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Blue Ocean Strategy

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Blue Ocean

on 2 April 2015

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Transcript of Blue Ocean Strategy

Your Market
First Tier
Second Tier
"Soon-to-be" noncustomers who minimally use the current market offerings to get by as they search for something better.
"Refusing" noncustomers who consciously choose against your market.
"Unexplored" noncustomers who are in markets distant from yours.
Blue Ocean Strategy
Blue Ocean Strategy
Part I: Blue Ocean Strategy

Part II: Formulating Blue Ocean Strategy

Part III: Executing Blue Ocean Strategy

Chapter 1:
Creating Blue Oceans

Value Innovation
What is "value innovation"?
• New part of strategy
• Creation of leap in value
• New uncontested market space
• Makes competition irrelevant
• Consists of two part: value and innovation
• Resists value-cost trade-off

How is "value innovation" created?
Cost savings in factors that the industry competes on
Adding buyer value through raising and creating elements that have not yet been offered in the industry
Value innovation = - Cost + Buyer Value

Value Innovation
• Make the value-cost trade-off
• Choice of
differentiation OR low cost

Red Oceans
• Create and capture new demand
• Break the value-cost trade-off
• Differentiation AND low cost

• Cornerstone of the Blue Ocean Strategy
• Basis for formulating and executing the Blue Ocean Strategy

Blue Oceans
Cirque du Soleil
Cirque de Soleil-Guy Laliberte
1984 street performers
Continuing Creation of Blue Oceans
Are blue oceans innovative?

Industry Classifications
Standard Industrial Classification (SIC) system
North American Industry Classification (NAICS) system

From Company and Industry to Strategic Move

How can a company break out of the red ocean of bloody competition?
How can it create a blue ocean?
Is there a systematic approach to achieve this and thereby sustain high performance?
Are there lasting “excellent” or “visionary” companies that continuously outperform the market and repeated create blue oceans?

New Market Space
The Rising Imperative of Creating Blue Oceans
• Increasing technology
• Globalization factors
o Trade barriers
• Increase in the commoditization of products
• Decrease in brand loyalty, brand differentiation

Chapter 5: Reaching Beyond Existing Demands
The Three Tiers of Noncustomers
Third Tier
Part One:
Blue Ocean Strategy

Chapter 4: Focus on the Big Picture, Not the Numbers
Part 3:
Blue Ocean Strategy

Part Two:
Formulating Blue Ocean Strategy

Chapter 7: Overcome Key Organizational Hurdles
Chapter 6:
Get the Strategic Sequence Right
Chapter 3: Reconstruct Market Boundaries
Mariam Shamside-Deen, Sarah Ritter
Chapter 4: Focus on the Big Picture, Not the Numbers
Annie Buttermore
Chapter 5: Reach Beyond Existing Demands
Alexa Arndt
Chapter 6: Get the Strategic Sequence Right
Callie Boelter

Chapter 8: Build Execution Into Strategy
Chapter 9: Conclusion: The Sustainability and Renewal of Blue Ocean Strategy
Testing for Exceptional Utility
Chapter 2:
Analytical Tools & Frameworks

