Team 3 Blue Ocean Strategy Chapter 1

Introduction Strategy? -A company’s chosen business plan Two kinds of Strategy -Red Ocean -Blue Ocean

RED OCEANS Existing industries AKA Known Markets Cut-throat and competitive Companies fighting over limited demand in market Example: American Automobile industry

BLUE OCEANS Non existing industries Untapped and unknown market space Create demand Opportunity for profitable growth Example: New inventions and expanding boundaries of red oceans -Nike running shoes

The Continuing Creation of Blue Oceans Blue Oceans is a new term but their existence is not new. A hundred years ago many of today's industries were not known. Automobiles, music recording, aviation, petrochemicals, heath care, and management consulting are all new. Just thirty years ago mutual funds, cell phones, gas-fired electric plants, biotechnology, discount retail, express package delivery, minivans, snowboards, and home videos did not exist and now are multibillion dollar industries. If history is any predictor of the future imagine how many new industries will be in existence in fifty years.

The Continuing Creation of Blue Oceans Industries will always continue to evolve. We have hugely underestimated the capacity to create new industries and re-create existing ones. The SIC system was replaced by the NAICS in 1997. This new system expanded the ten SIC industry sectors into twenty sectors to reflect the emerging realities of new industry territories. This replacement shows how significant the expansion of blue oceans has been.

The Continuing Creation of Blue Oceans Even though blue oceans are very important the overriding focus of strategic thinking has been focused on competition- based red ocean strategies. This is partly because the corporate strategy is heavily influenced by military strategy. The strategy can be described as confronting an opponent and fighting over a given piece of land that is both limited and constant. Unlike war history shows us that the market universe has never been constant and blue oceans have continuously been created over time. If we focus on red oceans we are accepting the key constraining factors of war which are limited terrain and the need to beat the enemy to succeed. This denies the distinctive strength of the business world which is the capacity to create new market space that is uncontested.

The Impact of Creating Blue Oceans Quantifying the impact of blue oceans is done through both revenues and profits. In a study of a 108 companies’ business launches s, 86 percent of the launches were line extensions (improvements within the red ocean). They account for 62 percent of total revenues and 39 percent of total profits. Ex: The introduction of the minivan to the automobile industry. Ex: Coke’s introduction to cherry coke, coke zero, and many others.

The Impact of Creating Blue Oceans The remaining 14 percent of the launches were blue ocean. 38 percent were total revenues 61 percent were total profits. It is evident that total profits from blue oceans are much greater than those of red oceans line extensions.

The Rising Imperative of Creating Blue Oceans Accelerated technological advances Improved industrial productivity Allowed suppliers to produce an array of products and services Increasing industries = supply exceeds demand Trade barriers between nations and regions dismantled Information of products and services becomes instantly and globally available niche markets and havens for monopolies continue to disappear EX: Microsoft – dominates the PC world with their window programs

The Rising Imperative of Creating Blue Oceans: As a Result… Accelerated commoditization of products and services Increasing price wars and shrinking profit margins Recent industry wide studies on major American brands confirm trend Differentiating brands become harder Examples: Colgate vs Crest Tide vs Downy Strategy and management approaches of 21st century are increasingly dissappearing Management should be more concerned with the blue ocean than fighting the bloody battle in the red ocean

From Company & Industry to Strategic Move Are there lasting “excellent” companies that continuously outperform the market and repeatedly create blue oceans? To answer, we must determine a basic unit of analysis for research. Business literature typically studies the company to determine performance. However, it is strategic move, not the company or the industry, that is the right unit of analysis. Examples: HP (industry sector performance) and Cirque du Soleil (industry performance)

From Company & Industry to Strategic Move What is a strategic move? Definition: it is the set of managerial actions and decisions involved in making a major market-creating business offering. Example: Compaq was acquired by HP and ceased to be an independent company. However, Compaq made strategic moves in creating the server industry that unlocked a new multibillion-dollar market space in computing.

From Company & Industry to Strategic Move Research After assessing industry, organizational, and strategic variables in over thirty industries, the authors found that the creation of blue oceans were achieved by all types of companies and industries. The consistent factor in creating blue ocean moves was the approach to strategy

Value Innovation: The Cornerstone of Blue Ocean Strategy New way of thinking about and executing strategy that creates a blue ocean and a break from the competition Instead of beating competition, focus on making competition irrelevant by creating a leap in value for buyers and your company Equal emphasis on value and innovation Occurs only when org’s align innovation with value, price, and cost positions

Value Innovation: The Cornerstone of Blue Ocean Strategy Simultaneous pursuit of differentiation and low cost Cirque du Soleil example Circus and theater Tent, clowns, classic acrobatic acts Theme and story line

Value Innovation: The Cornerstone of Blue Ocean Strategy 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 firms 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.

Formulating & Executing Blue Ocean Strategy How can companies systematically maximize opportunities while simultaneously minimize the risks associated with executing blue ocean strategy? -Strategy will always involve both opportunity and risk -In our current playing field, there is an unbalanced favor for conducting business in red oceans -As long as this remains true, red oceans will continue to dominate even though there is an imperative for creating blue oceans -Blue Ocean Strategy seeks to dismantle this current imbalance between red and blue oceans strategy

Formulating & Executing Blue Ocean Strategy Figure 1-4 highlights the Six Principles driving the successful formulation and execution of blue ocean strategy and the risks that these principles satisfy: The Six Principles of Blue Ocean Strategy: -Formulation principles: -Risk factor each principle satisfies: Reconstruct market boundaries Search risk Focus on the big picture Planning risk Reach beyond existing demand Scale risk Get the strategic sequence right Business model risk -Execution principles: Overcome key org. hurdles Organizational risk Build execution into strategy Management risk