Blue Ocearn Strategy 15178 142

8/3/2019 Blue Ocearn Strategy 15178 142

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Blue ocean strategyby W.Chan Kim&Renee Mauborgne

Com 459

Jeff McNeill

Lyn Jang



Value innovation =The value-cost trade off

-the cornerstone of Blue ocean Strategy

-a new way of thinking about and executing strategy that result in the creation ofa Blue ocean and a break from the competition.

-focusing on making the competition irrelevant by creating a leap in value forbuyers and your company, thereby opening up new anduncontested market space

Value innovation’s vies: “the deconstructionist view”

= Breaking the existing values cost trade-off and thereby creating a blue

ocean

When? Only when companies align innovation with ut ility, price, and priceposition

Utility/Cost company offer to buyer

generated value to company

Buyer value

** Cost down while simultaneously driving value up for buyers/

**Blue ocean strategy integrates the range of a firm’s functional and

The Six Principles of Blue ocean strategy

Formulating principles1.Reconstruct Market Boundaries : Create uncontested market space across

diverse industry domain

hence = attenuating search risk

2. Focus on the big picture, not the number:

visualizing approach-drives to focus on the big picture

The existing strategic plan keepscompany locked into making incremental improvements

== minimize Planning risk

3. Reach beyond existing demand= by building on the powerfulcommonalities across to maximize the size of the Blueocean being created & new demand being unlocked

= hence, it will minimizing scale risk

4. Get the strategic sequence right: to ensure that both you &

customer win as you create new business terrain

Sequence of utility, cost ,price, and adoption.

====decrease Business model risk

Execution principles

5. Overcome key organizational hurdles( tipping pointleadership”= it shows manager how to mobilize anorganization to overcome the key organizational hurdles ( the

cognitive, resource, motivational, and political hurdles inlimited time and resources )that block the implementation ofa blue ocean strategy

==== decrease organizational risk

6. Build execution into strategy: motivating people to act on andexecute a blue ocean strategy in a sustained way deep in anORGANIZATION..

**Fair process: facilitates both strategy making and execution bymobilizing people for the voluntary cooperation needed toexecute blue ocean strategy

=====decrease management risk (associating with people’s

attitudes and behaviors)

Blue ocean Strategy

Valueinnovation

Buyer value

Costs

Read oceanstrategy

Blue oceanstrategy

Compete in ex

isting marketspace

Createuncontestedmarket space

Beat thecompetition

Make thecompetitionirrelevant

Exploit existingdemand

Create andcapture newdemand

Make thevalue-costtrade off

Break thevalue-cost -off

Align the wholesystem of firm'sactivities with itsstrategic choice

of differentiationor low cost

Align the wholesystem of afirm’s activities

in pursuit of

differentiationand low cost



methods

• Red ocean versus blue oceanstrategy

• Value innovation:

“The Cornerstone of Blue ocean

Strategy” Red ocean strategy Blue Ocean Strategy



Reading thee value curves

The strategy canvas enables companies to see the future in the present. To achieve this, must understand how to read value curves.

• A blue ocean strategyWhen a company’s value curve- meet the three criteria that define a good blue

ocean strategy-focus, divergence, and a compelling tagline thatspeaks to the market- the company is on the right track

Remember: when..

1.Lacks of focus: cost structure increase, business model complex inimplementation and execution increase

2.lack of divergence : a company’s strategy is a me-too, with no reason to standapart in the marketplace.

3.lack of compelling tagline: a classic example of innovation for innovation’ssake with no great commercial potential , no natural take offcapability.

A Company caught in the red oceanWhen a company’s value curve converges..

- i t signals that a company caught within the red ocean of bloodycompetition

Remember: the signal slow growth unless by the grace of luck

Over delivery without payback

When a company’s value curve on the strategy canvas is shown to deliver highlevel across all factors.

If the company’s market share and profitability reflect these investment,oversupplying it’s customers, offering too much of those elementsthat add incremental value to buyers.