Four Hurdles
Chapter 1: Creating Blue Oceans
Brie Brose and Magdalena Schürmann

Chapter 2: Analytical Tools and Frameworks
Kaitlin Groeneweg and Liz May
Focusing on the Big Picture
Tipping Point Leadership in Action
The Pivotal Lever: Disproportionate Influence Factors
Break Through the Cognitive Hurdle
Jump the Resource Hurdle
Jump the Motivational Hurdle
Knock Over the Political Hurdle
Draw a strategy canvas:
Challenging Conventional Wisdom
The Right Strategic Sequence
1. Shows the strategic profile of an industry by depicting very clearly the factors that affect competition among industry players
Poor Process Can Ruin Strategy Execution
Example of Poor Process...
Lubber: Global leader in supplying water-based coolants for metalworking industries
developed expert system to cut failure rate of coolants to >10%
Why did it fail?
sales force fought system
not engaged in process
not told rationale of strategic shift
saw system as a direct threat to their value contribution
Why would it benefit them?
removes hassle-filled part of their job
more time for sales
more contracts for standing out in the industry
The Power of Fair Process
create buy-in up front
Strategic formulation process
fair Process
expectation clarity
feeling that opinions count
voluntary cooperation
go beyond the call of duty
Strategy execution
exceed expectations
2. Shows the strategic profile of current and potential competitors, identifying which factors they invest in strategically.
The Three E Principles of Fair Process
involving individuals in strategic decisions
ask for input (communicates respect)
encourage refutation (better collective wisdom)
everyone should understand final decisions
show consideration of option in decision
best decision for company (feedback loop)
Expectation Clarity
state clearly the rules of the game
clear understanding of expectations is more important than goals and expectations

Strategy Canvas
A Tale of Two Plants
Example of E Principles... Elco
Chester Plant
decertified their own union
High Park Plant
reputation for resistance

Failed to engage employees
Consulting firm hovered over employees
Failed to explain to employees
suspicion of downsizing the plant
suspicion of hidden agenda
Failed in expectation clarity
refused to work in stations
became angry at each other
could not trust manager

High Park...
Used the E principles
held plant=wide meetings
talked about observations of plant
included employees in decision and conversation
talked about changes in expectations
established team's new responsibilities

Why Does Fair Process Matter?
Emotional Recognition
people want to be valued as human being, not as a number (labor/personnel) and regardless of hierarchical level
Intellectual recognition
people want their ideas considered, and they want decisions explained to them
Intellectual and Emotional Recognition Theory
With it...
willing to share knowledge, active ideas
voluntary efforts to cooperate with organization

Without it...
hoard their best thinking/creative ideas
reject others ideas/intellectual worth
drag their feet/won't invest energy
apply counter efforts including sabotage
3. Shows the company's strategic profile- or value curve - depicting how it invests in the factors of competition and how it might invest in them in the future
Fair Process and Blue Ocean Strategy
heightened confidence in each other's ideas
override personal interest in the interests of the company

"Companies cannot create a blue ocean environment by separating strategic formulation from execution; instead, they must use fair process."

Barriers to Imitation
Chapter 3
Reconstruct Market Boundaries
Drawing your Strategy Canvas:
When to Value-Innovate Again
1. Visual awakening
2. Visual exploration
3. Visual strategy fair
4. Visual communication
The Four Actions Framework
Visualizing strategy at the Corporate Level
Using the strategy canvas
Using the pioneer-migrator-settler (PMS) map
Overcoming the limitations of strategic planning
Path 5: Look Across Functional or  Emotional Appeal to Buyers
Path 6: Look Across Time
Conceiving New Market Space
"Effective blue ocean strategy should be about risk minimization and not risk taking." - pg. 22?
Diagnostic and action framework
Two Purposes:
Captures the current state of play in the known market space
Finds the factors the industry competes on
Allows for redefinition of the industry and the problems facing it

U.S. Wine Industry
Third largest aggregate consumption of wine in the world
California and other domestic wines compete directly with imports
Consumer base has remained stagnant
31st Place in world for per capita wine consumption
Top 8 companies produced more than 75% of wine, remaining 1,600 companies produced remaining 25%
The Strategy Canvas of the U.S. Wine Industry in the Late 1990's
These seven factors were viewed as key to wine promotion
The vertical axis captures the offering level for buyers
Value Curve can be found for any company or industry
"To fundamentally shift the strategy canvas of an industry, you must begin by reorienting your strategic focus from competitors to alternatives, and from customers to nonconsumers in the industry."
Casella Wines
Australian Winery who redefined the problem

