Blue Ocean StrategyBusiness Creativity & Innovation

Creating uncontested market spaceand make the competition irrelevant

About the Founders: Chan & ReneeW. Chan Kim

The Boston Consulting Group Bruce D. Henderson Chair Professor of Strategy and International ManagementRene Mauborgne

The INSEAD Distinguished Fellow and Professor of Strategy and International ManagementTool 4: Blue Ocean Strategy

Two worlds Red OceanCompete in crowded markets

Blue OceanCreate and capture new market space

Creating Blue OceansTwo 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 SpaceThere is a fairly good understanding of how to compete in Red OceansBlue Oceans are known to exist, however, there is little practical guidance on how to create themThis book focuses on the analytical frameworks necessary to create Blue Oceans and the managerial strategy needed to sustain them

New Market SpaceIn Red Oceans, industry boundaries are defined and accepted, and the competitive rules of the game are knownIn Blue Oceans, there exists untapped market space, demand creation, and the opportunity for highly profitable growthMost Blue Oceans are created from within red oceans by expanding industry boundaries

The Continuing Creation of Blue OceansHow many of todays industries were unknown 100 years ago?Blue Oceans have continuously been created over timeThe key to strength in the business world is to create new, uncontested market space

Two worlds

Red Ocean StrategyBlue Ocean StrategyCompete 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. VALUE INNOVATION

The rising Imperative 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

The Rising Imperative of Creating Blue OceansGlobalism has made many brands become increasingly similar and more of a commodityTechnological improvement has caused supply to outweigh demandIt is now harder than ever to differentiate among brands

The Impact of Creating Blue OceansIn 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 profitsThe 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 MoveThe company is not the appropriate unit of analysis for exploring blue oceansBlue Oceans focus on the strategic move rather than the company or industryThis book focuses on 150 strategic moves made from 1880 to 2000 in various industriesBlue 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 StrategyValue creation alone improves value but is not sufficient to make you stand out in the marketplaceInnovation alone will often create a product that buyers are not willing to pay forValue innovation occurs only when companies align innovation with utility, price, and cost positionsValue innovation:Make the competition irrelevantCreate a leap in value for both buyers and your companyOpen up new and uncontested market space

UtilityCreate new buyerutilities

PriceSet a price that attracts a massof buyers

CostSet the structure based on a targetValue InnovationUnlocking non-customer demand

Generic Strategies vs. Value InnovationHighLowV1C1CostQualityHighHighHighLowLowLowQualityCostV1C1Red Ocean StrategyBlue Ocean StrategyStructuralistReconstructionist

Minimizing Risks and Maximizing Opportunities in Formulating and Executing Blue Ocean Strategy Kim & Mauborgne 2006

BOS Logic: The Core PrinciplesReconstruct Market Boundaries overcome believes. Reach beyondexisting Demand go for uncontested space.Get the strategic sequence right value [innovation] first.VIVICOSTVALUE

BOS Logic: Reconstruct market boundariesBoundaries of CompetitionHead-to-HeadCompetitionCreating New Market Space

IndustryFocuses on rivals within its industryStrategic GroupFocuses on competitive position within strategic groupBuyer GroupFocuses on better serving the buyer groupScope of Product and Service OfferingsFocuses on maximizing the value of product and service offerings within the bounds of its industryFunctional-emotional Orientation of an IndustryFocuses on improving price-performance with the functional-emotional orientation of this industryTime/TrendsFocuses on adapting to external trends as they occur

Looks across alternative industriesLooks across strategic groups within its industryRedefines the buyer group of the industryLooks across to complementary product and service offerings that go beyond the bounds of its industryRethinks the functional-emotional orientation of its industryParticipation in shaping external trends over time

BOS Logic: The Core PrinciplesReconstruct Market Boundaries overcome believes. Reach beyondexisting Demand go for uncontested space.Get the strategic sequence right value [innovation] first.VIVICOSTVALUE

BOS Logic: Reach beyond existing demandCore CustomerNoncostumerSoon-to-be-NCRefusing Customer

Three Tiers of CustomersThere 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 dont consume even the alternatives to your offeringsNon-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)Three Tiers of Customers

BOS Logic: The Core PrinciplesReconstruct Market Boundaries overcome believes. Reach beyondexisting Demand go for uncontested space.Get the strategic sequence right value [innovation] first.VIVICOSTVALUE

BOS Logic: Get the Strategic Sequence rightBuyer utilityIs there exceptional buyer utility in your business idea?AdoptionWhat are the adoption hurdles in actualizing your business idea?Are you addressing them up front?PriceIs your price easily accessible to the mass of buyers?CostCan you attain your cost target to profit at your strategic price?A commercially viable Blue Ocean StrategyYESYESYESYESNo RethinkNo RethinkNo RethinkNo Rethink

