Firm Theory Kim Valbum RUC MEA

Blue Ocean Strategy

W. Chan Kim & Rene Mauborgne

Make the Competition Irrelevant

Cirque de Soleil is a success by taking in new customers, combining cirkus/art/ performance at a high price to new customers

Value Innovation a cornerstone

The Simultaneous Pursuit of Differentiation and Low Cost
Value innovation is created in the region where a companys 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.

Red Ocean Versus Blue Ocean Strategy

Red Ocean Strategy Blue Ocean Strategy
Compete in existing market space Beat the competition Exploit existing demand Make the value-cost trade-off Align the whole system of a firms activities with its strategic choice of differentiation or low cost. Create uncontested market space Make the competition irrelevant Create and capture new demand Break the value-cost trade-off Align the whole system of a firms activities in pursuit of differentiation and low cost

The Six Principles of Blue Ocean Strategy

Formulation principles Reconstruct market boundaries Focus on the big picture, not the numbers Reach beyond existing demand Get the strategic sequence right Execution principles Overcome key organizational hurdles Build execution into strategy Risk faktor each principle attenuates \/ Search risk \/ Planning risk \/ Scale risk \/ Business model risk Risk factor each principle attenuates \/ Organizational risk \/ Management risk

The Four Actions Framework

Eliminate-Reduce-Raise-Create Grid: The case of Cirque du Soleil

Eliminate
Star performers Animal shows Aisle concession sales Multiple show arenas

Raise
Unique venue

Reduce
Fun and humor Thrill and danger

Create
Theme Refined environment Multiple productions Artistic music and dance

Red ocean six assumptions:

Define industry similarly and focus on being best Look through the lens of accepted strategic groups (luxury cars, family cars etc.) and strive to stand out Focus on the same buyer group Define the scope of the products and services offered by their industry similarly Accept their industrys functional or emotional orientation Focus on the same point in time and often on current competitive threats in formulating strategy

Blue Ocean path 1 Look Across Alternative Industries

A company competes not only with the other firms in its own industry but also with companies in those other industries that produce alternative products or services Products and services that have different forms but offer the same functionality are often substitutes for each other Alternatives include products or services that have different functions and forms but the same purpose

Blue Ocean path 2

Look Across Strategic Groups Within Industries

Blue oceans can often be created by looking across alternative industries, so can they be unlocked by looking across strategic groups. In most industries , the fundamental strategic differences among industry players are captured by a small number of strategic groups The key to creating a blue ocean across existing strategic groups is to break out of the narrow tunnel vision by understanding which factor determine customers decisions to trade up or down fron one group to another

Blue Ocean path 3 Look Across the Chain of Buyers

In most industries competitors converge around commen definitions buyers (which involve purchasers, users, influencers etc.) and target customer segments large vs. small customers etc. By looking across buyer groups, companies can gain new insights into how to redesign their value curves to focus on a previously overlooked set of buyers.

Blue Ocean path 4 Look Across Complementary

Product and Service Offerings

Few products and services are used in a vacuum. In most cases other products and services affect their value But in most industries, rivals converge within the bounds of their industrys product and service offerings

Untapped value is often hidden in complementary products and services. The key is to define the total solution buyers seek when they choose a product or service. A simple way to do so is to think about what happens before, during, and after your product is used.

Blue Ocean path 5 Look Across Functional/Emotional Appeal to Buyers

Competition tends to converge on an accepted notion and on few possible bases of appeal Some industries compete on rational appeal and some on emotional appeal

Over time, functionally oriented industries become more functionally oriented; emotional industries become more emotional oriented
Industries have trained customers in what to expect and they answer more for less

Emotionally oriented industries offer many extras that add price, but not functionality customers would welcome simpler, lower-priced and lowercost business models
Functionally oriented industries can stimulate new demand by adding a dose of emotion

Blue Oecean path 6 Look Across Time

All industries are subject to external trends that affect their businesses Looking at these trends with the right perspective can show how to create blue ocean opportunities Insights into blue ocean strategy arise from business insights into how the trend will change value to customers Three principals are critical to assessing trends across time and to form the basis of a blue ocean strategy: 1. These trends must be decisive to your business 2. These trends must be irreversible 3. These trends must have a clear trajectory

