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Blue Ocean Strategy BUSI 7980/7986 Fall, 2008. How can you grow in an unattractive market? How can you grow in an unattractive market? In today’s fast-pace.

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Presentation on theme: "Blue Ocean Strategy BUSI 7980/7986 Fall, 2008. How can you grow in an unattractive market? How can you grow in an unattractive market? In today’s fast-pace."— Presentation transcript:

1 Blue Ocean Strategy BUSI 7980/7986 Fall, 2008

2 How can you grow in an unattractive market? How can you grow in an unattractive market? In today’s fast-pace world, where do you find growth opportunities?

3 Cirque du Soleil Cirque du Soleil Sprung out of a declining industry Other forms of entertainment seemed much more appealing than the circus Traditional entertainment had turned to computer games Animal rights groups were rebelling

4 Cirque du Soleil Created a new market space The competition was no longer relevant The appeal was contrary to tradition Cirque du Soleil entered a new frontier

5 What is a Blue Ocean Strategy? Characteristics the “the new frontier” Traditional strategic efforts probably won’t work Untapped market space Competition is irrelevant The realization that to win in the future must stop trying to beat the competition Rules of the game are waiting to be set Another very simple example: Leggs egg

6 What is a Red Ocean? The traditional market place Must always swim successfully by out- competing rivals Red oceans will always exist…they are a part of business life Most businesses won’t look outside of the red oceans because of the risk involved

7 What is a Blue Ocean Strategy? Characteristics the “the new frontier” Traditional strategic efforts probably won’t work Untapped market space Competition is irrelevant The realization that to win in the future must stop trying to beat the competition Rules of the game are waiting to be set Another very simple example: Leggs egg

8 What is a Red Ocean? The traditional market place Must always swim successfully by out- competing rivals Red oceans will always exist…they are a part of business life Most businesses won’t look outside of the red oceans because of the risk involved

9 Red verses Blue Compete in existing market Beat the competition Exploit existing demand Make the value-cost trade off Choose between differentiation and low cost Create uncontested market space Make competition irrelevant Create and capture new demand Break the value-cost trade-off Pursue differentiation and low cost

10 Blue oceans are not new No industry stands still Change inspires blue oceans Focusing on a red ocean is like war Limited terrain and the need to beat the enemy to succeed

11 New business launches Most are expansions in present businesses—86% Most of the profitability existed in the businesses aimed at blue oceans

12 Why do we need blue oceans? Technological changes have flattened the playing field—quality and efficiency are not an advantage Supply exceeds demand Globalization has compounded the problem Business environment of the past no longer exists Some successes of past were actually changes in industry rather than one company (eg. HP)

13 Value Innovation: the Cornerstone of Blue Ocean VI means making the competition irrelevant—leaping into value for customers Equal emphasis on value and innovation Innovation without value is usually technology driven Value without innovation is generally incremental and not sufficient to stand alone in the market

14 Value innovation Defies the value-cost trade off Red oceans make a choice between differentiation and low cost Blue oceans pursue simultaneously Look at Cirque du Solei….completely broke from tradition and looked at a different market and the addition of sophistication (theatre aspect)

15 Cirque du Soleil Eliminated costly elements– eliminated factors an industry competes on Lifted the price point Added an entertainment aspect

16 Blue Ocean Drive costs down while simultaneously driving value up Looks at the whole system of a company Market boundaries and industry structures are not a given—they can be reconstructed by actions of industry players

17 Key issues of Blue Ocean Reconstruct market boundaries Focus on the big picture—not merely numbers Look past existing demand Don’t be bogged down by organizational hurdles Include execution in your strategy

18 Analytical tools Traditional strategy uses five forces and generic strategies Comfort in “tools” Blue ocean suggests entrepreneurial behavior and risk reduction

19 The Strategy Canvas Looks at the state of the known market place Where the competition is investing What they are competing on in products, services and deliveries What customers receive from the competitive offerings

20 The value curve A graphic depiction of a company’s relative performance across its industry’s factors of competition plotting all together shows the makeup of the industry To fundamentally shift the strategy canvas Reorient from competitors to alternatives From customers to non-customers

21 Four Actions Framework: to create new value curve Which factors should be reduced well below the industry’s standards? Which factors that the industry takes for granted should be eliminated? Which factors should be created that the industry has never offered? Which factors should be raised well above the industry’s standard?