The company must decide which factors to eliminate & reduce toconstruct a divergent value curve

An incoherent strategyIf a company value curve looks like a zigzag with no rhyme or reason==

company doesn’t have a coherent strategy

It makes little distinguish the company from the best competitor

Strategic ContradictionsArea where company is offering a high level on one competing factor

while ignoring others that support factor

* Strategic inconsistencies may lead a company lose marketshare

An internally Driven Company

The kinds of language used in the strategy canvas gives insightas to whether a company’s strategic vision is built on an “

outside-in”perspective, driven by the demand side, or an“inside-out”perspective that is operationally driven.

Help a company understand how far it is from creating industrydemand

Example of the strategy canvas( low cost, high value)

High

LowPrice Need

for customer

Value (convenience,friendliness etc)



From Head-to-Head Competition to Blue ocean

Creation

Head-to-HeadCompetition

Blue OceanCreation

Industry Focuses on rivals withinits industry

Looks acrossalternativeindustry

Strategic group Focuses on competitiveposition

Within strategic group

Looks acrossstrategic groupswithin industry

Buyer Group Focuses on betterserving the buyer group

Redefines theindustry buyergroup

Scope of product orservice offering

Focuses on maximizingthe value of product &service offerings withinthe bounds of itsindustry

Looks across tocomplementaryproduct andservice offerings

Functionalemotionalorientation

Focuses on improvingprice performance

within the functional-emotional orientation ofits industry

Rethinks thefunctional-

emotionalorientation of itsindustry

Time Focuses on adapting toexternal trends as theyoccurs

Participants inshaping externaltrends over time

Ch 3 “Reconstruct Market Boundaries”

Purpose: To break from the completion & Create Blue Ocean

6 basic approach to remaking market boundaries (6 path frame work)

= have general applicability across industry sectors, lead companiesinto the corridor of commerciality viable blue ocean idea

Alternative: include product or service that have different Functions and formsbut the same purpose“buyers implicitly weigh alternatives, often unconsciously” -The space between alternative industries provides opportunities for values innovativeThought questions: whey do corporations choose to use commercial airlineFor their corporate travel? = answer: Cost

-Why do people choose corporate jets over commercial travel?Answer: Corporations buy private jets to dramatically cut total travel time, to reduceThe hassle of congested airports, to allow for point-point travel,To gain the benefit ofhaving more productive and energized executives Who can hit the ground running uponarrival.

In most industries, the fundamental strategic differences among industry players arecaptured by a small member of strategic groups.

•2 dimensions that ranks strategic groups: 1. Price 2. Performance

-Each jump in price tends to bring a corresponding jump in some dimensions ofperformance.most companies focus on improving their competitive position within astrategic group **The key to creating a blue ocean across existing strategic group

== To break out of narrow tunnel vision by understanding which factors determinecustomer’s decisions to trade up or down from one group to another

“Buyers”- who are directly or indirectly involved in the buying decision

-Industry typically converges on a single buyer group, there is a STRONG economicrationale for this focus

- Challenging an industry’s conventional wisdom about which buyer group to

target can led to the discovery of new blue ocean.

--what we get by looking across buyer groups? : gain new insights into how to redesigntheir value curves to focus on a previously overlooked set of buyers

In most cases, other products and services affect their value

How can we find untapped value which is hidden in complementary products?

-To think about what happens before, during, and after your product is used-to think in terms of solving the major pain points in customers total solution.

Competition in an industry tends to converge not only on an accepted notion of thescope of its products and services but also on one of two possible based ofappeal

1)Rational: functionally oriented: Infuse commodity products with new life by adding adose of emotion and in so doing , can Stimulate new demand

2) emotional: emotionally oriented: offer many extras that add price withoutenhancing functionality, may create a fundamentally simper, lower-priced,lower-cost business model that customers would welcome.

