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Blue Ocean Strategy. By: W. Chan Kim & Renee Mauborgne. Summary by: Jesse Starmer COM 459. Value Innovation.

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slide1

Blue Ocean Strategy

By: W. Chan Kim & Renee Mauborgne

Summary by: Jesse Starmer

COM 459

value innovation
Value Innovation

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.

Costs

ValueInnovation

Buyer Value

red ocean versus blue ocean startegy
Red Ocean Versus Blue Ocean Startegy

In the red ocean, differentiation costs because firms compete with the same best-practice principle. Here, the strategic choices for firms are to pursue either differentiation or low cost. In the reconstructionist world, however, the strategic aim is to create new best-practice rules by breaking the existing value-cost trade-off and thereby creating blue ocean.

the six principles of blue ocean strategy
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.

strategy canvas
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

Low

Wine range

Above-the-line marketing

Vineyard prestige and legacy

Price

Use of enological terminology

Aging quality

Wine complexity

four actions framework eliminate reduce raise create grid
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.

four actions framework eliminate reduce raise create grid11
Four Actions Framework + Eliminate/Reduce/Raise/Create Grid

Reduce

Four Actions Framework

Eliminate

Create

A New Value Curve

Raise

The Eliminate-Reduce-Raise-Create Grid

four steps of visualizing strategy
Four Steps of Visualizing Strategy

The four steps of visualizing strategy builds on the six paths of creating blue oceans and involves a lot of visual stimulation in order to unlock people’s creativity. The four steps include visual awakening, visual exploration, visual strategy fair, and visual communication.

pioneer settler migrator map
Pioneer, Settler, Migrator Map

A corporate management team pursuing profitable growth can plot the company’s current and planned portfolios on a pioneer-migrator-settler (PMS) map. This strategy can help a company determine which businesses experience the highest and lowest growth and cash flow. These are classified accordingly with the highest growth potential being pioneers, then to migrators, then to the lowest rung, settlers.

Pioneers

Migrators

Settlers

Today

Tomorrow

pioneer settler migrator map15
Pioneer, Settler, Migrator Map

Pioneers

Migrators

Settlers

Today

Tomorrow

three tiers of noncustomers
Three Tiers of Noncustomers

There are three tiers of noncustomers that can be transformed into customers. They differ in their relative distance from your market. The first tier of customers minimally buy an industry’s offering out of necessity. The second tier of noncustomers refuse to use your industries offerings. The third tier are noncustomers who have never thought of your market’s offerings as an option.

Third Tier

Second Tier

First Tier

Your Market

sequence of blue ocean strategy
Sequence of Blue Ocean Strategy

No-- Rethink

An important part of blue ocean strategy is to “get the strategic sequence right.” This sequence fleshes out and validates blue ocean ideas to ensure their commercial viability. This can then reduce business model risk. In this model, potential blue ocean ideas must pass through a sequence of buyer utility, price, cost, and adoption. At each step there are only two options: a “yes” answer, in which case the idea may pass to the next step, or “no”. If an idea receives a no at any point, the company can either park the idea or rethink it until you get a yes.

Yes

No-- Rethink

Yes

No-- Rethink

Yes

No-- Rethink

Yes

A Commercially Viable Blue Ocean Idea

sequence of blue ocean strategy19
Sequence of Blue Ocean Strategy

No-- Rethink

Yes

No-- Rethink

Yes

No-- Rethink

Yes

No-- Rethink

Yes

A Commercially Viable Blue Ocean Idea

buyer utility map
Buyer Utility Map

The buyer utility map helps managers look at this issue from the right perspective. It outlines all the levers companies can pull to deliver exceptional utility to buyers as well as the various experiences buyers can have with a product or service.

The Six Stages of the Buyer Experience Cycle

1.

Purchase

2.

Delivery

3.

Use

4.

Supplements

5.

Maintenance

6.

Disposal

Customer Productivity

Simplicity

Convenience

The Six Utility Levers

Risk

Fun and Image

Environmental friendliness

buyer utility map21
Buyer Utility Map

The Six Stages of the Buyer Experience Cycle

4.

