategy. The horizontal axis captures the range of factors that the industry competes on and invests in, while the vertical axis captures the offering level that buyers receive across all of these key competing factors.

The strategy canvas serves two purposes:

· To capture the current state of play in the known market space, which allows users to clearly see the factors that the industry competes on and where the competition currently invests and

· To propel users to action by reorienting focus from competitors to alternatives and from customers to noncustomers of the industry

The value curve is the basic component of the strategy canvas. It is a graphic depiction of a company’s relative performance across its industry’s factors of competition. A strong value curve has focus, divergence as well as a compelling tagline.

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High

Low

Off

erin

g Le

vel

Key Competing Factors

Strategy Canvas

Industry Value Curve

Blue Ocean Strategic Move


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©2014 Blue Ocean Strategy. All rights reserved.

The Four Actions Framework is used to reconstruct buyer value elements in crafting a new value curve. To break the trade-off between differentiation and low cost and to create a new value curve, the framework poses four key questions, shown in the diagram, to challenge an industry’s strategic logic.

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Eliminate Create

Which of the factors that theindustry takes for grantedshould be eliminated?

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

Reduce

Which factors should be reduced well below the industry’s standard?

Raise

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

New Value Curve


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ERRC Grid


The Eliminate-Reduce-Raise-Create (ERRC) Grid compliments the Four Actions Framework.It pushes companies not only to ask the questions posed in the Four Actions Framework but also to act on all four to create a new value curve, which is essen-tial to unlocking a new blue ocean. By driving compa-nies to fill in the grid with the actions of eliminating and reducing as well as raising and creating, the grid gives companies four immediate benefits:

· It pushes them to simultaneously pursue differentiation and low cost to break the value-cost trade off.

· It immediately flags companies that are focused only on raising and creating and thereby lifting the cost structure and often overengineering products and services – a common plight in many companies.

· It is easily understood by managers at any level, creating a high level of engagement in its application.

· Because completing the grid is a challenging task, it drives companies to robustly scrutinize every factor the industry competes on, making them discover the range of implicit assumptions they make unconsciously in competing.

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ERRC GridEliminate Raise

Reduce Create

Which of the factors that theindustry takes for grantedshould be eliminated?

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

Which factors should be reduced well below the industry’s standard?

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


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Six Paths Framework


The Six Paths Framework allows managers to address the search risk many companies struggle with. It enables them to successfully identify out of the haystack of possibilities that exist, commercially compelling blue oceans by reconstructing market boundaries.

There are six basic approaches to reconstructing market boundaries. These paths challenge the six fundamental assumptions underlying many companies’ strategies that keep companies trapped competing in red oceans. Instead of looking within the accepted boundaries of competition, the Six Paths Framework allows managers to look systematically across them to create blue oceans.

The table outlines these six basic assumptions and the pathway managers can take to break away from head-to-head competition towards blue ocean creation.

The six paths have general applicability across industry sectors. None of the paths requires special vision or foresight about the future. All are based on looking at familiar data from a new perspective.

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Focuses on rivals within its industry

Focuses on better serving the buyer group

Focuses on maximizing the value of product and service offerings within the bounds of its industry

Focuses on improving the price performance within the functional-emotional orientation of its industry

Industry

The Six PathsFrom Head-to-Head Competition to Blue Ocean Creation

Head-to-Head Competition Blue Ocean Creation

Looks across alternative industries

Redefines the industry buyer group

Looks across to complementary product and service offerings

Participates in shaping external trends over time

Rethinks the functional-emotional orientation of its industry

Focuses on adapting to external trends as they occur

Focuses on competitive position within strategic group

StrategicGroup

Time

BuyerGroup

Scope of Productor Service Offering

Functional-emotionalOrientation

Looks across strategic groups within industry


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Pioneer-Migrator-Settler (PMS) Map


A useful exercise for a corporate management team pursuing profitable growth is to plot the company’s current and planned portfolios on the Pioneer-Migrator-Settler (PMS) map.

Settlers are defined as me-too businesses, migrators are business offerings better than most in the market-place, and a company’s pioneers are the businesses that offer unprecedented value. These are your blue ocean strategists, and are the most powerful sources of profitable growth. These businesses have a mass following of customers.

If both the current portfolio and the planned offering consist mainly of settlers, the company has a low growth trajectory, is largely confined to red oceans, and needs to push for value innovation. Although the company might be profitable today as its settlers are still making money, it may well have fallen into the trap of competitive benchmarking, imitation, and intense price competition.

If current and planned offerings consist of a lot of migrators, reasonable growth can be expected. But the company is not exploiting its potential for growth, and it risks being marginalized by a company that value-innovates. In our experience the more an industry is populated by settlers, the greater the opportunity to value-innovate and create a blue ocean of new market space.

