Management 377 Competitive Strategy Prof. Rick Smith
Blue Ocean Strategy How to Create Uncontested Market Space and Make the Competition Irrelevant By W Chan Kim & Renee Mauborgne With reference to Leading The Revolution By Gary Hamel
Blue Ocean Strategy • Companies have fought for competitive advantage, battled over market share, and struggled for differentiation since the conception of commerce. • Yet in today’s overcrowded industries, competing head-on results in nothing but a bloody “red ocean” of rivals fighting over a dwindling profit pool.
Blue Ocean Strategy • And yet while most companies compete within such red oceans, , this “boiler-plate” strategy is increasingly unlikely to create profitable growth in the future.
Blue Ocean Strategy • Some creative thinkers and consultants argue • that tomorrow’s leading companies will • succeed not by battling competitors, but rather • by creating “blue oceans” of uncontested • market space ripe for growth.
Value Innovation • Strategic moves designed to create powerful leaps in value for both the firm and its buyers. • The intended result is to render rivals obsolete as well as unleashing new demand.
Blue Ocean Strategy • Blue Ocean Strategy provides a systematic approach to making the competition “irrelevant.” • Refer to Gary Hamel, strategy consultant and London Business School.
Blue Ocean Strategy • The only way to beat the competition is to stop trying to beat the competition. • Red oceans represent all the industries in existence today. This is the known market space. • Blue oceans denote all the industries not in existence today. This is the unknown market space.
Blue Ocean Strategy • It will always be critical to swim successfully in the red ocean by outperforming rivals. • Red oceans will always matter and will continue to be a fact of business life. • Blue oceans denote all the industries not in existence today. This is the unknown market space.
Blue Ocean Strategy • BUT with supply exceeding demand in most industries, competing for a share of dwindling markets, while necessary, will not be sufficient to sustain high performance. • Firms need to go beyond competing. • To seize new profit and growth opportunities, they also need to create blue oceans. • Unfortunately, blue oceans are largely uncharted.
Blue Ocean Strategy • The dominant focus of strategy work over the past 25 years has been on competition-based red ocean strategies. • The result has been a good understanding of how to compete skillfully in red water from analyzing the underlying structure of an existing industry, to choosing a strategic position of low cost or differentiation or focus, to benchmarking the competition.
Blue Ocean Strategy • There have been some discussions about blue ocean strategies; however, there is little practical guidance on how to create them. • Without the usual analytic framework to create blue oceans and effective principles to manage risk, creating blue oceans remains wishful thinking that is viewed as too risky for managers to pursue as strategy.
The Continuing Creation of Blue Oceans • Although the term blue oceans is relatively new, their existence is not. They are a feature of business life. • How many of today’s industries were unknown 100 years ago? • Now turn the clock back only 30 years….how many?
The Continuing Creation of Blue Oceans • Now put the clock forward twenty years and ask yourself how many now unknown industries will have appeared by then. If history can be used as a predictor of the future, again the answer is many of them. • The reality is that industries never stand still. They continuously evolve. Operations improve, markets expand, and players come and go.
The Continuing Creation of Blue Oceans • History teaches us that we have hugely underestimated capacity to create new industries and recreate existing ones.
The Continuing Creation of Blue Oceans • Strategy can be described in military terms; e.g., “officers, headquarters, front lines, tactics. • Described this way, strategy is about confronting an opponent and fighting over a given piece of territory that is both limited and constant.
The Continuing Creation of Blue Oceans • Unlike war, however, the history of industry • shows us that the market universe has never • been constant; rather, blue oceans have • continuously been created over time. • This is the “theme” of blue ocean strategy.
The Continuing Creation of Blue Oceans • The number of new industries is ever expanding, • -- and the pace is accelerating.
The Continuing Creation of Blue Oceans • Let’s adopt a working definition of an • industry as “the group of firms producing • products that are close substitutes for each • other.” • Michael Porter
The Impact of Creating Blue Oceans • If we examine company growth in both revenue • and profit in a study of business launches for 108 • firms, we find that 86 percent of the launches • were line extensions; i.e., incremental • improvements within the red ocean of existing • market space.
