Blue Ocean Strategy By: W. Chan Kim & Renee Mauborgne Summary by: Jesse Starmer COM 459

Value Innovation Costs Buyer Value Value innovation is created in the region where a company’s actions favorably affect both its cost structure and its value proposition to buyers. Cost savings are made by eliminating and reducing the factors an industry competes on. Buyer value is lifted by raising and creating elements the industry has never offered. Over time, costs are reduced further as scale economies kick in due to the high sales volumes that superior value generates. Costs Value Innovation Buyer Value

Value Innovation

Red Ocean Versus Blue Ocean Startegy In the red ocean, differentiation costs because firms compete with the same best-practice principle. Here, the strategic choices for firms are to pursue either differentiation or low cost. In the reconstructionist world, however, the strategic aim is to create new best-practice rules by breaking the existing value-cost trade-off and thereby creating blue ocean. 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 firm’s activities with its strategic choice of differentiation or low cost. Align the whole system of a firm’s activities in pursuit of differentiation and low cost.

Red Ocean Versus Blue Ocean Strategy Red Ocean Strategy Blue Ocean Strategy

The Six Principles of Blue Ocean Strategy This figure highlights the six principles driving the successful formulation and execution of blue ocean strategy and the risks that these principles attenuate. Formulation Principles Risk factor each principle attenuates Reconstruct market boundaries Focus on the big picture, not the numbers Reach beyond existing demand Get the strategic sequence right Search risk Planning risk Scale risk Business model risk Evaluation principles Overcome key organizational hurdles Build execution into strategy Organizational risk Management risk

The Six Principles of Blue Ocean Strategy Formulation Principles Risk factor each principle attenuates Evaluation principles

Strategy Canvas High Low The strategy canvas is both a diagnostic and an action framework for building a compelling blue ocean strategy. It captures the current state of play in the known market space. This allows you to understand where the competition is currently investing, the factors the industry currently competes on in products, service, and delivery, and what customers receive from the existing competitive offerings on the market. The horizontal axis captures the range of factors the industry competes on an invests in. The vertical axis captures the offering level that buyers receive across all these key competing factors. The value curve then provides a graphic depiction of a company’s relative performance across its industry’s factors of competition. High Low Above-the-line marketing Vineyard prestige and legacy Wine range Price Use of enological terminology Aging quality Wine complexity

Strategy Canvas High Low

Four Actions Framework + Eliminate/Reduce/Raise/Create Grid The four actions framework offers an technique that breaks the trade-off between differentiation and low cost and to create a new value curve. It answers the four key questions of what industry takes for granted and needs to be eliminated; what factors need to be reduced below industry standards; what factors need to be raised above industry standards; and what should be created that the industry has never offered. Which factors should be reduced well below industry standards? Eliminate A New Value Curve Create Which of the factors that the industry takes for granted should be eliminated? Which factors should be created that the industry has never offered? Raise Which factors should be raised well above the industry’s standard? The eliminate-reduce-raise-create grid pushes companies not only to ask all four questions in the four actions framework but also to act on all four to create a new value curve. By driving companies to fill in the grid with the actions of eliminating, reducing, raising, and creating, the grid provides four immediate benefits: it pushes them to simultaneously pursue differentiation and low costs; identifies companies who are only raising and creating thereby raising costs; makes it easier for managers to understand and comply; and it drives companies to scrutinize every factor the industry competes on. 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

Four Actions Framework + Eliminate/Reduce/Raise/Create Grid A New Value Curve Raise Eliminate Raise Reduce Create The Eliminate-Reduce-Raise-Create Grid

Four Steps of Visualizing Strategy The four steps of visualizing strategy builds on the six paths of creating blue oceans and involves a lot of visual stimulation in order to unlock people’s creativity. The four steps include visual awakening, visual exploration, visual strategy fair, and visual communication. Visual Awakening Visual Exploration Visual Strategy Fair Visual Communication Compare your business with your competitors’ by drawing your “as is” strategy 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” strategy canvas based on insights from field observations. Get feedback on alternative strategy canvases from customers, competitors’ customers, and noncustomers. 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 the gaps to actualize the new strategy.

Four Steps of Visualizing Strategy Visual Awakening Visual Exploration Visual Strategy Fair Visual Communication

Pioneer, Settler, Migrator Map A corporate management team pursuing profitable growth can plot the company’s current and planned portfolios on a pioneer-migrator-settler (PMS) map. This strategy can help a company determine which businesses experience the highest and lowest growth and cash flow. These are classified accordingly with the highest growth potential being pioneers, then to migrators, then to the lowest rung, settlers. Pioneers Migrators Settlers Today Tomorrow

Pioneer, Settler, Migrator Map Migrators Settlers Today Tomorrow

Three Tiers of Noncustomers There are three tiers of noncustomers that can be transformed into customers. They differ in their relative distance from your market. The first tier of customers minimally buy an industry’s offering out of necessity. The second tier of noncustomers refuse to use your industries offerings. The third tier are noncustomers who have never thought of your market’s offerings as an option. Third Tier Second Tier First Tier Your Market

Three Tiers of Noncustomers

Sequence of Blue Ocean Strategy Buyer utility Is there exceptional buyer utility in your business idea? No-- Rethink An important part of blue ocean strategy is to “get the strategic sequence right.” This sequence fleshes out and validates blue ocean ideas to ensure their commercial viability. This can then reduce business model risk. In this model, potential blue ocean ideas must pass through a sequence of buyer utility, price, cost, and adoption. At each step there are only two options: a “yes” answer, in which case the idea may pass to the next step, or “no”. If an idea receives a no at any point, the company can either park the idea or rethink it until you get a yes. Yes Price Is your price easily accessible to the mass of buyers? No-- Rethink Yes 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 Idea

