Analytical Tools And Frameworks Blue Ocean Strategy Chapter 2

Developing Analytical Tools and Frameworks Red Oceans Five forces analyzing existing industry Three generic strategies Blue Oceans No set tools to excel Learn from failure Minimize risk

Quest for Blue Oceans U.S. wine industry Third largest aggregate consumption Stuck at 31st place in per capital wine consumption Top 8 companies produce 75 % of U.S. wine 1600 wineries produce the remaining 25% Causes Intense competition Mounting price pressures Flat demand despite overwhelming choice

Strategy Canvas A diagnostic and an action framework Captures the current state of play Help create a different strategic profile The Value Curve - Company’s relative performance across its industry’s factors of competition

Strategy Canvas

Blue Ocean Winery To create a strong profitable growth trajectory DON’T Try to outcompete, a little more for a little less Perform customer research, they just want more of what they are getting

Blue Ocean Winery To fundamentally shift the strategy canvas of an industry DO Focus on alternatives instead of competitors Focus on non-customers instead of customers CAUSES You to gain insight into how to redefine the problem the industry focuses on, and reconstruct buy value elements

NEW BLUE OCEAN Red Ocean Winery Wineries focused on overdeveloping on prestige and the quality of wine at its price point Blue Ocean Winery (Casella Wines) How to make a fun and nontraditional wine that’s easy to drink for everyone Found that American Adults saw wine as intimidating and pretentious

Four Action Framework

Eliminate Which of the factors that the industry takes for granted should be eliminated? Sometimes there is a change in what buyer’s value: Companies focused solely on benchmarking the competition will miss out on capitalizing on these changes.

Reduce Which factors should be reduced well below the industry standard? Companies must determine which products/services in the industry are being overdesigned/overfunded: Sometimes companies will over serve their customers which will tend to increase costs, while gains and profits stay the same.

Raise and Create Which factors should be raised well above the industry’s standard? This pushes the company to find out and eliminate the compromises that the industry forces customers to make while using the product/service. Which factors should be created that the industry has never offered? This helps to discover new sources of value, create new demand and shift the strategic pricing of the industry.

Blue Ocean Eliminating and Reducing: Eliminating and Creating: Pursuing these will help drop the company’s cost structure which will take out a lot of its competitors. Having a high cost structure and a complex business model makes it hard for any business to grow. Eliminating and Creating: These prompt the companies to change certain factors themselves rather then simply expanding on the norm. Makes the existing rules of competition irrelevant.

Example: [yellow tail] Wine created by Casella Wines Wine no longer wine Casella created a social drink accessible to everyone (i.e. beer drinkers, cocktail drinkers, etc.) August 2003: Number one red wine in a 750 ml bottle sold in the U.S. Selling more than 4.5 million cases a year

From Red to Blue Blue Ocean: New Market Red Ocean: Traditionally there were only people who drank a certain type/standard of wine. Blue Ocean: Non wine drinkers now in the market Novice wine drinkers able to drink more frequently Jug wine drinkers moved up and began to drink the slightly higher priced [yellow tail]

Cont’d A New Norm: Blue Ocean: Red Ocean: Wine’s complicated taste is hard to appreciate for the average customer. Blue Ocean: [yellow tail] has a soft taste, upfront and primary flavors, and the sweetness of it makes it much easier to drink. *Industry said the fruitiness reduced the quality of the wine: Although found to be true, it did not take away any of [yellow tail]’s customers, because the new customer base was not concerned about it*

Cont’d Ease of Selection: Red Ocean: Blue Ocean: Aisles and aisles of wine mixed with the intense terminology on each bottle made it hard - not only for the customers to choose from- but also for the retailers themselves to have any valid opinion to suggest a certain brand. Blue Ocean: Casella dramatically reduced the range of wine offered to (2): Chardonnay (most popular white wine in the US) and Red wine. They also removed all technological jargon from the bottle and used a simple, nontraditional label having a yellow kangaroo against a black backdrop. Another interesting thing that [yellow tail] did was that it sent australian outfits to the retailers to not only create a fun atmosphere and working environment, but it also brought the wine’s attention to the retailer and made it easy for them to suggest it when a customer asked for their opinion.

Reduced Costs The low variety of flavors that it offered helped to minimize the cost of inventory and also enabled them to be the first company in the industry to put both red and white wine in the same box. They also eliminated the need for aging the wine because their customers were simply not concerned about it: This reduced costs and also created a faster payback for wine produced.

The Elimination-Reduce-Raise-Create Grid This grid pushes companies to not only ask the questions from the Four Actions Framework – but to actually act on them. Four Immediate Benefits: 1. It pushes them to simultaneously pursue differentiation and low costs to break the value-cost trade-off 2. Flags companies focused only on raising and creating which raises their cost structure and lets them know if they are ‘overengineering’ their product/service. 3. It’s easily understood by managers at any level, creating a high level of engagement in its application. 4. Drives companies to scrutinize every factor the industry competes on, making them discover the range of implicit assumptions they make unconsciously while competing.

[yellow tail] Grid (Figure 2-4 pg 35) Eliminate: Tough 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

Three Characteristics of a Good Strategy Focus Divergence Compelling Tagline

Focus Focus and excel in a couple of key aspects of the value line that your competition does not. Don’t invest across the board! Set your own agenda, don’t let the competition set the agenda.

Focus Cont. Example Southwest focuses on 3 key factors Friendly Service Speed Frequent Point Departures In the meantime their competitors invest across the board and can’t match Southwest’s prices

Divergence Act don’t react When a company has to act reactively they lose their uniqueness by generally having the same strategic profile as their competitors Stand Apart When you have a divergent strategic profile you can allow your company to have a blue ocean strategy

Divergence Cont. Example Southwest started the point-to-point departures instead of using hub and spoke systems. This makes for a lot more efficient travel for people to middle sized cities.

Compelling Tagline Have a clear-cut tagline Effective taglines are easier to come by when your company has a blue ocean strategy, because you are competing on something different than your other competitors It must be truthful An untrue tagline will lose your customers trust

Compelling Taglines Cont. Examples of good taglines Wal-Mart… “Save Money. Live Better” Red Bull… “ Gives you Wings”

Reading the Value Curves When a company’s value curve meets the 3 criteria that lead to Blue Ocean strategy you are on the right track. When a company lacks any of these 3 criteria it lacks the ability to live up to its full potential.

Reading the Value Curves Cont. 3 signs your company is caught in a Red Ocean: Over delivery without payback… must cut back in some areas. An incoherent strategy… can’t be up and down curves. An internally driven company…. must stay demand driven not operationally driven.

Thank You for Your Time Any Questions?