Supplements

5.

Maintenance

6.

Disposal

1.

Purchase

2.

Delivery

3.

Use

Customer Productivity

Simplicity

Convenience

The Six Utility Levers

Risk

Fun and Image

Environmental friendliness

buyer experience cycle
Buyer Experience Cycle

A buyer’s experience can usually be broken into a cycle of six stages, running more or less sequentially from purchase to disposal. Each stage encompasses a wide variety of specific experiences. At each stage, managers can ask a set of questions to gauge the quality of buyer’s experience.

Purchase

Delivery

Use

Supplements

Maintenance

Disposal

How long does it take to find the product you need?

Is the place of purchase attractive and accessible?

How secure is the transaction environment?

How rapidly can you make a purchase?

How long does it take to get the product delivered?

How difficult is it to unpack and install the new product?

Do buyers have to arrange delivery themselves? If yes, how costly and difficult is this?

Does the product require training or expert assistance?

Is the product easy to store when not in use?

How effective are the product’s features and functions?

Does the product or service deliver far more power or options than required by the average user? Is in overcharged with bells and whistles?

Do you need other products and services to make this product work?

If so, how costly are they?

How much time do they take?

How easy are they to obtain?

Does the product require external maintenance?

How easy is it to maintain and upgrade the product?

How costly is maintenance?

Does use of the product create waste items?

How easy is it to dispose of the product?

Are there legal or environmental issues in disposing of the product safely?

How costly is disposal?

buyer experience cycle23
Buyer Experience Cycle

Purchase

Delivery

Use

Supplements

Maintenance

Disposal

uncovering blocks to buyer utility
Uncovering Blocks to Buyer Utility

Uncovering blocks to buyer utility can identify the most compelling hot spots to unlock exceptional utility. By locating your proposed offering on the thirty-six space of the buyer utility map, you can clearly see how, and whether the new idea not only creates a different utility proposition from existing offerings but also removes the biggest blocks to utility that stand in the way of converting noncustomers into customers.

price corridor of the mass
Price Corridor of the Mass

This tool helps managers find the right price for an irresistible offer, which, by the way, isn’t necessarily the lower price. The tool involves two distinct buy interrelated steps. The first step involves identifying the price corridor of the mass which deals with customer price sensitivity and pricing strategies of products offered outside the group of traditional competitors. The second step deals with specifying a level within the price corridor which factors in legal protection and exclusive assets.

Step 1: Identify the price corridor of the mass.

Step 2: Specify a price level within the price corridor.

Three alternative product/service types:

Different form and function, same objective

Same form

Different form, same function

High degree of legal and resource protection

Difficult to imitate

Upper-level pricing

Some degree of legal and resource protection

Price Corridor of the Mass

Mid-level pricing

Low degree of legal and resource protection

Easy to imitate

Lower-level pricing

price corridor of the mass27
Price Corridor of the Mass

Step 1: Identify the price corridor of the mass.

Step 2: Specify a price level within the price corridor.

Three alternative product/service types:

Different form and function, same objective

Same form

Different form, same function

High degree of legal and resource protection

Difficult to imitate

Upper-level pricing

Some degree of legal and resource protection

Price Corridor of the Mass

Mid-level pricing

Low degree of legal and resource protection

Easy to imitate

Lower-level pricing

profit model of blue ocean strategy
Profit Model of Blue Ocean Strategy

The profit model of blue ocean strategy shows how value innovation typically maximizes profit by using the three levers of strategic price, target cost, and pricing innovation.

The Strategic Price

The Target Profit

The Target Cost

Streamlining and Cost Innovations

Partnering

Pricing Innovation

blue ocean idea index
Blue Ocean Idea Index

The blue ocean idea index is a simple but robust test demonstrating how the sequence of utility, price, cost, and adoption form an integral whole to ensure commercial success through blue ocean strategy.

DoCoMo

I-mode

Japan

Motorola

Iridium

Philips

CD-i

-

-

+

-

-

+

-

-

+

-

+/-

+