This exercise is especially valuable for managers who want to see beyond today’s performance. Revenue, profitability, market share, and customer satisfaction are all measures of a company’s current position. Contrary to what conventional strategic thinking sug-gests, those measures cannot point the way to the future; changes in the environment are too rapid. Today’s market share is a reflection of how well a busi-ness has performed historically.

Clearly, what companies should be doing is shifting the balance of their future portfolio toward pioneers. That is the path to profitable growth.

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Pioneer-Migrator-Settler (PMS) Map

Pioneers

Today Tomorrow

Value Innovation

MigratorsValue Improvement

SettlersValue Imitation


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3 Tiers of NoncustomersTypically, to grow their share of a market, companies strive to retain and expand their existing customer base. This often leads to finer segmentation and greater tailoring of offerings to better meet customer preferences. The more intense the competition is, the greater, on average, is the resulting customization of offerings. As companies compete to embrace customer preferences through finer segmentation, they often risk creating too-small target markets.

To maximize the size of their blue oceans, companies need to take a reverse course. Instead of concentrating on customers, they need to look to noncustomers. And instead of focusing on customer differences, they need to build on powerful commonalities in what buyers value. This reorientation allows companies to reach beyond existing demand to unlock a new mass of customers that did not exist before.

There are three tiers of noncustomers that can be transformed into customers. They differ in their rela-tive distance from the current market.

The first tier of noncustomers is closest to the current market, sitting just on the edge. They are buyers who minimally purchase an industry’s offering out of neces-sity but are mentally noncustomers of the industry. They are waiting to jump ship and leave the industry as soon as the opportunity presents itself. However, if offered a leap in value, not only would they stay, but also their frequency of purchases would multiply, unlocking enormous latent demand.

The second tier of noncustomers is people who refuse to use your industry’s offerings. These are buyers who have seen your industry’s offerings as an option to fulfill their needs but have voted against them.

The third tier of noncustomers is farthest from your market. They are noncustomers who have never thought of your market’s offerings as an option.

By focusing on key commonalities acrossthese noncustomers and existing customers, compa-nies can understand how to pull them into their new market.


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3 Tiers of Noncustomers

“Soon-to-be” noncustomers who are on the edge of your market waiting to jump ship.

Customers of your industy

“Refusing” noncustomers who consciously choose against your market.

“Unexplored” noncustomers who are in markets distant from yours.

CURRENTMARKET

TIER 1“Soon-to-be”

TIER 2“Refusing”

TIER 3“Unexplored”

1

2

3


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Sequence of Blue Ocean Strategy


Companies need to build their blue ocean strategy in the sequence of buyer utility, price, cost, and adoption.

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Sequence of BOS Buyer Utility

Is there exceptional buyer utility in your business idea?

PriceIs your price easily accessible to the mass of buyers?

CostCan you attain your cost target to profit at your strategic price?

AdoptionWhat are the adoption hurdles in actualizing your business idea?

Are you addressing them upfront?

A Commercially Viable Blue Ocean Idea

Rethink

Rethink

Rethink

NOYES

NOYES

NOYES


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Buyer Utility Map


The Buyer Utility Map helps to get managers thinking from a demand-side perspective. It outlines all the levers companies can pull to deliver exceptional utility to buyers as well as the various experiences buyers can have with a product or service. This mindset helps managers identify the full range of utility spaces that a product or service can potentially fill.

The Buyer Experience Cycle (BEC): A buyer’s experience can usually be broken into a cycle of six stages, running more or less sequentially from purchase to disposal. Each stage encompasses a wide variety of specific experiences. Purchasing, for example, might include the experience of browsing Amazon.com as well as the experience of pushing a shopping cart through Wal-Mart’s aisles.

Utility levers: Cutting across the stages of the buyer’s experience are what we call utility levers – the ways in which companies unlock utility for buyers. Most of the levers are obvious. Simplicity, fun and image, and environmental friendliness need little explanation.

Nor does the idea that a product might reduce a customer’s financial, physical, or credibility risks. And a product or service offers convenience simply by being easy to obtain, use, or dispose of. The most commonly used lever is that of customer productivity, in which an offering helps a customer do things faster or better.

By locating a new offering on one of the spaces of the buyer utility map, managers can clearly see how, and whether, the new idea creates a different utility proposition from existing offerings but also removes the biggest blocks to utility that stand in the way of converting noncustomers into customers. In our experience, managers all too often focus on delivering more of the same stage of the buyer’s experience. This approach may be reasonable in emerging industries, where there is plenty of room for improving a company’s utility proposition. But in many existing industries, this approach is unlikely to produce a market-shaping blue ocean strategy.

