MARKPRU K32 (Product Management) HANDOUT

TOPIC: BLUE OCEAN STRATEGY – Business Creativity & Innovation

PREPARED BY: Choa, Gerome S. / Delos Santos, Gabrielle / Lim, Justine M. /

Mendoza, Darwyn Albert T. / Mendoza, Lance William T. /

Ong, Caitlin Keely S. / Uy, Bryan Joseph G. (Group 5)

In Layman’s term: Creating uncontested market space and make the competition

irrelevant.

About the authors:

1.) W. Chan Kim

- The Boston Consulting Group Bruce D. Henderson Chair Professor of Strategy

and International Management

2.) Renée Mauborgne

- The INSEAD Distinguished Fellow and Professor of Strategy and International

Management

Creating Blue Oceans

Two Types of Markets:

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

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

New Market Space

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

Blue Oceans are known to exist, however, there is little practical guidance on

how to create them

This book focuses on the analytical frameworks necessary to create Blue

Oceans and the managerial strategy needed to sustain them

In Red Oceans, industry boundaries are defined and accepted, and the

competitive rules of the game are known

In Blue Oceans, there exists untapped market space, demand creation, and the

opportunity for highly profitable growth

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

boundaries

Two different worlds

Red Ocean Strategy Blue Ocean Strategy

Compete 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-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

Imperatives of Creating Blue Oceans

Supply exceeds demand

Accelerated commoditization of products and services

Increasing price wars

Shrinking profit margins

Brands are becoming more similar

Select based on price

Globalism has made many brands become increasingly similar and more of a

commodity

Technological improvement has caused supply to outweigh demand

It is now harder than ever to differentiate among brands

Impact of creating Blue Oceans

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

Ocean)

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

The other 14% of launches were aimed at creating blue oceans and accounted

for 38% of revenue and 61% of total profit

The Profit and Growth Consequences of Blue Oceans

From Company and Industry to Strategic Move

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

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

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

industries

Blue Oceans were found to be created by new and old companies, attractive and

unattractive industries, and both private and public companies

Value Innovation: The Cornerstone of Blue Ocean Strategy

Value creation alone improves value but is not sufficient to make you stand out in

the marketplace

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

Value innovation occurs only when companies align innovation with utility, price,

and cost positions

Value innovation:

Make the competition irrelevant

Create a leap in value for both buyers and your company

Open up new and uncontested market space

Profit Impact

Revenue Impact

Business Launch

61%

38%

14%

39%

62%

86%

Launches with Blue Oceans

Launches with Red Oceans

Unlocking non-customer demand

Minimizing Risks and Maximizing Opportunities in Formulating and Executing

Blue Ocean Strategy

Value Innovation

Utility Create new

buyer utilities

Price Set a price that

attracts a mass of buyers

Cost Set the

structure based on a

target

Core / Formulation Principles

Reconstruct market boundaries

Reach beyond existing demand

Get the strategic sequence right

Execution Principles

Focus on the big picture, not the numbers

Overcome key organizational hurdles

Build execution into strategy

Formulation Risks

Execution Risks

Search Risk

Planning Risk

Scale Risk

Business Model Risk

Organizational Risk

Management Risk

BOS Logic: The Core Principles

1. Reconstruct market boundaries: To break from the competition and create blue

oceans. The challenge is to successfully identify, out of the haystack of possibilities

that exist, commercially compelling blue ocean opportunities. This challenge is keen

because managers cannot afford betting their strategy on intuition or on a random

drawing.

There are clear patterns for creating blue oceans, with six basics approaches to

remarking market boundaries: The six paths framework

In the first path: companies in the red ocean define their industry similarly and focus

on being the best within it. But to create new market space companies must look across

alternative industries because a company competes not only with the other firms in its

own industry, but also with companies in those other industries that produce alternative

products and services.

Creating New Market Space

Looks across alternative

industries

Looks across strategic groups

within its industry

Redefines the buyer group of the

industry

Looks across to complementary

product and service offerings that

go beyond the bounds of its

industry

Rethinks the functional-emotional

orientation of its industry

Participation in shaping external

trends over time

Boundaries of Competition

Head-to-Head Competition

Industry Focuses on rivals within its industry

Strategic Group

Focuses on competitive position within strategic group

Buyer Group Focuses on better serving the buyer group

Scope of Product and

Service Offerings

Focuses on maximizing the value 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

The second path: The next boundary is the strategic group. A strategic group is

companies within an industry that pursue a similar strategy.

The key in creating new market space is to understand what factors determine buyers´

decision to switch from one strategic group to another.

The third path: In most industries, competitors converge on the definition of the target

buyer. In the reality, though, there is a chain of buyer who directly or indirectly involved

in the buying decision: the purchaser, the user, for example.

But by looking across buyer groups, companies can gain new insights into how to

redesign their value curves to focus on a previously overlooked set of buyers.