Made a fun & nontraditional wine that was easy to drink

[yellow tail] brand
Entered U.S. Market in 2000
by 2003 had #1 750-ml bottle red wine
No promotional campaign, mass media, or advertising
Look Across Alternative Industries
Substitutes vs. Alternatives
: products or services that have different forms but offer the same functionality (i.e. picking one movie or theater over another)
: products or services that have different functions/forms but serve the same purpose (i.e. restaurant vs. movie)
Why Alternatives?
NetJets - looking across commercial flights
pros and private jet pros.
Look Across Strategic Groups Within Industries
What is a strategic group?
Group of companies within an industry that pursue a similar strategy
Luxury vs Economic cars
Looking Within vs. Across strategic groups
built on the advantages of 2 strategic groups: traditional health clubs and home exercise programs
Look Across the Chain of Buyers
Chain of buyers
Purchasers: those who pay for the product or service
Users: those who actually use the product
Different industries put more focus on different inks of the chain.
Novo Nordisk & insulin production
shifted focus from doctors (influencers) to patients (users)
Path 4: Look Across Complementary Product and Service Offerings
Products and services affect the value
Movie Theaters - ease and cost of getting a babysitter and parking perceives the value of going
"Define the total solution buyers seek when they choose a product or service"
Think what happens before, during, and after your product is used:
The Six Stages of the Buyer Experience Cycle
From Exceptional Utility to Strategic Pricing
Step 1: Identify the Price Corridor of the Mass
Step 2: Specify a level Within the Price Corridor
From Strategic Pricing to Target Costing
From Utility, Price, and Cost to Adoption
Business Partners
The General Public
Eliminate-Reduce-Raise-Create Grid
Three Characteristics of a Good Strategy
A good blue ocean strategy will:
1. be tightly focused
2. diverge from the strategies by other industry players
3. be easy to communicate
Reading the Value Curves
The value curve displays strategic knowledge on the current and future status of an industry
Next time...
Part II: Creating Blue Ocean Strategy
Chapter 3: Reconstruct Market Boundaries
Chapter 4: Focus on the Big Picture, Not the Numbers
Chapter 5: Reach Beyond Existing Demands
Chapter 6: Get the Strategic Sequence Right

Last time...

Chapter 1: Creating Blue Oceans

Chapter 2: Analytical Tools and Frameworks
-Philips' CD-i

"Unless the technology makes buyers' lives dramatically simpler, more convenient, more productive, less risky, or more fun and fashionable, it will not attract the masses no matter how many awards it wins.
To achieve this...
Companies should challenge two conventional strategy practices.

1. The focus on existing customers

2. The drive for finer segmentation to accommodate buyer differences
Third principle of Blue Ocean Strategy
Goal: maximize the size of the blue ocean you are creating
Key tips:
1. Think noncustomers before customers

2. Commonalities before differences

3. Desegmentation before pursuing finer segmentation
Callaway Golf
Looked to noncustomers...
Asked why sports enthusiasts and others had not taken up golf.
Found one key commonality uniting noncustomers: the hand-eye coordination demand of golf.
Able to convert noncustomers into customers and please existing customers (less frustration).
Best seller!
Pret A Manger
Before Pret, professionals in European city centers frequented sit-down restaurants for lunch.

Lack of healthy options, time, and the cost caused this to change.

Professionals were increasingly grabbing something on the run. They wanted fast, fresh and healthy, reasonably priced lunch options.
Average price: $4-$6
Average line-leave time: 90 seconds
Before 1964, the outdoor advertising industry included billboards and transport advertising.
"street furniture"
JCDecaux provided street furniture, including maintenance and upkeep, free to municipalities.

Campaigns could now be rolled out in two to three days, as opposed to fifteen days for traditional billboard campaigns.

Street furniture became the highest-growth market in the overall display advertising industry.

