1. Business Creativity & Innovation
Blue Ocean Strategy
Business Creativity & Innovation
Creating uncontested market space
and make the competition irrelevant

2. Tool 4: Blue Ocean Strategy
About the Founders: Chan & Renee
W. Chan Kim
The Boston Consulting Group
Bruce D. Henderson Chair
Professor of Strategy and
International Management
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.
Renée 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.
Renée Mauborgne
The INSEAD Distinguished
Fellow and Professor of Strategy
and International Management

3. Two worlds … Red Ocean Compete in crowded markets Blue Ocean
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 Ocean
Compete in crowded markets
Blue Ocean
Create and capture new market space

4. 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)

5. 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

6. New Market Space
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

7. The Continuing Creation of Blue Oceans
How many of today’s industries were unknown 100 years ago?
Blue Oceans have continuously been created over time
The key to strength in the business world is to create new, uncontested market space

8. Two 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.
VALUE INNOVATION
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 Strategy
Value 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.

9. 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 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.

10. The Rising Imperative of Creating Blue Oceans
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

11. The 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

12. The Profit and Growth Consequences of Blue Oceans

13. 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

14. 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

15. Set the structure based on a target
Unlocking non-customer demand
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
Prof. Shipilov INSEAD

16. Generic Strategies vs. Value Innovation
Red Ocean Strategy
Blue Ocean Strategy
High
High V1 • V1
Quality
Quality •
Low
Low
High C1
Low
High C1
Low
Cost
Cost
Structuralist
Reconstructionist
Prof. Shipilov INSEAD

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

18. BOS Logic: The Core Principles
Reconstruct Market
Boundaries
… overcome believes.
Reach beyond
existing Demand
… go for uncontested space.
Reconstruct Market Boundaries
The 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. VI
COST VI
Get the strategic
sequence right
… value [innovation] first.
VALUE

19. BOS Logic: Reconstruct market boundaries
Boundaries of
Competition
Head-to-Head
Competition
Creating
New Market Space
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
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
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.

20. BOS Logic: The Core Principles
Reconstruct Market
Boundaries
… overcome believes.
Reach beyond
existing Demand
… go for uncontested space.
Reach beyond existing Demand
The 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. VI
COST VI
Get the strategic
sequence right
… value [innovation] first.
VALUE

21. BOS Logic: Reach beyond existing demand
Core Customer
Noncostumer
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.
Soon-to-be-NC
Refusing Customer

22. 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
1st
2nd
3rd

23. Three Tiers of Customers
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)
Prof. Shipilov INSEAD

24. BOS Logic: The Core Principles
Reconstruct Market
Boundaries
… overcome believes.
Reach beyond
existing Demand
… go for uncontested space.
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. VI
COST VI
Get the strategic
sequence right
… value [innovation] first.
VALUE

25. BOS Logic: Get the Strategic Sequence right
Buyer utility
Is there exceptional buyer
utility in your business idea?
No  Rethink
YES
Price
Is your price easily accessible to the mass of buyers?
No  Rethink
YES
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.
Cost
Can you attain your cost target to profit at your strategic price?
No  Rethink
YES
Adoption
What are the adoption hurdles in actualizing your business idea?
Are you addressing them up front?
No  Rethink
YES
A commercially viable Blue Ocean Strategy

26. Four Actions Framework: Key to Value Curve
Reduce
The key to discovering a new value curve lies in answering four basic questions
What factors should be reduced well below the industry standard?
Eliminate
What factors that the industry has taken for granted should be eliminated?
Create/Add
What factors that the industry has never offered should be created or added?
Creating new markets:
A new value curve
Raise
Cirque du Soleil example
What factors should be raised well above the industry standard?

27. Strategy Canvas
high
low
Industry Variables

28. Four Steps of Visualizing
1. Visual Awakening
2. Visual Exploration
3. Visual Strategy Fair
4. Visual Communication
Compare your business with your competitors’ by drawing your “as is” canvas
See where your strategy needs to change
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
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
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

29. The Case of Cirque du Soleil
Cirque du Soleil achieved rapid growth in a declining industry with low profit potential
Cirque du Soleil created uncontested new market space that made the competition irrelevant

30. Example: Cirque du Soleil
Instead 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 theater
Because of this, Cirque du Soleil appealed to both circus customers and noncustomers

31. Example: Cirque du Soleil
Each show, like a theater production, had its own unique theme and storyline
This allowed customers to return to the show more frequently
They also did away with the traditional high-priced concessions and vendors thereby cutting costs