Four Actions Framework: Key to Value CurveReduceWhat factors should be reduced well below the industry standard?RaiseWhat factors should be raised well above the industry standard?The key to discovering a new value curve lies in answering four basic questions Creating new markets:A new value curveCirque du Soleil example

lowhighIndustry VariablesStrategy Canvas

Four Steps of Visualizing

1. Visual Awakening2. Visual Exploration3. Visual Strategy Fair4. Visual CommunicationCompare your business with your competitors by drawing your as is canvas

See where your strategy needs to changeGo 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 changeDraw 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 strategyDistribute 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

The Case of Cirque du SoleilCirque du Soleil achieved rapid growth in a declining industry with low profit potentialCirque du Soleil created uncontested new market space that made the competition irrelevant http://www.youtube.com/watch?v=M4lAPI5BAuk

Example: Cirque du SoleilInstead of simply trying to outpace the competition, Cirque du Soleil offered people both the fun and thrill of the circus and the intellectual sophistication of the theaterBecause of this, Cirque du Soleil appealed to both circus customers and noncustomers

Example: Cirque du SoleilEach show, like a theater production, had its own unique theme and storylineThis allowed customers to return to the show more frequentlyThey also did away with the traditional high-priced concessions and vendors thereby cutting costs

Example: Cirque du SoleilCirque du Soleil effectively combined the best of both the circus and the theater while eliminating everything elseThis allowed them to achieve both differentiation and low cost

Eliminate-Reduce-Raise-Create

EliminateStar PerformersAnimal showsAisle concession salesMultiple show arenasRaiseUnique venuesReduceFun and humorThrill and dangerCreateThemeRefined environmentMultiple productionsArtistic music and dance

The Strategy Canvas of Cirque du Soleilhioffering levelloPriceFun & HumorUnique VenueAisle ConcessionsMultiple Show ArenasThrills & DangerAnimal ShowsStar Performers Kim & Mauborgne 2006

The Strategy Canvas of Cirque du Soleilhioffering levelloPriceFun & HumorUnique VenueAisle ConcessionsMultiple Show ArenasThrills & DangerAnimal ShowsStar Performers Kim & Mauborgne 2006Ringling BrothersSmaller Regional Circus

The Case of Yellow TailEliminate-Reduce-Raise-Create Grid:Source: Blue Ocean Strategy, Kim and Mauborgne

EliminateEnological terminology and distinctionsAging qualitiesAbove-the-line marketingRaisePrice versus budget winesRetail store involvementReduceWine complexityWine rangeVineyard prestigeCreateEasy drinkingEase of selectionFun and adventure

Source: Blue Ocean Strategy, Kim and Mauborgne

*Value Curve for US Wine Industry vs Yellow TailPriceUse of technical wine terminologyAbove-the-line marketingAging qualityVineyard prestigeWine complexityWine rangeEasy drinkabilityEase of selectionFun and adventureLowHigh

Strategy CanvasFour Actions FrameworkERRC GridSource: Blue Ocean Strategy, Kim and Mauborgne

EliminateEnological terminology and distinctionsAging qualitiesAbove-the-line marketingRaisePrice versus budget winesRetail store involvementReduceWine complexityWine rangeVineyard prestigeCreateEasy drinkingEase of selectionFun and adventure

Cost per room100,000 FF 270,000 FFCost of staff 20-23% of sales vs. 23-25% Profit Margins > 2x industry averageOccupancy rates > 3x industry averageFrom customers perspective:Hygiene> average 2* hotelBed quality> average 2* hotelSilence> average 2* hotelPrice 100 FF 200 FF of industryFrom Formule 1s perspective:Source: HBR: Value Innovation Logic, Kim and MauborgneThe Case of Accor's Formule 1 Budget Hotel

The value curve of Formule 1 in the French Low Budget Hotel IndustryResults of Formule 1s Strategy

LowPriceMealsLoungesSeating Class choicesHub connectivityFriendly serviceSpeedFrequent point- to-point departureHighAverage AirlineSouthwestCar TransportThe Strategy Canvas of Southwest AirlinesThe value curve of Southwest Airline

Strategy Canvas of Personal Finance Software Industryhioffering levelloPriceSpeedAccuracyOptional FeaturesEase of Use Kim & Mauborgne 2006

Exercise1. List Factors of Competition2. Top 2 or 3 in ERRC Grid Quadrants

ExerciseWrite on Worksheet: E left, C rightDraw As IsDraw To Be

Examples

Examples

Examples

References W. Chan Kim, Rene Mauborgne, Blue Ocean Strategy, 2005, Havard Business School Press.

http://www.blueoceanstrategy.com

HANDELSBLATT, Donnerstag, 06. Oktober 2005, Mit Nichtkunden neue Mrkte finden.

http://www.hotelformule1.com

Assignment:Choose 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

**INSEAD = ???W . Chan Kim is The Boston Consulting Group Bruce D. Henderson Chair Professor of Strategy and International Management at INSEAD. He was Professor at the University at Michigan Business School. He has served as a board member as well as and adviser for a number of multinational corporations in Europe, the United States, and Pacific Asia. He has published numerous articles on strategy and managing the multinational.