The Impact of Creating Blue Oceans • And yet these line extensions accounted for only • 62% of total revenues and a mere 39% of total • profits. • The remaining 14% of the launches were aimed • at creating blue oceans. • They generated 38% of the total revenues and • 61% of the total profits.
The Impact of Creating Blue Oceans Business Launch Revenue Impact Profit Impact
The Impact of Creating Blue Oceans • Given that business launches included the total • investments made for creating red and blue • oceans (regardless of their subsequent revenue • and profit consequences, including failures), the • performance benefits for creating blue waters are • evident. • Introduce Pareto Principle (80-20 rule) • 80% of the effects are a result of 20% of the • causes. Introduce general concept only.
The Rising Imperative of Creating Blue Oceans im per a tive “not to be avoided or evaded” There are several driving forces behind a rising need “to not avoid” the creation of blue oceans.
The Rising Imperative of Creating Blue Oceans • Accelerated technological advances have • substantially improved industrial productivity • and have allowed suppliers to produce an • unprecedented array of products and services. • This translates into an increasing number of • industries in which supply exceeds demand.
The Rising Imperative of Creating Blue Oceans • The trend toward globalization compounds this • situation. • As trade barriers between nations are dismantled • and as information on products and prices become • instantly and globally available, niche markets • and havens for monopoly continue to disappear. • And while supply is increasing globally, there • is no clear evidence that global demand is • increasing.
The Rising Imperative of Creating Blue Oceans • The result of this shift has been accelerated • commoditization of products and services, • increasing price wars, and shrinking profit margins. • Recent studies on major American brands • confirm this trend. They indicate that major brands • are becoming more similar, and as they become • more similar, buyers make their selections based • on price.
The Rising Imperative of Creating Blue Oceans • People no longer insist that their laundry • detergent be Tide. Nor will they necessarily stick • with Crest when Colgate is on sale and vice versa. • In overcrowded industries, differentiation of • brands becomes more difficult in both economic • upturns and downturns.
The Rising Imperative of Creating Blue Oceans • All of this suggests that the business environment • in which most strategy and management approaches • of recent history evolved is increasingly • disappearing. • As red oceans become increasingly bloody, • management will need to become more sensitive • to blue oceans than the current corps of managers • is accustom.
From Company and Industry to Strategic Move • So just how can a company break out of the red • ocean of bloody competition? • How can it create blue ocean? • Is there a systematic approach to achieve this • and thereby sustain high performance?
From Company and Industry to Strategic Move • To understand the roots of high performance, • business literature typically uses the company as • the basic unit of analysis. • Authors continually marvel at how companies • attain strong, profitable growth with a set of • strategic, operational, and organizational • characteristics. • Our question….Are there lasting “excellent” or • “visionary” firms that continuously outperform the • market and repeatedly create blue oceans?
From Company and Industry to Strategic Move • Best selling books such as Good To Great, • In Search of Excellence, and Built To Last are • now “old” books. But in their glory days, each • book made the best-seller list. • So what has happened to the companies identified • as “visionary” firms by Tom Peters and • Jim Collins? • Sears Roebuck, Atari, Chesebrough-Ponds, • Data General, National Semiconductor, and Fluor?
From Company and Industry to Strategic Move • Two-thirds of the firms identified by the authors • as being “visionary” fell from their perch within • five years of book publication. • One possible explanation for this highly visible • downward spiral was that much of the success • attributed to the strategic management of these • referenced firms was really the result of the • “industry sector performance rather than the • companies themselves.”
From Company and Industry to Strategic Move • An example of the previously referenced • industry sector performance that illustrates how a • firm allegedly outperforms its competition in • Hewlett-Packard (HP). • Jim Collins praises HP for outperforming the • market in the long-term.
From Company and Industry to Strategic Move • In reality, HP outperformed the market, BUT so • did the entire computer-hardware industry. • What’s more, HP did not even outperform the • competition within the industry. • And we have all seen the stagnation or declining • performance of Japanese companies that were • once deemed to be revolutionaries. • So what is your interpretation of being brilliant • at one moment but running completely amuck • the next?
From Company and Industry to Strategic Move • The “company” is not the appropriate unit of • analysis to explore the roots of high performance • and blue oceans. • In addition, industries are constantly being created • and expanded over time and that industry conditions • and boundaries are not given; individual actors can • shape them. • So it appears that neither the company nor the • industry is the best unit of analysis in studying the • roots of profitable growth.