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

33. Eliminate-Reduce-Raise-Create
Star Performers
Animal shows
Aisle concession sales
Multiple show arenas
Raise
Unique venues
Reduce
Fun and humor
Thrill and danger
Create
Theme
Refined environment
Multiple productions
Artistic music and dance

34. The Strategy Canvas of Cirque du Soleilhi
Ringling Brothers
Theme
Refined Viewing Environment
Multiple
Productions
Artistic Music
& Dance
Cirque du Soleil
Smaller Regional Circus
offering level lo
Multiple Show
Arenas
Price
Animal Shows
Thrills & Danger
Star Performers
Aisle Concessions
Fun & Humor
Unique Venue
© Kim & Mauborgne 2006

35. The Strategy Canvas of Cirque du Soleil
Eliminate
Reduce
Raise
Create hi
Ringling Brothers
Theme
Refined Viewing Environment
Multiple
Productions
Artistic Music
& Dance
Cirque du Soleil
offering level
Smaller Regional Circus lo
Price
Animal Shows
Multiple Show
Arenas
Thrills & Danger
Star Performers
Aisle Concessions
Fun & Humor
Unique Venue
© Kim & Mauborgne 2006

36. Eliminate-Reduce-Raise-Create Grid:
The Case of Yellow Tail
Eliminate-Reduce-Raise-Create Grid:
Eliminate
Enological terminology and distinctions
Aging qualities
Above-the-line marketing
Raise
Price versus budget wines
Retail store involvement
Reduce
Wine complexity
Wine range
Vineyard prestige
Create
Easy drinking
Ease of selection
Fun and adventure
Source: Blue Ocean Strategy, Kim and Mauborgne

37. Premium – $15 - $20 per bottle
Budget - $5 - $7 per bottle
Source: Blue Ocean Strategy, Kim and Mauborgne

38. Value Curve for US Wine Industry vs Yellow Tail
Expensive wines
Yellow tail
Cheap wines
High
Low
Price
Above-the-line marketing
Vineyard prestige
Wine range
Ease of selection
Use of technical wine terminology
Aging quality
Wine complexity
Easy drinkability
Fun and adventure

39. Four Actions Framework
Eliminate
Enological terminology and distinctions
Aging qualities
Above-the-line marketing
Raise
Price versus budget wines
Retail store involvement
Reduce
Wine complexity
Wine range
Vineyard prestige
Create
Easy drinking
Ease of selection
Fun and adventure
Strategy Canvas
Four Actions Framework
ERRC Grid
Source: Blue Ocean Strategy, Kim and Mauborgne

40. The Case of Accor's Formule 1 Budget Hotel
From Formule 1’s perspective:
Cost per room 100,000 FF  270,000 FF
Cost of staff % of sales vs %
Profit Margins > 2x industry average
Occupancy rates > 3x industry average
From customers’ perspective:
Hygiene > average 2* hotel
Bed quality > average 2* hotel
Silence > average 2* hotel
Price FF  200 FF of industry
Source: HBR: Value Innovation Logic, Kim and Mauborgne

41. Results of Formule 1’s Strategy
The value curve of Formule 1 in the French Low Budget Hotel Industry
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:
Ebay
Cirque 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.)
Swatch
Body Shop
Ikea
Starbucks
Ryanair, Easyjet
to name a few!!!!

42. Frequent point- to-point departure
The Strategy Canvas of Southwest Airlines
The value curve of Southwest Airline
High
Southwest
Average Airline
Car Transport
Low
Price
Lounges
Hub connectivity
Speed
Frequent point- to-point departure
Meals
Friendly service
Seating
Class
choices

43. Strategy Canvas of Personal Finance Software Industryhi
Quicken
Personal Finance Software
The Pencil
offering level lo
Price
Ease of Use
Optional Features
Speed
Accuracy
© Kim & Mauborgne 2006

44. 1. List Factors of Competition 2. Top 2 or 3 in ERRC Grid Quadrants
Exercise
1. List Factors of Competition
2. Top 2 or 3 in ERRC Grid Quadrants

45. Write on Worksheet: E left, C right Draw “As Is” Draw “To Be”
Exercise
Write on Worksheet: E left, C right
Draw “As Is”
Draw “To Be”

46. Examples

47. Examples

48. Examples

49. References W. Chan Kim, Renée Mauborgne, Blue Ocean Strategy, 2005,
Havard Business School Press.
HANDELSBLATT, Donnerstag, 06. Oktober 2005,
Mit Nichtkunden neue Märkte finden.

50. 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

51. Thank you