22 Which factors should be reduced well below the industry’s standards? Which factors should be reduced well below the industry’s standards? Eliminate factors that companies in the industry have always competed on Sometimes there is a fundamental change in buyer preference but companies benchmarking each other may never perceive 1960s and 1970s US auto industry

23 Which factors that the industry takes for granted should be eliminated? Have some of the products been overdesigned in the race to meet or exceed competition Perhaps $$$ spent in advertising that were unnecessary Over serving can increase cost structure

24 Strategy canvas What do you see as the strategy canvas in the American beer industry? Now, look at the strategy canvas on page 32 of Yellow tail wine. Compare this to the strategy canvas for the wine industry on page 26. How did Sam Adams step outside the box? What would the strategy canvas be for Sam Adams?

25 Grid Eliminate-reduce-raise-create grid Can be used to force companies to put on paper how they will act on the four questions in the four action framework

26 Characteristics of a Good Strategy Focus Divergence Compelling tagline

27 Focus-Divergence-Compelling Tagline Focus: What is the emphasis of the company? Don’t have to focus on everything. Southwest Airlines: frequency, service and speed as opposed to lounges, meals, seating classes etc. Divergence: How are they different from other companies? Reactive strategists tend to share same strategic profile Southwest Airlines: point to point between midsized cities as opposed to hub and spoke

28 Focus-Divergence-Compelling Tagline Compelling Tagline: must deliver a clear message but also a truthful message

29 How do you reconstruct market boundaries? “Blue Ocean companies” have followed six basic approaches: six path framework

30 Path 1: Look across alternative industries Not substitutes (coke verses pepsi) Look at alternatives…include products and services that have different functions and forms but same purpose Restaurants/movies: enjoy an evening out NetJets: fractional jet ownership Fly commercial or purchase a corporate plane 1/16 th ownership/50 hours per month 5500 airports across country

31 Path 2: Look across strategic groups within industries Strategic groups are companies within an industry that share a similar strategy Strategic groups are generally built on price and performance Most companies want to improve their position within strategic groups Don’t usually look outside because don’t believe they are competing

32 Path 2: Look across strategic groups within industries Break out of tunnel vision Curves—entered oversaturated market Aim is to spend social as well as exercise time Question to be answered…what makes people trade up or down For curves it offered a “women’s only” atmosphere Champion Enterprises allows for inexpensive prefab homes….with high end finishings

33 Path 3: Look across the chain of buyers Chain of buyers: purchasers may be different from users and there also may be influencers— may have different ideas of value (consider insurance) Most players in an industry focus on same buyer—eg: pharmaceutical industry on physicians Blue Ocean concept is to challenge conventional wisdom as to the target group. Can gain insights into redesign

34 Novo-Nordisk Insulin producers usually targeted doctors Broke away from competition They looked at patient…developed the ease of insulin injections with a pen…continually upgraded Went from insulin producer to a diabetic care company

35 Bloomberg Shifted from purchasers who valued standardization (IT managers) To users –2 flat paneled monitors to see all at once; keyboards with familiar financial terms— built in analytical capability Also, additional information and purchasing services for down times aimed at enhancing personal lives (ordering flowers etc.)

36 UPS Handle problems with computers shipped back to Dell—in the hanger Cut down on time away from owner

37 Path 4: Look Across Complementary Product/Service offerings Usually compete product for product but most products don’t exist in vacuum Offering babysitting services at a gym or movie theater NABI (Hungarian): Bus companies competed on lowest bid Costs were high—designs outdated and delivery time late, not to mention quality Buses stayed in existence for usually 12 years

38 Path 4: Look Across Complementary Product/Service offerings NABI realized that the cost of the bus was not the issue—it was maintenance after purchase Took attention away from initial cost of a bus but focused on long term use Made buses out of fiberglass to cut costs of preventive maintenance, less cost in fuel Initial price was higher but average life cycle cost was considerably lower