From Company and Industry to Strategic Move • So what is the best unit of analysis as we • determine and dissect the roots of profitable • growth?
From Company and Industry to Strategic Move • Studies indicate that the strategic move and not • the company or the industry is the correct unit of • analysis for explaining the creation of blue oceans • and sustained high performance. • A strategic move is a set of managerial actions • and decisions involved in making a major • market-creating offering.
From Company and Industry to Strategic Move • Research has been conducted to determine • convergence within a given strategic move as well • as across strategic moves. Both blue ocean and • red ocean competitors were included in the • research. • In doing so, researchers tried to discover common • factors leading to the creation of blue oceans and • the key differences separating those winners from • the mere survivors and the losers adrift in the red • ocean.
From Company and Industry to Strategic Move • Analysis of more than 30 industries, confirms • that neither industry nor organizational characteristics • explain the distinction between the two • groups.
From Company and Industry to Strategic Move • In assessing industry, organizational, and strategic • variables, researchers found that the creation and • capturing of blue oceans were achieved by small • and large companies, by young and old managers, • by firms in both attractive and unattractive • industries, by new entrants as well as established • encumbants, by private and public companies, by • companies in low- and high-tech industries, and by • companies of diverse national origins.
From Company and Industry to Strategic Move • So analysis failed to find any perpetually • excellent company or industry. • But what it did find lurking behind the seemingly • idiosyncratic success stories, however, was a • consistent and common pattern across strategic • moves for creating and capturing blue oceans.
Value Innovation: The Cornerstone of Blue Ocean Strategy • What consistently separated winners from losers • in creating blue oceans was their approach to • strategy. • The firms caught in the red ocean followed a • conventional approach of racing to beat the • competition by building a defensible position • within the existing industry order.
Value Innovation: The Cornerstone of Blue Ocean Strategy • The creators of blue oceans, surprisingly, didn’t • use the competition as their benchmark. • Instead, they followed a different strategic logic that we • will call value innovation. • Value innovation is the cornerstone of blue ocean • strategy. • It is called value innovation because we focus on making • our competition irrelevant as opposed to focusing on • beating our competition. We can make the competition • irrelevant by creating a leap in value for buyers and your • firm thereby opening up new and uncontested market • space.
Value Innovation: The Cornerstone of Blue Ocean Strategy • Importantly, value innovation defies one of the most • commonly accepted dogmas of competition-based strategy: • the value-cost trade-off. • It is conventionally believed that firms can either create • greater value to customers at a higher cost or create • reasonable value at a lower cost. • At this point, strategy is seen as making a choice between • differentiation and low cost. • In contrast, those who seek to create blue oceans pursue • differentiation and low cost simultaneously.
Value Innovation: The Cornerstone of Blue Ocean Strategy Costs Value Innovation Buyer Value The Simultaneous Pursuit of Distribution and Low Cost
Value Innovation: The Cornerstone of Blue Ocean Strategy • Value innovation is created in the region where a company’s • 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.
Minimizing Risk and Maximizing Opportunity • As shown in the previous figure, the creation of blue oceans is about • driving costs down while simultaneously driving value up for buyers. • This is how a leap in value for both the company and its buyers is • achieved. • Because buyer value comes from the utility and price that the company • offers to buyers and because the value to the company is generated from • price and its cost structure, value innovation is achieved only when the • whole system of the company’s utility, price and cost activities is • properly aligned. • It is this whole-system approach that makes the creation of blue oceans • a sustainable strategy. Blue ocean strategy integrates the range of the • firm’s functional and operational activities.
Minimizing Risk and Maximizing Opportunity • So is blue ocean strategy inherently more risky? • Any strategy, whether red or blue, involves risk. • But when it comes to venturing beyond the red ocean to create and capture blue oceans, there are six key risks companies face: • Search risk • Planning risk • Scope risk • Business model risk • Organizational risk • Management risk
Minimizing Risk and Maximizing Opportunity • The first four risks revolve around strategy formulation • and the latter two around strategy execution • Each of the six principles in Blue Ocean Strategy expressly addresses how to mitigate each of these risks.