When companies are willing to challenge the functional -emotional orientation of theirindustry, they often find new market space

Key insight into Blue ocean strategy: arise from business insights into how the trend willchange value to customers and impact the company’s business mode. By looking

across time- from the value a market delivers today to the value it might deliver

tomorrow- managers an actively shape their future and lay claim to a new blue ocean.l3 principles to access trends across time: 1) be decisive to business 2) be irreversible 3)have a clear trajectory



The four actions frame work : To reconstruct buyer value elements in crafting a new value curve

Apply the four actions frame work to the strategy canvas of your industry= get a revealingnew look at old perceived truths

A new value curve

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

:eliminating factors that companies in your industry have long competed on

As buyers values are changing, companies should be change and act.

CreateWhich factors should be created that the industry

has never offered?To determine whether products or services

have been over designed in the race to match and beatthe competition.

** Companies over serve customers, increasing their

Cost structure for no gain

EliminateWhich of the factors that

The industry takes for granted shouldBe eliminated?

= To uncover and eliminate the compromises yourindustry forces customers to make

Raise Which factors should Be raised will Above the industry’s standard?

= To helps you to discover entirely new sources of value for buyersAnd to create new demand and shift the strategic pricing of the industry Provide you with insight into how to lift buyer

Value and create new demand.Also explore how you can reconstruct

Buyer value elements across alternativeIndustries to offer buyers an entirely

New experience while simultaneously keepingYour cost structure low

Push companies to go beyond value

maximization exercises with existing factorsOf competition. Also prompt

Companies to change the factors

Themselves, hence makingThe existing rules of competition

irrelevant



Elimnate-Reduce-Raise-Create Grid

a third tool, key to creation of blue oceans/ asupplementary analytic to the four actions frame work

how does it work?Push to ask all 4 questions in the four actions framework &

act on all four

gives companies four immediate benefits

1. Push them to pursue differentiation and low costs tobreak the value-cost trade-off

2.it immediately flags companies that are focused only onraising and creating and thereby lifting their cost structure

and often over engineering products and services-a common plight in many companies.

3. It is easily understood by managers at any level, creatinga high level of engagement in its application

4. Drives companies to robustly scrutinize every factor theindustry competes on, making them discover the range ofimplicit assumptions they make unconsciously in

competing.

Eliminate Raise

Reduce Create

Form of Grid

The four actions Framework

A new valueCurve



Ch. 4 Focus on the big picture, not the number1.VisualAwakening

2. Visualexploration

3. Visualstrategy fair

4. Visualcommunication

-Compare yourbusiness withyour

competitor's bydrawing your“as is” strategy

canvas

- See whereyour strategyneeds tochange

-go into the fieldto explore the sixpaths to creating

blue oceans

-observe thedistinctiveadvantages ofalternativeproducts andservices.

-see whichfactors youshould eliminate,create, orchange.

-draw your “to

be” strategy

canvas based

on insights fromfieldobservations

-Get feedbackon alternativestrategycanvases fromcustomers,competitors’

customers, andnoncustomers.

-Use feedbackto build the best“to be “ future

strategy.

Distribute yourbefore-and -after

Strategic profileson one pate foreasycomparison.

-Support onlythose projectsand operationalmoves that allowyour company toclose the gapsto actualize thenew strategy

Draw the value curveof company’s

strategybrings home the need

for Change

It serves as a forcefulwake-up call forcompanies to challenge

theirexisting strategies

-As comparing picture,- find lacking factors

To send a team into the field, putting manager face-to-face withthat they must make sense of : how people use or don’t use their products or service

*A company should never outsource its eyes- no substitute for seeing for yourself-Great strategic insights are less the product of genius than of getting into the

Filed and challenging the boundaries of competition.

Learn that buyers from all markets have a basic of set of needs andexpected similar services/ able to complete their mission

(* able to draw a value curve that is a truer likeness of the existingstrategic profile than anything We produce earlier.)

The last step to communicateIt in a way that can be

Easily understoodBy any employee.