Joint Strike Fighter (JSF) Program
Challenged the differences between the Navy, Marines, and Air Force when it came to their conceptions of the ideal fighter plane.
Looked at all three branches as potentially unexplored noncustomers.
Realized that the two highest-cost components of the three branches' aircraft were the same: avionics (software) and engines.
JSF's aim was to build one aircraft for all three divisions by combining the key factors that each one desired at a lower cost.
Support from all 3 branches!
In 2001, Lockheed Martin was awarded the massive $200 billion JSF contract.
Which tier do I go for?
Focus on the tier that represents the biggest catchment at the time.
"It is not enough to maximize the size of the blue ocean you are creating. You must profit from it to create a sustainable win-win outcome" p. 115
"Ensures that buyers not only will want to buy you offering but also have a compelling ability to pay for it."
Important to know from the start what price will quickly capture the mass of target buyers.
Companies are discovering that volume generates higher returns than it used to
The value of a product or service may be closely tied to the total number of people using it.

Different form, same function

Different form and function, same objective
Helps managers determine how high a price they can afford to set within the corridor without inviting competition from imitation products or services.
To maximize the profit potential of a blue ocean idea.
Strategic price- desired profit margin to arrive at the target cost.
To hit cost targets
1. Streamlining Operations: Can raw materials be replaced by less expensive one?
2. Partnering- provides a way for companies to secure needed capabilities fast and efficiently while dropping their cost structure.
3. Changing the price model of the industry.
-Blockbuster: renting instead of buying.
-Failure to address the concerns of employees about the impact of a new business idea on their livelihoods can be expensive.
-Communication with employees and know they are aware of the threats posed by the execution of the idea.

-Revenue streams and market positions are threatened by a new business idea.

- Threatening established social or political norms.
Next time...
Part III: Executing Blue Ocean Strategy
Chapter 7: Overcome Key Organizational Hurdles
Chapter 8: Build Execution into Strategy
Chapter 9: Conclusion: The Sustainability and Renewal of Blue Ocean Strategy
French outdoor advertising vendor
There is one of two possible bases of appeal
-Functional: the price and function on calculations of utility-Rational appeal
-Emotional: largely on feelings-Emotional appeal

They both unconsciously educate/train consumers on what to expect into a reinforcing cycle by a companies behavior
-Market research rarely reveals new insights on what attracts customers
When companies are willing to challenge the functional – emotional orientation of their industry they find New Market Space
-Emotionally oriented industries: many extras that add price without enhancing functionality
-Creates a fundamentally simpler lower priced, lower-cost business model that customer would welcome
-Functionally oriented industries: infuse commodity products with new life by adding emotion to stimulate new demand

“All industries are subject to external trends that affect their business over time”
Ex: Rise of the internet or global movement toward protecting the environment

- In some ways companies pace their own actions to keep trends they’re tracking
- BUT insights into blue ocean strategy rarely come from projecting the trend itself
- Instead they arise from business insights into how the trend will change value to customers and impact the company’s business model
“From the value a market delivers today to the value it might deliver tomorrow”
-Managers can actively shape their future and lay claim to a new blue ocean
-Not predicting the future but rather finding insight in trends that are observable today

3 Principles to Assessing Trends Across Time
1) Trends must be decisive to your business
2) Must be irreversible
3) Must have a clear trajectory
Ex: Technology, a rise of a new lifestyle, or change in regulatory or social environments

How to make convention-altering, strategic moves that reconstruct established market boundaries and create blue oceans.
-Not all about what comes to mind or intuition but to engage in a structured process of reordering market realities in a fundamentally new way- using existing market elements across industry and market boundaries
"Once a company creates a blue ocean and its powerful consequences are known, sooner or later imitators appear on the horizon (p. 185)."

QUESTION: How soon or late will they come? How easy or difficult is blue ocean strategy to imitate?
When should a company reach out to create another blue ocean?
Blue ocean may conflict with other companies brand image.
Natural monopoly: The market cannot support a second player.
Patents or legal permits block imitation.
High volume leads to rapid cost advantage for the value innovator, discouraging followers from entering the market.
-Network externalities discourage imitation.