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Buyer Utility Map

Current Industry Focus Blue Ocean Offering

The

Six

Uti

lity

Leve

rs

The Six Stages of Buyer Experience Cycle

CustomerProductivity

Simplicity

Convenience

Risk

Purchase Delivery Use Supplements Maintenance Disposal

Fun andImage

EnvironmentalFriendliness


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Four Hurdles to Execution


Once a company has developed a blue ocean strategy with a profitable business model, it must execute it. The challenge of execution exists, of course, for any strategy. Companies, like individuals, often have a tough time translating thought into action whether in red or blue oceans.

Knowing how to triumph over challenges is key to attenuating organizational risk. To varying degrees, companies may face all or a subset of the following four hurdles:

· The Cognitive Hurdle: Waking employees up to the need for a strategic shift. Red oceans may not be the paths to future profitable growth, but they may have served the organization historically and employees have grown comfortable with them, so why rock the boat?

· The Resource Hurdle: It is assumed that the greater the shift in strategy, the greater the resources it requires for execution.

· The Motivational Hurdle: How do you motivate key players to move fast and tenaciously to carry out a break from the status quo?

· The Political Hurdle: As one manager put it, “In our organization you get shot down before you stand up.”

To overcome these hurdles, companies must abandon perceived wisdom on effecting change. Conventional wisdom asserts that the greater the change, the greater the resources and time you will need to bring about results. Instead, you need to flip conventional wisdom on its head using what we call tipping point leadership.

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Four Hurdlesto Execution

Resource Hurdle Political Hurdle

Limited ResourcesOpposition from powerful vested interests

Cognitive Hurdle

An organization wedded to the status quo

Motivational Hurdle

Unmotivated Staff


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The conventional theory of organizational change rests on transforming the mass. So change efforts are focused on moving the mass, requiring steep resources and long time frames — luxuries few executives can afford. Tipping point leadership, by contrast, takes a reverse course. To change the mass it focuses on transforming the extremes: the people, acts, and activities that exercise a disproportionate influence on performance. By transforming the extremes, tipping point leaders are able to change the core fast and at low cost to execute their new strategy.

By single-mindedly focusing on points of disproportionate influence, tipping point leadership helps managers topple the Four Hurdles to Execution quickly and at a low cost by answering the following questions:

· What factors or acts exercise a disproportionately positive influence on breaking the status quo?

· On getting the maximum bang out of each buck of resources?

· On motivating key players to aggressively move forward with change?

· And on knocking down political roadblocks that often trip up even the best strategies?

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Conventional Wisdom



Company

Disproportionate Influence Factors

Disproportionate Influence FactorsCompany

Theory of organization change rests on transforming the mass. So change efforts are focused on moving the mass, requiring steep resources and long time frames.

To change the mass, focus on the extremes — people, acts, and activities that exercise a disproportionate influence on performance to achieve a strategic shift fast at low cost.

Mass of Employees


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Fair Process


Fair process builds execution into strategy by creating people’s buy-in up front. When fair process is exercised in the strategy formulation phase, people trust that a level playing field exists, inspiring voluntary cooperation during the execution phase.

There are three mutually reinforcing elements that define fair process: engagement, explanation, and clarity of expectation. Whether people are senior executives or shop employees, they all look to these elements. We call them the three Ε principles of fair process.

It should be noted that any subset of the three is insufficient. The three criteria collectively lead to judgments of fair process.

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Three E Principles of Fair Process

Engagement means involving individuals in the strategic decisions that affect them by asking for their input and allowing them to refute the merits of one another’s ideas and assumptions. Engagement communicates management’s respect for individuals and their ideas. The result is better strategic decisions by management and greater commitment from all involved in execution.

Explanation means that everyone involved and affected should understand why final strategic decisions are made as they are. An explanation of the thinking that underlies decisions makes people confident that managers have considered their opinions and have made decisions impartially in the overall interests of the company.An explanation allows employees to trust managers’ intentions even if their own ideas have been rejected. It also serves as a powerful feedback loop that enhances learning.

Expectation clarity requires that after a strategy is set, managers clearly state the new rules of the game. Although the expectations may be demanding, employees know up front the standards by which their work will be judged and the penalties for failure. When people clearly understand expectations, political jockeying and favouritism are minimized, and people can focus on executing the strategy rapidly.

Engagement Explanation Expectation Clarity


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Blue Ocean Strategy Tools and Frameworks - Cloud …€¦ · Blue Ocean Strategy Tools and Frameworks ... Red Ocean vs. Blue Ocean Strategy Red Ocean Strategy Blue Ocean Strategy