Creating Blue Oceans

1. Creating Blue Oceans

2. © JOHN ABBOTT © JOHN ABBOTT Prof Chan Kim Prof Renee Mauborgne The Book and the Authors

3. Accolades • Over 2 million copies sold Translated into over 41 foreign languages – a world record Taught as the major theory of strategy at leading business schools Gives insights to CEOs, Executives, Heads of State and Prime Ministers

6. New Market Space Red oceans and blue oceans make up market universe Red oceans: all industries in existence = known market space Blue oceans: all industries not in existence = unknown market space

7. Red Oceans vs. Blue Oceans Red oceans Industry boundaries defined and accepted Competitive rules of game known Companies try to outperform rivals; cutthroat competition As market space gets crowded, prospects for profit and growth reduced Products become commodities Red ocean strategy is a market-competing strategy Blue oceans Undefined market space, demand creation, opportunity for highly profitable growth Most are created from within red oceans by expanding existing industry boundaries Rules of game waiting to be set Competition irrelevant Blue ocean strategy is a market-creating strategy

8. The Rising Imperative of Creating Blue Oceans Supply is exceeding demand in most industries global competition is intensifying Problems: Accelerated commodization of products and services Increasing price wars Shrinking profit margins Red oceans becoming bloodier, need to be concerned with creating blue oceans

9. The Continuing Creation of Blue Oceans Blue oceans have been around for some time; a feature of business life Industries never stand still, constantly evolving Significant expansion of blue oceans over years So why the focus on red ocean strategy? Corporate strategy influenced by military strategy Need to create new market space that is uncontested

10. The Impact of Creating Blue Oceans

11. From Company and Industry to Strategic Move Are there lasting visionary companies that continuously outperform the market and create blue oceans? Found success of these model companies was a result of industry sector performance, not companies themselves Strategic move used as unit of analysis (rather than company or industry) Strategic move: the set of managerial actions and decisions involved in making a major market-creating business offering

12. Value Innovation: The Cornerstone of Blue Ocean Strategy Creators of blue oceans follow value innovation Value Innovation Equal emphasis on value and innovation Defies value-cost trade-off of competition-based strategy Successful value innovation: Drives down costs while driving up buyers’ value Uses a whole-system approach Follows reconstructionist view

13. RedOcean Vs. BlueOcean Compete in existing market space Beat the competition Exploit existing demand Make the value-cost trade-off Align the whole system of a firm’s 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 firm’s activities in pursuit of differentiation and low cost

14. Formulating and Executing Blue Ocean Strategy Six Principles of Blue Ocean Strategy Reconstruct market boundaries Focus on the big picture, not the numbers Reach beyond existing demand Get the strategic sequence right Overcome key organizational hurtles Build execution into strategy The remaining chapters will give you the principles and generalized frameworks to succeed in blue oceans

15. Take Aways Red ocean strategy is a market-competing strategy, while blue ocean strategy is a market-creating strategy As red oceans are becoming bloodier, we need to create more blue oceans “The only way to beat the competition is to stop trying to beat the competition!”

16. 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.

17. Points of view • Business often look at the industry from a structuralist (supply) point of view • What if we looked at the industry from a reconstructionist (demand) point of view? • Market boundaries are not viewed as given, but could be reconstructed to unlock new demand

18. Generic Strategies vs. Value Innovation Red Ocean Strategy Blue Ocean (VI) Strategy High High D V1 • V1 Quality Quality • LC Low Low High C1 Low C1 High Low Cost Cost Structuralist Reconstructionist

19. Example:A highly competitive Industry The American Wine Industry

20. What the industry offers Premium Wines Budget Wines Polarised Strategic Groups Massive Choice

21. American Wine Industry • 3rd largest in world: worth $20 billion • Californian makes 66% - the rest is from Italy, France, Spain, Chile, Argentina, Australia • Exploding number of new wines – new vineyards in Oregon, Washington, New York Customer base stagnant 31st in the world in per capita consumption!

22. American Wine Industry • Top 8 producers had 75% of the market; 1600 had the remaining 25% • $ millions spent in marketing - Titanic battles – intense competition • Sever price pressure • The dominant growth strategy was towards premium wines – more complexity, better image, more prestigious vineyards, number of medals won at wine festivals.