Rene Maoborgne is the INSEAD distinguished Fellow and a professor of strategy and management at INSEAD in Fontainebleau, France, and Fellow of the World Economic Forum. She has published numerous articles on strategy and the multinational.

The two of them are the winners of the Eldridge Haynes Prize, awarded by the Academy of International Business and the Eldridge Haynes Memorial Trust of Business International, for the best original paper in the field of international business. *To win in the future New Market Space, companies must stop competing with each other.Because the only way to beat the competition is to stop trying to beat the competition.To understand this idea, imagine a market universe composed to two sorts of oceans:-red oceans and-blue oceans.

*****Red oceans represent all the industries in existence today. This is the known market space.Blue oceans denote all the industries not in existence today. This is the unknown market space.

In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here, companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowed, prospects for profits and growth are reduced. Products become commodities, and cutthroat competition turns the red ocean bloody.

Blue Oceans, in contrast, are defined by untapped market space, demand creation, and the opportunity for highly profitable growth. Although some blue oceans are created well beyond existing industry boundaries, most are created from within red oceans by expanding existing industry boundaries. In blue oceans competition is irrelevant because the rules of the game are waiting to be set.

Logic of Blue Ocean Strategy is so called value innovation and is the cornerstone of Blue Ocean StrategyValue innovation places equal emphasis on value and innovation. It is a new way of thinking about and executing strategy that results in the creation of a blue ocean and a break from the competition. Importantly, value innovation defies one of the most commonly accepted dogmas of competition-based strategy: The value-cost trade-off. It is conventionally believed that companies can either create greater value to the customers at higher cost or create reasonable value at a lower cost. Here strategy is seen as making a choice between differentiation and low cost. In contrast , those that seek to create blue oceans pursue differentiation and low cost simultaneously.

Now turn the clock back only thirty years, How many industries of today's industries were then unknown? Mutual funds, cell phones, gas-fired electricity plants, biotechnology, discount retail, snowboards and coffee bars to name a few.

*The reason of the appearance of the Blue Ocean Strategy -is that in increasing numbers of industries, supply exceeds demand.-The trend toward globalization compounds the situation. As trade barriers between nations and regions are dismantled and as information on products and prices becomes instantly and globally available, niche markets and havens for monopoly continue to disappear. -The result has been accelerated commoditization of products and services, increasing price wars, and shrinking profit margins. -And for major product and service categories, brands are generally becoming more similar and as they are becoming more similar people increasingly select based on price.

*****Prof. Shipilov INSEAD*Prof. Shipilov INSEAD**Reconstruct Market BoundariesThe first principle of Blue Ocean Strategy is to 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 key because managers cannot afford betting their strategy on intuition or on a random drawing.

*There are a clear pattern 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.

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. *Reach beyond existing DemandThe second principle of Blue Ocean Strategy. This 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 markets 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.

Prof. Shipilov INSEAD**Get the strategic sequence right This next challenge is to build a robust business model to ensure that you make a healthy profit on your blue ocean idea.

Here you can see again the Logic of Blue Ocean Strategy: The value innovation, the cornerstone of Blue Ocean Strategy. In order to create blue oceans the companies pursue differentiation and low cost simultaneously.

*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.

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.

*********Premium $15 - $20 per bottleBudget - $5 - $7 per bottle****For example we take Formule 1 hotels (part of Groupe Accor), which introduced a pioneering budget hotel concept. The Hotels served previously travelers who wanted something between the one or two-star category. Accor figured out what it could deliver what travelers value most- like easy and speedy check-ins by using a credit card for access, and clean, quiet rooms with bed quality while reducing what they didn't care as much about- like restaurants, decorated lobbies, architecture, room size, reception desk, price and 24 hours reception.

These hotels offered a new, attractive solution for those customers who would otherwise balk at the idea of staying in an economic hotel.

In effect, Formule 1 Hotels created a value curve that was completely different from its competitors. Its costs were slashed and its profit margins were doubled that of the industry average, while occupancy rates were also higher. Creating a new value curve is the key to Value Innovation.

Price average: 15 versus/against 30 the industry price

Cost per room: 15 versus 41 Cost of staff/sales:20.23 % versus 25-35%Occupancy rate: 3 times average

Profit margins: 2 x industry average

Other examples for the success of this strategy are:

EbayCirque du Soleil (by looking across the market boundary of the theater, Cirque du Soleil, also offered new noncircus factors, ech Cirque du Soleil creation has a theme and a story line, somewhat resembling a theater performance. Le Cirque du Soleil also borrows ideas from BroadwaY shows.)SwatchBody ShopIkeaStarbucksRyanair, Easyjet to name a few!!!!

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