-able to move from the oldTo the new value curve give

The go-ahead



A pioneer-migrator-settler(PMS)map:A useful exercise for a corporate management team pursuing profitable growth to plot the

company’s current and planned portfolio

pioneers

Migrators

Settlers

Today Tomorrow

The only ones with a mass following of customers

**have Maximum growth potential but oftenconsume cash at the outset as they grow andexpand

Business offerings better than most in the marketplace

*lot of migrators= reasonable growth can be expected.However, it risks being marginalized by a company thatvalue -innovates

Me-too Businesses

*the more an industry ispopulated by settlers, the greateris the opportunity to value-innovate and create a blue oceanof new market space.

- will not generally contributemuch to a company’s future

growth, they will be stuck withinthe red ocean The Key point :To manage their portfolio of businesses to wisely balance between profitable growth and cash flow at a

give point in time



1.Visual Awakening 2. Visual exploration 3. Visual strategy fair 4. Visualcommunication

The 4 steps of Visualizing strategy

Today tomorrow

pioneers

Migrators

Settlers



Ch. 5 The three tiers of Noncustomers

Third TierSecond TierFirst Tier

Your Market

“Unexplored” noncustomers who are in markets

Distant from yours

**people who have never thought of your market’s offerings as

an option. By focusing on key commonalities across thesenoncustomers and existing customers, companies can

understand how to pull them into their new market

*unexplored noncustomers

-have not been targeted or thought of as potential customers byany player in the industry. That’s because their needs and the

business opportunities associated with them have somehowalways been assumed to belong to toher markets.

“Refusing” noncustomers who consciously choose against your

market•People who refuse to use your industry’s offerings./ buyers who have

seen your industry’s offerings as an option to fulfill their needs but have

voted against them

•Second-Tier Noncustomers

-either do not use or cannot afford to use the current market offeringsbecause they find the offerings unacceptable or beyond their means.

Their needs are either dealt with by other means or ignored

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

* Buyers who minimally purchase an industry’s offering out of

necessity but are mentally noncustomers of the industry. They arewaiting to jump ship leave the industry as soon as the opportunitypresents itself



The Three Tiers of Noncustomers



Buyer utility

Is there exceptional buyer utility in your

Business idea?

Price

Is your price easily accessible to the massof buyers?

Cost

Can you attain your cost target to profit atyour strategic price?

Adoption

What are the adoption hurdles in actualizing yourbusiness idea?

Are you addressing them up front?

A commercially viable blue ocean idea

yes

yes

yes

No- Rethink

No-Rethink

No-Rethink

No-Rethink

The Sequence of Blue Ocean Strategy

First two steps

- address the revenue side of a company’s

business model./ Ensure that you create a leapin net buyer value, where net buyer valueequals the utility buyers receive minus the price

they pay for it

Ensures the tit creates a leap in value for itself inthe form of profit that is, the price of the offering

minus the cost of production. It is the combinationof exceptional utility, strategic pricing, and targetcosting that allows companies to achieve valueinnovation- a leap in value for both buyers andcompanies

Last step: to address adoption hurdles

** the formulation of blue ocean strategy iscomplete only when you can address

adoption hurdles in the beginning toensure the successful actualization of youridea

* It includes potential resistance to theidea by retailers or partners. Becauseblue ocean strategies represent asignificant departure from red oceans,it is key to address adoption hurdlesup front



Buyer utility

Price

Cost

Adoption

The Sequence of Blue Ocean Strategy



The Buyer Utility Map

Customerproductivity

1.Purchase

2.delivery

3. Use 4.

supplements

5.Maintenance

6.Disposal

simplicity

Convenience

Risk

Fun and

image

EnvironmentalFriendliness

Help managers look at issue from the right perspective-outlines all the levers companies can pull to deliver exceptionalutility to buyers as well as the various experiences buyers can

Have with a product or service.-allows managers to identify the full range of utility spaces that

A product or service can potentially fill

Purchase

Delivery Use supplements

5.Maintenance


Customer productivity: in which stage are the biggest blocks to customer

productivity?