From Head-to-head Competition to Blue Ocean Creation

Head-to-Head Competition Industry Strategic group Focuses on rivals within its industry Focuses on competitive position within strategic group Buyer group Focuses on better serving the buyer group Scope of product Focuses on maximizing the value or service of product and service offerings offering within the bounds of its industry FunctionalEmotional orientation Time Blue Ocean Creation -> Looks across alternative industries -> Looks across strategic groups within industry -> Redefines the industry buyer group -> Looks across to complementary product and service offerings

Focuses on improving price -> Rethinks the functional-emotional performance within the functionalorientation of its industry emotional orientation of its industry Focuses on adapting to external trends as they occur -> Participate in shaping external trends over time

The Four Steps of Visualizing Strategy

1. Visual Awakening Compare your business with your competitiors by drawing your as is strategy canvas See where your strategy needs to change 2. Visual Exploration 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 3. Visual Strategy Fair 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 4. Visual Communication 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

Testing the Growth Potential of a Portfolio of Businesses

The Three Tiers of Noncustomers

Third Tier

Second Tier First Tier Your market

First Tier: Soon-to-be noncustomers who are on the edge of your market, waiting to jump ship Second Tier: Refusing noncustomers who consciously choose against your market

Third Tier: Unexplored noncustomers who are in markets distant from yours

The Sequence of Blue Ocean Strategy

The Buyer Utility Map

T h e Si x U ti li t y L e v e rs
Customer
productivity Simplicity

The Six Stages of the Buyer Experience Cycle

1 Purchase 2 Delivery 3 Use 4 5 6 Supplements Maintenance Disposal

Convenience
Risk Fun & image

Environmental
friendliness

The Buyer Experience Cycle

Uncovering the Blocks to Buyer Utility

Purchase Delivery Use Supplements Maintenance Disposal

Customer Productivity: In which stage are the biggest blocks to customer productivity? Simplicity: Convenience: Risk: In which stage are the biggest blocks to simplicity? In which stage are the biggest blocks to convenience? In which stage are the biggest blocks to reducing risks?

Fun and image:

Environmental Friendliness:

In which stage are the biggest blocks to fun and image?

In which stage are the biggest blocks to environment friendliness?

The Price Corridor of the Mass

The Profit Model of Blue Ocean Strategy

The Strategic Price
The Target Profit

The Target Cost

Streamlining and Cost Innovations Pricing Innovation Partnering

Blue Ocean Idea (BOI) Index

Philips CD-i Utility Is there exceptional utility?
Are there compelling reasons to buy your offering?

Motorola Iridium

DoCoMo i-mode Japan +

Price

Is your price easily accessible to the mass of buyers? Does your cost structure meet the target cost?

+/-

+ + +

Cost

Adopt Have you addressed adoption hurdles up front? ion

The Four Organizational Hurdles to Strategy Execution

Cognitive Hurdle
An organization wedded to the status quo

Ressource Hurdle
Limited resources

Political Hurdle
Opposition from powerful vested interests

Motivational Hurdle
Unmotivated staff

Conventional Wisdom vs. Tipping Point Leadership

How Fair Process Affects Peoples Attitudes and Behavior

Strategy Formulation Process Fair Process Engagement Explanation Expectation clarity Trust and Commitment I feel my opinion counts Behavior Voluntary Cooperation Ill go beyond the call of duty Exceeds Expectation Self-initiated

Attitudes

Strategy Execution

The Execution Consequences of the Presence and Absence of Fair Process in Strategy Making
Fair Process Intellectual and Trust and Emotional Commitment Recognition Voluntary Cooperation in Strategy Execution

Violation of Fair Intellectual and Distrust and Process Emotional Resentment Indignation

Refusal to Execute Strategy

Imitation Barriers to Blue Ocean Strategy

Value innovation does not make sense to a companys conventional logic Blue ocean strategy may conflict with other companies brand image Natural monopoly: The market often cannot support a second player Patents or legal permits block imitation High volume leads to rapid cost advantage for the value innovator, discouraging followers from entering the market Network externalities discourage imitation Imitation often requires significant political, operational, and cultural changes Companies that value-innovate earn brand buzz and a loyal customer following that tends to shun imitators

Blue Ocean Strategy

Dont Compete with Rivals Make Them Irrelevant