Presentation on theme: "Creating Blue Oceans Hilary Becker, Ph.D. Carleton University"— Presentation transcript:
1 Creating Blue Oceans Hilary Becker, Ph.D. Carleton University * These slides are based on the work of Kim and Mauborgne in their book Blue Ocean Strategy, Harvard Business Press 2005.
2 Cirque du Soleil Why do blue oceans exist? Business and markets never stands stillAchieved rapid growth in declining marketFound new market spaceCustomer focusEliminated animal actsIntroduced Theater ideas and storylineOffer fun and thrill of circus with sophistication of theater.
4 Markets BLUE OCEANS RED OCEANS All unknown markets or markets not in existence todayIndustry boundaries are undefinedCompetitive rules unknown and companies look for demand creationEstablished markets. All known markets in existenceIndustry boundaries are definedCompetitive rules known and companies compete on traditional methods
5 Blue Oceans Created (generally) from expansion of red oceans. Management ideas, opportunities, SWOT, Environmental scan, R&D, TechnologyNo Competition – No competitorsTraditional focus of strategic management based on red ocean strategiesanalyze underlying economic structure,determining strategic position/strategyBenchmarking industryConvergence to target market
6 Examples in past 30 years Mutual funds Cell phones Biotechnology Coffee bars (Starbucks)Home video, VCD, DVDCD, MP3, IPODMinivansSnowboards/In-line skatesInternetBacardi RumCNNMicrosoftSouthwest AirlinesCirque du SoleilBig Screen TV/LCD/PlasmaCelebrity Clothing/Perfume Lines
7 New Business Launches Launches from Red Oceans Business launch 86% 14% Revenue Impact62%38%Profit Impact39%61%Launches from Blue Oceans
8 Driving Forces of Blue Ocean GlobalizationFirms looking to expand beyond local borders to gain efficiencies and increase profitabilityDecline of trade barriers, niche markets and monopoliesDevelopment of economic free trade zones and clustering (European Union, Caribbean Common Market).Increasing supply without increasing demand is forcing companies to look for new markets/opportunitiesTechnology & TelecommunicationsDecreased cost, increased efficiency, greater flexibilityIncreased communicationsAllows foreign companies to effectively manage international operations (Favors creation of IJV)Improved industrial productivityLimited competitive advantage for technological advances (shorter time horizon)Organizational StructureFlatter, flexible and mobileStrategic Alliances and JVBureaucracy: Persists but at a different levelFocus on EnvironmentSustainable Development (Balanced Scorecard)
9 Driving Forces of Blue Ocean Accounting & FinanceHarmonization of Accounting PrinciplesImportance of International Monetary ManagementManaging Foreign ExchangeHuman ResourcesWork Teams (multiculturalism)FlexibilityIncreased training and cross-trainingCommunicationCoordination of ActivityManagementGeocentric: view entire world as one organizationPolycentric: view host country cultures are different and allow operations to be managed more autonomouslyEthnocentric: view home-country standards to be superior.
10 Results Accelerated commoditization of products and services As products become standardized, selection is based more on pricesIncreasing price warsShrinking profit margins
11 Strategic Moves to succeed Research has shown that a move to Blue Ocean has identified commonalities in strategic moves.Strategic move: The set of managerial actions and decisions involved in making a major market-creating business offering.Commonality seems to exist in strategic moves by all firms finding blue oceans.However, there was not commonality in types of firms:small/large - attractive/unattractive industriesYoung/mature - private/publicLow/hi tech - diverse national originsThe basis of Blue Ocean Strategy is in developing Value Innovation.
12 Value InnovationInstead of focusing on competition, focus on making the competition irrelevant by creating a leap in value for buyers, and opening uncontested market space.Value without innovation – red ocean strategy of value creation on incremental scale (new bells or whistles)Innovation without value – red ocean technology innovation (often beyond what consumers are ready to accept or pay for).Value innovation occurs when companies align innovation with utility, price and cost positions thereby defying the traditional Cost-Value Tradeoff.Focus on differentiation and low cost simultaneously
13 Value Innovation Costs Simultaneous pursuit of Differentiation and Low *****Buyer value
15 Formulating and Executing Blue Ocean Strategy General belief (red ocean) that going beyond existing industry space is low odds of success.Most business strategy is red ocean focused.Based on 6 principlesDecreasing search risk, planning risk, scale risk, business model risk, organizational risk and management risk.
16 Six Principles of Blue Ocean Strategy - Summary Formulation PrinciplesReconstruct market boundariesFocus on big picture, not numbersReach beyond existing demandGet the strategic sequence straightExecution PrinciplesOvercome key organizational hurdlesBuild execution into strategyRisk FactorsDecrease search riskDecrease planning riskDecrease scale riskDecrease business model riskRisk FactorOrganizational riskManagement risk
17 Four Guiding Formulation Principles Identify paths to systematically create uncontested market space and make the competition irrelevant (search risk)Design strategic planning to go beyond incremental improvements to create value innovations (planning risk)Maximize the blue ocean to create the greatest market of new demand. (scale risk)Design strategy to allow companies to provide a leap in value to buyers and build viable business model to produce and maintain profitable growth for itself. (business model risk).