Sequence of Blue Ocean Strategy Buyer utility No-- Rethink Yes Price No-- Rethink Yes Cost No-- Rethink Yes Adoption No-- Rethink Yes A Commercially Viable Blue Ocean Idea

Buyer Utility Map The buyer utility map helps managers look at this issue from the right perspective. It outlines all the levers companies can pull to deliver exceptional utility to buyers as well as the various experiences buyers can have with a product or service. The Six Stages of the Buyer Experience Cycle 1. Purchase 2. Delivery 3. Use 4. Supplements 5. Maintenance 6. Disposal Customer Productivity Simplicity Convenience The Six Utility Levers Risk Fun and Image Environmental friendliness

Buyer Utility Map The Six Stages of the Buyer Experience Cycle 1. Purchase 2. Delivery 3. Use 4. Supplements 5. Maintenance 6. Disposal Customer Productivity Simplicity The Six Utility Levers Convenience Risk Fun and Image Environmental friendliness

Buyer Experience Cycle A buyer’s experience can usually be broken into a cycle of six stages, running more or less sequentially from purchase to disposal. Each stage encompasses a wide variety of specific experiences. At each stage, managers can ask a set of questions to gauge the quality of buyer’s experience. Purchase Delivery Use Supplements Maintenance Disposal How long does it take to find the product you need? Is the place of purchase attractive and accessible? How secure is the transaction environment? How rapidly can you make a purchase? How long does it take to get the product delivered? How difficult is it to unpack and install the new product? Do buyers have to arrange delivery themselves? If yes, how costly and difficult is this? Does the product require training or expert assistance? Is the product easy to store when not in use? How effective are the product’s features and functions? Does the product or service deliver far more power or options than required by the average user? Is in overcharged with bells and whistles? Do you need other products and services to make this product work? If so, how costly are they? How much time do they take? How easy are they to obtain? Does the product require external maintenance? How easy is it to maintain and upgrade the product? How costly is maintenance? Does use of the product create waste items? How easy is it to dispose of the product? Are there legal or environmental issues in disposing of the product safely? How costly is disposal?

Buyer Experience Cycle Purchase Delivery Use Supplements Maintenance Disposal

Uncovering Blocks to Buyer Utility Uncovering blocks to buyer utility can identify the most compelling hot spots to unlock exceptional utility. By locating your proposed offering on the thirty-six space of the buyer utility map, you can clearly see how, and whether the new idea not only creates a different utility proposition from existing offerings but also removes the biggest blocks to utility that stand in the way of converting noncustomers into customers. Purchase Delivery Use Supplements Maintenance Disposal Customer Productivity: In which stage are the biggest blocks to customer productivity? Simplicity: In which stages are the biggest blocks to simplicity? 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 to environmental friendliness?

Uncovering Blocks to Buyer Utility Purchase Delivery Use Supplements Maintenance Disposal Customer Productivity: Simplicity: Convenience: Risk: Fun and Image: Environmental Friendliness:

Price Corridor of the Mass This tool helps managers find the right price for an irresistible offer, which, by the way, isn’t necessarily the lower price. The tool involves two distinct buy interrelated steps. The first step involves identifying the price corridor of the mass which deals with customer price sensitivity and pricing strategies of products offered outside the group of traditional competitors. The second step deals with specifying a level within the price corridor which factors in legal protection and exclusive assets. Step 1: Identify the price corridor of the mass. Step 2: Specify a price level within the price corridor. Three alternative product/service types: Different form and function, same objective Same form Different form, same function High degree of legal and resource protection Difficult to imitate Upper-level pricing Some degree of legal and resource protection Price Corridor of the Mass Mid-level pricing Low degree of legal and resource protection Easy to imitate Lower-level pricing

Price Corridor of the Mass Step 1: Identify the price corridor of the mass. Step 2: Specify a price level within the price corridor. Three alternative product/service types: Different form and function, same objective Same form Different form, same function High degree of legal and resource protection Difficult to imitate Upper-level pricing Some degree of legal and resource protection Price Corridor of the Mass Mid-level pricing Low degree of legal and resource protection Easy to imitate Lower-level pricing

Profit Model of Blue Ocean Strategy The profit model of blue ocean strategy shows how value innovation typically maximizes profit by using the three levers of strategic price, target cost, and pricing innovation. The Strategic Price The Target Profit The Target Cost Streamlining and Cost Innovations Partnering Pricing Innovation

Profit Model of Blue Ocean Strategy

Blue Ocean Idea Index The blue ocean idea index is a simple but robust test demonstrating how the sequence of utility, price, cost, and adoption form an integral whole to ensure commercial success through blue ocean strategy. Utility Is there exceptional utility? Are there compelling reasons to buy your offering? Price Is your price easily accessible to the mass of buyers? Cost Does your cost structure meet the target cost? Adoption Have you addressed adoption hurdles up front? DoCoMo I-mode Japan Philips CD-i Motorola Iridium - - + - - + - - + - +/- +

Blue Ocean Idea Index Utility Is there exceptional utility? Are there compelling reasons to buy your offering? Price Is your price easily accessible to the mass of buyers? Cost Does your cost structure meet the target cost? Adoption Have you addressed adoption hurdles up front?