The fourth path: In the red ocean: few products and services are used in a vacuum. In

most cases, other products and services affect their value. But companies can create

new market space by focusing on the complements that detract from the value of their

product or service.

The fifth path: Competition in an industry tends to converge around two bases of

appeal:

-Some industries compete principally on price and function, their appeal is rational.

Other industries compete largely on feelings, their appeal is emotional.

Companies can find new market spaces when they are willing to challenge the

functional-emotional orientation of their industry.

The sixth path: All industries are subject to external trends that affect their business

over time. Firms tend to pace their own thinking to keep up with the development of the

trends they are tracking.

By finding insights trends that are observable today, firms can unlock innovation that

creates new market spaces.

2. Reach beyond existing demand: This is a key component of achieving value

innovation. By aggregation the greatest demand for a new offering. To achieve this,

companies should challenge two conventional strategy practices. One is the focus

on existing customers. The other is the drive for finer segmentation to

accommodate buyer differences. To maximize the size of blue oceans, companies

need to take a reverse course.

- Instead of concentration 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.

That allows companies to reach beyond existing

demand to unlock a new mass of customers that

did not exist before.

- There are three types of noncustomer that can be transformed into customers. They

differ in their relative distance from the market.

The first of noncustomers is closest to the market. They are buyers who nominally

purchase an industry's offering out of necessity, but are mentally

noncustomers of the industry.

The second type of noncustomers is people who refuse to use the industry's

offerings. These are buyers who have seen the industry's offerings as an option

to fulfill their needs but have voted against them.

The third type of noncustomers is farthest from the market. They are

noncustomers who have never thought of the market´s offerings as an option.

You must look at each of the three types of noncustomers to understand how you can

attract them and expand the own blue ocean.

Three Tiers of Customers

There is a universe of noncustomers which can be turned into customers to offer a big blue ocean market.

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

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

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

• 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)

3. Get the strategic consequence right: To build a robust business model to ensure

that you make a healthy profit on your blue ocean idea.

- This brings us to the fourth principle of the Blue Ocean Strategy: Get the

strategic sequence right.

- As shown in this figure, companies need to build their Blue Ocean Strategy in

the sequence of buyer utility, price, cost, and adoption.

The starting point is buyer utility. Does your offering unlock exceptional utility? Is

there a compelling reason for the mass of people to buy it?

Absent this, there is no Blue Ocean potential to begin with. Here there are only two

options. Park the idea, or rethink it until you reach an affirmative answer.

When you clear the exceptional utility bar, you advance to the second step: setting

the right strategic price. Remember a company does not want to rely on price to

create demand. The key question her is this: Is your offering priced to attract the

mass of target buyers so that they have a compelling ability to pay for your offering?

If it is not, they cannot buy it. Nor will the offering create irresistible market buzz.

Four Actions Framework: Key to Value Curve

These two steps address the revenue side of a company's business model.

Securing the profit side bring the third element: cost. Can you produce your offering

at the target cost and still earn a healthy profit margin? Can you profit at the strategic

price-the price easily accessible to the mass of target buyers? You should not let

costs drive prices. Nor should you scale down utility because high costs block your

ability to profit at the strategic price. When the target cost cannot be met, you must

either forgo the idea because the Blue Ocean won't be profitable, or you must innovate

your business model to hit the target cost. It is the combination of exceptional utility,

strategic pricing, and target costing that allows companies to achieve value innovation-

a leap in value for both buyers and companies.

The last step is to address adoption hurdles. What are the adoption hurdles in rolling

out your idea? Have you addressed these up front? The formulation of Blue Ocean

Strategy is complete only when you address adoption hurdles in the beginning to

ensure the successful actualization of your idea. Adoption hurdles include, for

example, potential resistance to the idea by retailers or partners. Because Blue Ocean

Strategies represent a significant departure from red oceans, it is key to address

adoption hurdles up front.

Four Steps of Visualizing

1. Visual Awakening

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

See where your strategy needs to change

2. Visual Exploration

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

3. Visual Strategy Fair

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

4. Visual Communication

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

Examples of companies in the Philippines that uses Blue Ocean Strategy and

Why?

1. Cebu Pacific

- It adds the “value” to what people really want, which is to “fly.”

2. HBC

- From an obscure retailer mixing incompatible grocery products and beauty care

products, they dropped groceries and canned products and focused on pushing

beauty products

3. C2

- Instead of looking at the existing RTD tea market as a competition, it looked at

alternatives and competed in a relatively uncontested market space

- Instead of beating the competition, they made the competition irrelevant

4. Dell

- Strategized using low-cost mass production of computers sold directly for

consumers per each customer, thus bypassing retailers and other costly

marketing channels and schemes

5. Body Shop

- Ignored most glamorous aspects of the industry

- Instead, it designed its image around functionality, reduced prices and modest

packaging

- Increased the value to natural ingredients , a healthy lifestyle and ethical

concerns

6. Nintendo

- Systematic development of innovations such as Nintendo DS or Nintendo Wii