23. What wine customers said … • “It is too confusing and complex” • Wine descriptions and terminology • The shopping experience • The lack of clear guidance on what to buy and drink • Thus, massively intimidating for ‘noncustomers’ (the large majority of the US population who were not wine drinkers)

24. What are people looking for in a wine?

25. Segmentation of Market and Brands

26. Strategy Canvas 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 Premium Wines Budget Wines Low Wine range Above-the-line marketing Vineyard prestige and legacy Price Use of enological terminology Aging quality Wine complexity

27. Four Steps of Visualizing

28. Raise What factors should be raised well beyond the industry standard? Eliminate Create What factors should be eliminated that the industry has taken for granted? What factors should be created that the industry has never offered? Reduce What factors should be reduced well below the industry standard? Four Actions to create a Blue Ocean

29. Four Actions Framework + Eliminate/Reduce/Raise/Create Grid Reduce 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 factors should be created that the industry has never offered? Which of the factors that the industry takes for granted should be eliminated? 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.

30. ERRC Grid yellow tail

31. To Be Canvas • Eliminate • Reduce • Raise • Create

32. Yellow Tail • Only 2 types initially – Chardonnay and Shiraz • Fruity, soft on palette, sweet-ish – great for those who had not drunk wine before • Same bottle for red and white – low logistics costs • Simple vibrant packaging – lower case letters/kangaroo • Un-intimidating • They were selling “The essence of a great land … Australia” – ie they were not selling the wine • Australian clothing for the retail staff – they enthusiastically promoted a wine they could understand.

33. Value Innovation of [yellow tail]

34. Results • No 1 imported wine (outsells France and Italy) • Fastest growing imported wine in the history of the USA industry • New consumers of wine • Jug drinkers trade up • Premium wine drinkers trade down • Industry criticizes them mercilessly at first Now wine press blurb gives it a “best buy” for value; winning wine awards.

35. The Case of Cirque du Soleil Cirque du Soleil achieved rapid growth in a declining industry with low profit potential Cirque du Soleil created uncontested new market space that made the competition irrelevant If you don’t know them you can see some at http://www.youtube.com/watch?v=M4lAPI5BAuk

36. Example: Cirque du Soleil Instead of simply trying to outpace the competition, Cirque du Soleil offered people both the fun and thrill of the circus and the intellectual sophistication of the theater Because of this, Cirque du Soleil appealed to both circus customers and noncustomers

37. Example: Cirque du Soleil Each show, like a theater production, had its own unique theme and storyline This allowed customers to return to the show more frequently They also did away with the traditional high-priced concessions and vendors thereby cutting costs

38. Example: Cirque du Soleil Cirque du Soleil effectively combined the best of both the circus and the theater while eliminating everything else This allowed them to achieve both differentiation and low cost

39. Eliminate-Reduce-Raise-Create

40. The Strategy Canvas of Cirque du Soleil Create Raise Eliminate Reduce Cirque du Soleil Multiple Productions Theme Artistic Music & Dance Refined Viewing Environment hi Ringling Brothers offering level Smaller Regional Circus lo Multiple Show Arenas Animal Shows Price Thrills & Danger Unique Venue Fun & Humor Aisle Concessions Star Performers © Kim & Mauborgne 2006

41. Key Takeaways • Three tiers of non-customers: • 1: buyers who purchase your industry offerings out of necessity; will jump ship if given an opportunity. • 2: buyers who purchase alternative offerings that serve the same function • 3: people who don’t consume even the alternatives to your offerings • Non-customer demand is unlocked by providing new buyer utilities, at a price that attracts a mass of buyers, given target costs. • Buyers could be not only end-users, but also other participants in a value chain (e.g. distributors)

42. Comparison of approaches Red Ocean Strategy Blue Ocean Strategy

43. Exercise 1. List Factors of Competition 2. Top 2 or 3 in ERRC Grid Quadrants Clearly define the group of “non-customer” that you are going after.

44. Examples

45. Exercise Write on Worksheet: E left, C right Draw “As Is” Draw “To Be”

46. Examples