39 Concept How is product/service used…look before and after Audio equipment to hear CDs “Living room” for book stores Filter-less coffee pots Dyson—no bags (always run out)

40 Path 5: Look Across Functional or Emotional Appeal to Buyers Swatch from functional to emotional— fashion statement Body Shop from emotional to functional—no nonsense cosmetics Cemex-from functional to emotional, cement is “building a dream”—positioned as a gift registry Viagra—medical treatment to lifestyle enhancement

41 Path 6: Look across time External trends affect business—eg: internet Most companies adapt incrementally Blue Ocean looks at how the trend will change value to customers Value offered tomorrow To find trends across time Must be decisive to your business Irreversible Clear trajectory CNN first global real-time news network Pharmaceutical industries getting into biotech realizing couldn’t do all themselves

42 How do you align strategy to focus on the big picture? Typically managers spend time filling in boxes and running numbers rather than thinking outside the box.

43 Focusing on big picture Focus strategy toward blue ocean Strategy canvas helps visualize current position but also helps chart future direction Four steps to visualizing strategy Visual Awakening: how do you compare to your competition Visual Exploration: look at distinctive advantages of alternative products/services—how can you eliminate, change, create Visual Strategy Fair—what “could you be” get feedback Visual Communications—Look at before and after— support only moves that close gap

44 Visual Awakening Take a critical look at where you are Compare this with your competitors If your strategy canvas is the same…what is the value? Sears didn’t do this until it was too late WalMart on the other hand looked to see how they could be different

45 Visual Exploration Go out in the field and find out how people use or don’t use products or services Someone familiar needs to do this Look at customers as well as non customers Propose a new strategy based on what you observed

46 Visual Strategy Fair Brainstorming about what you can be..always with $$ behind and expertise How add value How become more focused Always including a compelling tagline!

47 Visual Communications Communicate to employees—before and after writing Explain why need to change, eliminate etc. Whirlpool in late 1980s teleconferences worldwide with all employees to talk about changes The soul never thinks without an image

48 How do you maximize the size of the Blue Ocean? BO principle: Reach beyond existing demand

49 Reach Beyond existing Demand Conventional strategy practices Focus on existing customers Drive for finer segmentation The more intense the competition, greater on average the customization of offerings—often risk too-small target market

50 Blue oceans look to noncustomers Build on commonalities of what buyers value Think non customers before customers Commonalities before differences Desegmentation before finer segmentation

51 Look to the noncustomers 3 Tiers 1 st : Sit on edge of market…minimally purchase industry’s offering out of necessity—but would jump ship if opportunity arises (can’t find anything better or a better fit) 2 nd : Refuse to use industry’s offerings (country club…social member but won’t spring for golf membership) 3 rd : Never even thought of ever indulging!

52 First-tier Example: Want quality food…quick…but want it fresh: sandwiches at the Fresh Market (book gave example of Pret A Manger) Come in, look, pick (could even pre-pay)

53 What are the key reasons to jump ship? Look for commonalities in responses Perhaps long lines

54 Second-tier These customers are refusing Either do not use or can’t afford Needs are dealt with elsewhere or ignore Example: French Outdoor advertising …viewed as transitory and expensive Repeat visits low, not a popular form Many companies refused Low value added OR Luxury couldn’t afford

55 Second-tier Looked for stationary downtown locations to advertise…people could read and therefore message come across better Company provided street furniture to municipalities-- maintained and used as venue for advertising Must determine: why are these customers refusing and look to the commonality of responses

56 Third-tier Not even considered as potential customers by anyone in industry Example: Won’t go to dentist for teeth whiting—considered extravagant Most companies would be amazed at the ocean of latent demand

57 Third tier Book looked at defense industry—building aircraft that would suit Air Force, Marines and Navy… Built plane that could meet all demands… But had to map out what each wanted first Not enough to maximize the size of the ocean…must create a sustainable win-win outcome

58 Next need to build a robust business model to ensure a healthy profit Get the strategic sequence right

59 Build strategy in the sequence of: Buyer Utility—is there an exceptional utility in the idea (compelling reason) Price—can the masses afford (compelling reason to pay the price) Cost—can you attain cost target to be profitable—don’t let cost drive prices Adoption—what are the adoption hurdles (will there be resistance)

