Blue Ocean Strategy Analytical Tools and Frameworks June 2, 2009

Introduction  Effective blue ocean strategy should be about risk minimization, not risk taking.  Looks closely at US wine industry

US Wine Industry  Intense Competition 75% of US wine is produced by top 8 companies 75% of US wine is produced by top 8 companies Leaves last 25% to be produced by remaining 1600 wineries Leaves last 25% to be produced by remaining 1600 wineries  Mounting price pressure  Increasing bargaining power by retailers, distributors  Flat demand

Critical Questions  Two critical questions remain with wine market How do you break out of the bloody competition? How do you break out of the bloody competition? How do you open up and capture a blue ocean? How do you open up and capture a blue ocean?  The Answer Analytical tools and frameworks Analytical tools and frameworks

Overview  The Strategy Canvas  The Four Actions Framework  The Eliminate-Reduce-Raise-Create Grid  3 Characteristics of a Good Strategy  Reading the Value Curves

The Strategy Canvas

 Both a Diagnostic and Action framework  Wine Example  Value Curve

The Four Actions Framework

Raise Which factors should be raised well above the industry’s standard? Eliminate Which of the factors that the industry takes for granted should be eliminated? Create Which factors should be created that the industry has never offered? Reduce Which factors should be reduced well below the industry’s standard? The Four Actions Framework A New Value Curve A New Value Curve

[yellow tail]

 Created three new factors in the wine industry – easy drinking, easy to select, fun and adventure  Eliminated and Reduced factors the wine industry long competed on – tannins, oak, complexity, and aging  Raised price versus budget wines and retail involvement

The Four Actions Framework: Ipod  Which of the factors that the industry takes for granted should be eliminated? The need for cds/ cassette tapes The need for cds/ cassette tapes The need for batteries The need for batteries  Which factors should be reduced well below the industry’s standard? The size of music players The size of music players

The Four Actions Framework: Ipod  Which factors should be created that the industry has never offered? The transfer of music from multiple sources The transfer of music from multiple sources Portability: cars, stereos, headphones, computers, shoes, jackets Portability: cars, stereos, headphones, computers, shoes, jackets  Which factors should be raised well above the industry’s standard? Mass storage capacity Mass storage capacity Quality in sound Quality in sound

Eliminate-Reduce-Raise-Create Grid

Eliminate-Reduce-Raise-Create Grid Yellow Tail Eliminate  Enological terminology and distinctions  Aging qualities  Above-the-line marketing Reduce  Wine complexity  Wine range  Vineyard prestige Raise  Price versus budget wines  Retail store involvement Create  Easy drinking  Ease of selection  Fun and adventure

Eliminate  Star performers  Animal shows  Aisle concession sales  Multiple show arenas Reduce  Fun and humor  Thrill and danger Eliminate-Reduce-Raise-Create Grid Cirque du Soleil Raise  Unique venue Create  Theme  Refined environment  Multiple productions  Artistic music and dance

3 Characteristics of a Good Strategy

Three Characteristics of a Good (Blue Ocean) Strategy  Focus  Divergence  Compelling Tagline

Focus  A company’s conviction to its strategy  Example: Southwest Airlines Strategy: competing more with the car than with other airlines Strategy: competing more with the car than with other airlines Without focus, investments would have strayed to mirror those of established airlines Without focus, investments would have strayed to mirror those of established airlines  Example: [yellowtail] Strategy was to sell to average consumer Strategy was to sell to average consumer Focus allowed company to dismiss critics from wine community Focus allowed company to dismiss critics from wine community

Divergence  The basis of finding a Blue Ocean Retroactively forming a strategy throws companies right into Red Oceans Retroactively forming a strategy throws companies right into Red Oceans Benchmarking is widely used in the business community, but perpetuates the same cycles Benchmarking is widely used in the business community, but perpetuates the same cycles

Divergence Examples  Southwest Airlines Common practices of other airlines? Common practices of other airlines?-Meals-Lounges -Seating class choices Common practices of Southwest? Common practices of Southwest? - Friendly Service -Speed -Frequent point-to-point departure  New ideas born from four actions of eliminating, reducing, raising, and creating  [yellow tail] Diverge from prestige of wine drinking to create easy drinking product Diverge from prestige of wine drinking to create easy drinking product

Compelling Tagline  Simple but crucial Must deliver a clear, truthful message Must deliver a clear, truthful message Should highlight divergent characteristics Should highlight divergent characteristics  Example: Southwest Airlines Taglines change with advertising campaigns Taglines change with advertising campaigns However, one thing remains the same However, one thing remains the same - Southwest always highlights its different culture  Example: [yellowtail] “a fun and simple wine to be enjoyed everyday” “a fun and simple wine to be enjoyed everyday” Highlights strategic profile Highlights strategic profile

Reading the Value Curves

Types of Tools and Frameworks  Companies Caught in the Red Ocean  Overdelivery without Payback  An Incoherent Strategy  Strategic Contradictions  An Internally Driven Company

Companies Caught in Red Ocean  When Value Curves Converge Company is caught in the Red Ocean Company is caught in the Red Ocean Strategy is trying to outdo its competitors Strategy is trying to outdo its competitors

Overdelivery Without Payback  Does the company’s market share and profitability reflect these investments? If not, the company might be oversupplying its customers If not, the company might be oversupplying its customers

An Incoherent Strategy  Inconsistency with growth and decline Reflects an organization with divisional and functional silos Reflects an organization with divisional and functional silos The strategy is based on independent sub strategies that do not distinguish the company or provide a clear strategic vision The strategy is based on independent sub strategies that do not distinguish the company or provide a clear strategic vision

Strategic Contradictions  Are there strategic contradictions? Offering a high level on one competing factor while ignoring others that support that factor Offering a high level on one competing factor while ignoring others that support that factor Example: Example: Investing heavily in a web site that is very user- friendly, but not improving the speed of the site’s operationInvesting heavily in a web site that is very user- friendly, but not improving the speed of the site’s operation

An Internally Driven Company  Is the strategic vision of the company built on an “outside-in” perspective, which is driven by demand  Or an “inside-out” perspective, which is driven by operations

Sum It Up!

Conclusion Analytical Tools & Frameworks:  Strategy Canvas : - drawing the value curve  Four Actions Framework : - breaking trade-off between differentiation and low cost and creating a new value curve  Eliminate-Reduce-Raise-Create Grid : - pushes companies to act  3 Characteristics of a Good Strategy : - Focus, Divergence, & Compelling Tagline  Reading the Value Curves : - Caught in the Red Ocean, Overdelivery without Payback, an Incoherent Strategy, Strategic Contradictions, and an Internally Driven Company

Take Aways  The point where these analytic techniques and the six principles of creating blue ocean meet is the point where a company begins to break out of their red ocean and into a blue ocean.