18 Two Guiding Execution Principles Mobilize the organization to overcome key organizational hurdles that block implementation of a blue ocean. (Organizational risk)Motivating people to act on and execute a blue ocean strategy (management risk).
19 Analytical Tools and Framework The Blue OceanAnalytical Tools and Framework
20 Red Ocean Governed by existing framework of strategic management Porter 5 Forces modelThree Generic StrategiesValue Chain managementOffer better solutions than rivals to existing problems defined by industryEffective Blue Ocean seeks to minimize risk not maximize riskTake notes from Entrepreneurs, learn and apply to new situationsCreate entrepreneurial framework within organizational structure (Ex. 3M – Post-it Notes)
21 Wine Industry Intense competition (8 main competitors) What to do? Leverage distribution, shelf space and marketing drivenDownward pressure on pricesIncreasing bargaining power of distribution channel and flat demandWhat to do?Develop a strategy canvasAnalytical framework that is central to value innovation and creating a blue ocean.
22 Strategy Canvas Purpose: Wine industry Price per bottle Refined Image Capture current state of play in market spaceDevelop an action FrameworkWine industry7 principle factorsPrice per bottleRefined ImageMarketingAging of wineLegacy of vineyardComplexity and sophisticationRange of wines
23 Strategy Canvas Marketing Range Price Legacy Aging High Low Complexity TerminologyMarketingAgingLegacyComplexityRange
24 Strategy Canvas - Analysis Convergence in values, but at different levels between premium (differentiation) and (low cost)Look for uncontested market space.Re-orient strategic focus from competitors to alternatives, from customers to non-customers.Casella Wines – Yellow Label
25 Four Actions Framework Reconstruct buyer value4 Key Questions:Which of the factors that industry takes for granted should be eliminated?Environmental Scan – factors companies have long competed on.Which factors should be reduced well below the industry’s standards?Which products or services have been overdesigned?Which factors should be raised well above the industry’s standards?Uncover and eliminate the compromises the industry has forced on customers.Which factors should be created that the industry has never offered?Helps to discover new sources of value for buyers and to create demand.
26 Four Actions Framework ReduceWhich factors toReduce?EliminateWhich factors toEliminate?A New ValueCurveCreateWhich factors toCreate?RaiseWhich factors toRaise?
27 Eliminate-Reduce-Raise-Create Grid Key to creating Blue Oceans.Four immediate benefitsSimultaneously pursue differentiation and low-cost strategies to break Value-Cost Tradeoff.Flags companies that are focused on raising and creating (thus increasing cost structure and over-engineering products and services)Easily understood and communicatedDrives company to scrutinize every factor the industry competes upon.
28 Yellow Tail Developed a fun new drink not pretentious Reduced aging (less capital cost)Ease of selection by reducing wine offerings (Chardonnay and Shiraz)Removed technical jargon from bottlesSimple, eye catching non-traditional labelWine boxes were simple and used for displayAdvertising in stores with clerk outfitsOffered a LEAP IN VALUE to customers.
29 ERRC Grid – Yellow Tail Eliminate - Terminology and distinction Raise Aging qualityAbove the line marketingRaisePrice vs. budget wineRetail store environmentReduceWine complexityWine rangeVineyard PrestigeCreateEasy drinkingEase of selectionFun and adventure
31 Characteristics of a Good Strategy FocusThe company does not diffuse efforts across all key factors of competitionDivergenceThe shape of the value curve diverges from that of its competitionCompany does not act reactivelyCompelling TaglineStrategic profile is clear and concise to customers.Used to develop marketing campaign
32 Reading the Value Curves (6 Ways) Blue Ocean StrategyWhether 3 criteria for good blue ocean strategy are met (focus, divergence, tagline), this is a litmus test for commercial viability of blue ocean.Company caught in Red OceanCompanies value curve converges with competitorsCompany is attempting to compete head to head with competitors (slower growth and potential)Overdelivery without PaybackIf value curve is higher across all factors, Does Market share and profitability reflect investment?
33 Reading the Value Curves (6 Ways) An Incoherent StrategyAll over the map, it signals it does not have a cohesive and coherent strategy, likely based upon independent sub-strategies (divisional or functional silos).Strategic ContradictionsOffering high level on one competing factor while ignoring others that support that factor. (ex. Self serve gasoline at higher prices)Internally Driven CompaniesHow does it label its factors (If highly technical, built on internal perspective rather than external perspective).