Imitation often requires significant political, operational, and cultural changes.
Companies that value-innovate earn brand buzz and a loyal customer following that tends to shun imitators.
More often then not, a blue ocean strategy will go without credible challenges for ten to fifteen years.
This sustainability can be traced to these imitation barriers:
Monitor curve valves
avoid the trap of competing
signals when and when not to value innovate
alerts you to reach out to another blue ocean
keeps you from pursuing another blue ocean
Do not value innovate if:
value curve still has focus
there is divergence
company has compelling tagline

Value innovate if:
rivalry intensifies
supply exceeds demand
bloody competition turns the ocean red
"You should swim as far as possible in the blue ocean, making yourself a moving target, distancing yourself from your early imitators, and discouraging them in the process."

companies should go beyond competing for share to creating blue oceans
blue and red oceans have always coexisted, but successful companies master the strategies for both
companies understand how to compete in red oceans, but they need to learn how to make the competition irrelevant
In Blue Ocean You Have Learned...
Part I: Blue Ocean Strategy
Chapter 1: Creating Blue Oceans
Chapter 2: Analytical Tools and Frameworks
Part II: Creating Blue Ocean Strategy
Chapter 3: Reconstruct Market Boundaries
Chapter 4: Focus on the Big Picture, Not the Numbers
Chapter 5: Reach Beyond Existing Demands
Chapter 6: Get the Strategic Sequence Right
Part III: Executing Blue Ocean Strategy
Chapter 7: Overcome Key Organizational Hurdles
Chapter 8: Build Execution into Strategy
Chapter 9: Conclusion: The Sustainability and Renewal of Blue Ocean Strategy
Last Time...
Part II: Creating Blue Ocean Strategy
Chapter 3: Reconstruct Market Boundaries
Chapter 4: Focus on the Big Picture, Not the Numbers
Chapter 5: Reach Beyond Existing Demands
Chapter 6: Get the Strategic Sequence Right
A Company is Everyone
align around strategy to support it
heart and mind
voluntary cooperation to carry it out
create a culture of trust and commitment
step out of comfort zone to change
Companies must...
build execution strategies from the start
minimizes risk of distrust, noncooperation, and sabotage
- Waking employees up to the need for a strategic shift
Limited Resources
- Greater strategy shift = greater need for resources
- Get key players to move fast and tenaciously to carry out a break from the status quo
- "In our organization, you get shot down before you stand up"
Bill Bratton - NYPD
1. Organization wedded to status quo
2. Opposition from powerful vested interests
3. Unmotivated staff
4. Limited Resources
Changes happen quickly when when the beliefs and energies of a critical mass of people create and epidemic movement toward an idea.
Concentration - not diffusion.
How can your small business use the theory of disproportionate influence factors?
Relying on numbers as the case for change makes it feel abstract
Make people see and feel the harsh reality firsthand
Mindset changes are then internally driven of people's own accord.
Example: Bratton makes transit police ride the "electric sewer" and meet with disgruntled customers.
Give an example of a time in your life where "seeing was believing."
Multiply the value of the resources you have
Hot spots - police officers on most dangerous subway routes
Cold spots - processing criminals in court/ roving bust buses
Horse trading - office space for patrol cars
In your job, internship, or small business project, what actions consume your greatest resources but have the least performance impact?
Three factors of disproportionate influence:
- natural leaders, persuasive, well-respected (26 precinct heads)
Fishbowl management
- make the actions of kingpins transparent (biweekly meetings to analyze each precinct)
- make bold, overarching strategies seem attainable by breaking it into "atoms" that employees can relate to (block by block, precinct by precinct, borough by borough)

Three disproportionate influence factors:
Leverage angels - those who have the most to gain from a strategic shift. Build a coalition to avoid an all-out war.
Silence devils - those who have the most to lose from a strategic shift. Know their angles of attack and prepare counterarguments
Get a consigliere on the top management team - highly respected insider who knows in advance all the land mines
Don't focus on converting the masses - which requires steep resources and long time frames.
Focus on the extremes - people, acts, and activities that exercise a disproportionate influence on performance
Not every challenge requires proportionate action!
What types of people in your organization can you leverage when instituting a change?
Value innovation move does not make sense based on conventional strategic logic
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