Customer productivity: in which stage are the biggest blocks to customerproductivity?

Convenience: in which stage are the biggest blocks to convenience?

Risk: in which stage are the biggest blocks to reducing risks?

Fun and Image: in which stage are the biggest blocks to fun and image?

Environmental friendliness:in which stage are the biggest blocks toenvironmental friendliness?

Uncovering the Blocks to buyer Utility

-To test for exceptional utility, companies should checkwhether their offering has removed the greatest blocks to utility across

The entire buyer experience cycle for customers and noncustomers

**this figure shows how a company can identify the most compelling hotSpots to unlock exceptional utility.By locating your propositionOffering on the thirty -six spaces of the buyer utility map,You can clearly see how , and whether, the new idea not only creates adifferentUtility proposition from existing offeringsBut also removes the biggest blocks to utilityThat stand in the way of converting noncustomers intoCustomers.



Customerproductivity

1.Purchase

2.delivery 3. Use 4.

supplements

5.

Maintenance

6.Disposal

simplicity

Convenience

Risk

Fun andimage


The Buyer Utility Map Uncovering the Blocks to buyer Utility

Purchase

Delivery Use supplements

5.Maintenance




The price Corridor of the mass

Step1: identify the priceCorridor of the mass

Three alternative product/ service types:

Same form different form differentform andfunctions,same objective

Price corridor of the mass

Upper-level pricing

Mid-level pricing

Lower-level pricing

High degree of legal and

Resource protection

Difficult to imitate

Some degree of legal and resourceprotection

Low degree of legal and

Resource protection

Easy to imitate

Step 2. Specify a price levelWithin the price corridor.

The main challenge: to understand the price sensitivitiesof those people who will be comparing the new productor service with a host of very different-looking product orservice with a host of very different looking products andservices offered outside the group of traditionalcompetitors

Create blue oceans thathave same core utility asthe new one but takes avery different physicalform

Listing the groups of alternative productsand services allows managers to see thefull range of buyers they can poach fromother industries as well as fromnonindustries* This approach provides astraightforward way to identify where themass of target buyers is what pricesthese buyers are prepared to pay for the

products and services they currently use.

It helps managers determine how high a price they can afford to setwithin the corridor without inviting competition from imitationproducts or services.* 2 principle factors: 1) the degree to which the product or service isprotected legally through patents or copyrights

2) The degree to whichthe company owns someexclusive asset or corecapability such as anexpensive productionplant, that can block

imitation

Companies with uncertainpatent and asset protectionshould consider pricingsomewhere in the middle ofthe corridor

When to pursue mid-to lower 1)Their blue ocean offering has high

fixed costs and marginalvariable cost

2)their attractiveness depends heavilyon network externalities

3) Their cost structure benefits fromsteep economies of scaleand scope. In these cases,volume brings with itsignificant cost advantages,something that makes pricing

for volume even more key



Price corridor of the mass

The price Corridor of the mass

Step1: identify the priceCorridor of the mass

Three alternative product/ service types:

Step 2. Specify a price levelWithin the price corridor.

Upper-level pricing

Mid-levelpricing

Lower-level pricing

Same different form, different formForm same function and function

same objective



The Strategic Price

The target cost

Pricing innovation

The target profit

Streamlining andCost innovations Partnering

The profit Model of Blue Ocean Strategy

It shows how value innovation typicallymaximizes profit by using the foregoingthree levers

The Company

Start withDeduct

Supports profit

When the target cost cannot be metdespite all efforts to build a lost-costbusiness model, the company shouldturn to the third lever, pricinginnovation, to profitably meet thestrategic price.

If a company's offering successfully addresses the profit side of the business model, Ready toadvance to the final step in the sequence of blue ocean strategy.

The profit Model of Blue Ocean Strategy

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