60 Buyer Utility: Don’t fall in technology trap Unless makes buyers’ lives more simple, more convenient, more productive, less risky, more fun or fashionable—won’t attract the masses Remember focused, divergent, compelling Value innovation is not the same as technology innovation

61 Test of exceptional utility A buyer’s experience can usually be broken into a cycle of six stages from purchase to disposal Test for exceptional utility: Does company offering remove the greatest blocks to utility across entire buyer experience

62 Buyer experience cycle Purchase: how to, place, security, speed Delivery: how long, how difficult, how to do (self arrangement), how costly Use: need for training, ease of storage, effectiveness of features, how does it compare to competition Supplements: complimentary products? If so cost, time, ease Maintenance: external maintenance, ease, cost Disposal: waste, ease, environmental issue, cost

63 Buyer Utility Map Utility levers: How a company can unlock exceptional utility for buyers Greatest blocks often represent the most pressing opportunities Look across levers…the more blocks uncovered the better…go back and refine The map highlights differences between ideas truly new and those that are only revisions

64 PurchaseDelivery Use SupplementsMaintenance Disposal Customer Productivity Simplicity Convenience Risk Fun &Image Environmental Friendliness

65 Uncovering blocks Customer Productivity: where is the biggest block to customers Simplicity: where are the biggest blocks to simplicity Convenience: where are the biggest blocks to convenience Risk: same Fun and Image: same Environmental Friendliness: same

66 Strategic pricing People must be attracted and willing to pay Know from the start what people will be willing to pay—don’t start at one level and drop price later To some the value of a product may be tied to number using it (eg: eBay) Must earn reputation from beginning Curves Starbucks Price must not only attract buyers but retain them also

67 Identify price corridor of the mass Challenge to pricing: Understanding price sensitivities of people comparing products to yours outside the industry How then: Look at products of different forms but same function Products of different forms and functions but same overall objective

68 Different form, same function Ford priced Model T against horse drawn carriage..not other cars (price point lower)

69 Different form and function, same objective Cirque du Soleil lured customers from all other areas of entertainment— including bars and restaurants--- objective, an evening out

70 Specify level within price corridor Determine how high can price without inviting imitation products as competitors Dependent on: Degree it is protected legally (patents or copyrights) Degree company owns core assets or capabilities Example: Dyson patent and hard to imitate bagless vacuum

71 Companies should choose mid to lower pricing if High fixed cost and marginal variable costs Attractiveness depends on network externalities Cost structure benefits from steep economies of scale and scope

72 Strategic Pricing to Target Costing To maximize profit potential..start with strategic price..deduct desired profit margin and arrive a target cost Price-minus costing not cost plus pricing Profitable and hard for followers to match Must drill down and be creative Eg: can raw materials be replaced by unconventional, less expensive Sometimes partnering helps

73 The next step is Adoption Any new business idea needs adoption for employees Must address their concerns Same goes for business partners General public—environmentalist McDonald and Styrofoam

74 Overcoming organizational obstacles First need to show employees why there is a need for change Second—you generally end up cutting resources Third—you have to motivate the key players Overcome politics—don’t let yourself be shot down

75 You need a champion And a leader that is willing to do what is needed

76 Execution Engagement—involved in decision Explanation—understand why final decisions are made Expectation clarity—explain the new rules of the game

77 Sustainability and Renewal of Blue Ocean Strategy Like all strategy, it is a dynamic process Soon imitators appear When do you reach out to create a new blue ocean?

78 Barrier to Imitation Sustainability can be traced to these barriers: Sometimes value innovation defies conventional logic Brand image conflicts prevents companies from imitating blue ocean (imitation might invalidate current practices) Natural monopoly blocks imitation—can’t support more than one in market

79 Barrier to Imitation Patents Initial high volume results in cost advantages Network externalities block (more customers of eBay the more attractive to others) Imitation requires substantial changes Loyal followers

80 When to value innovate again? Continually map and monitor value curves If it begins to converge with competition, it is time to reach out As rivalry intensifies supply exceeds demand and a red ocean emerges

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