Blue Ocean Strategy Outline

Title: Blue Ocean Strategy - How to create uncontested market space and make the competition irrelevant

Authors: W. Chan Kim and Renee Mauborgne

Length: 256 pages

Published: 2005

ISBN-10: 1591396190

ISBN-13: 978-1591396192

Preface

“These ideas are not for those whose ambition in life is to get by or merely survive. That was never an interest of ours. If you can be satisfied with that, do not read on.”

There are no permanently excellent companies or industries

Break out of the red ocean bloodied by shrinking market space and go to blue ocean area

They want to provide a way to break out of standard thinking and maximize benefits

Part 1: Blue Ocean Strategy

Creating Blue Oceans

Cirque de Soleil

  • circus industry seemed unattractive
  • instead of aiming at children, created a new market “The only way to beat the competition is to stop trying to beat the competition.”

Red oceans

  • industry boundaries are defined and accepted
  • competitive rules of the game are known
  • try to grab bigger share of existing demand
  • profits and growth are reduced
  • products become commodities

Blue oceans

  • untapped market space, demand creation, opportunity for highly profitable growth
  • most are created by expanding existing industry boundaries
  • competition is irrelevant because the rules of the game are waiting to be set

Unfortunately, most research has been focused on red oceans

  • hence, they seem very risky
  • this book provides a framework to analyze these in

The continuing creation of blue oceans

  • can go back 100 years or 30 years and see industries that exist today that simply did not exist then
  • “History teaches us that we have a hugely underestimated capacity to create new industries and re-create existing ones.”
  • most of business thinking is in red ocean thinking because of similarities with war (fighting over a scarce resource or with limits)
  • should think instead about creating a market space that is uncontested

The rising imperative for creating blue oceans

  • considerably more profitable
  • in an increasing number of industries, supply exceeds demand (due to technology)
    • AJP - I’ve been thinking this quite a bit lately
  • globalization reduces niche markets
  • people increasingly select solely on price because of commodotization
  • brand differentiation is not enough

From company and industry to strategic move

  • AJP - mentions the phrase “creative deconstruction”, and that is really what this book is about (Schumpeter)
  • people have tried to gather companies with excellent strategies, but there seem to be none that routinely exceed expectations
  • authors contend that neither the company nor the industry is the proper unit for analysis
    • instead, look at strategic moves for creating blue oceans and having sustained high performance
  • looked a companies from different sectors over > 100 year time span and try to generalize
  • neither industry nor organizational characteristics is a predictor of success

Value innovation: the cornerstone of blue ocean strategy

  • instead of focusing on the competition, create a leap of value for customers and thereby make your competition irrelevant
  • strike a balance between value creation and innovation, neither of which are extremely valuable in themselves
  • “what separates winners from losers in creating blue oceans is neither bleeding-edge technology nor ‘timing for market entry.’”
    • if they fail, they provide seeds for future companies to benefit from their hard work
    • it’s a strategy that embraces the entire system of a company’s activities
  • goes against standard dogma of value-cost trade-off – instead, seek both low cost and higher quality
  • offer a better solution to an existing problem
  • strategies need to be looked at from an entire business perspective
    • simply lowering costs of one subsection is not enough to create the value diamond that is required for true value innovation
  • basically see PG’s How to Create Wealth

Formulating and executing blue ocean strategy

  • how can companies maximize benefits from blue oceans while minimizing risks?
  • strategy will always involve both strategy and risk

Analytical Tools And Frameworks

Discusses wine industry in America

The strategy canvas

  • first, understand the current market environment competition factors (horizontal axis)
  • second, understand the offering level that buyers receive across the competition factors (vertical axis)
  • competitor research and extensive customer research are not sufficient to put you into a blue ocean
  • to fundamentally shift, think in terms of alternatives instead of competitors, and noncustomers instead of customers
  • redefine the problem so that you don’t think how everyone else thinks

The four actions framework

  • the four factors
    • which of the factors that the industry takes for granted should be eliminated?
    • often factors for competition don’t increase value or customers don’t appreciate them
    • which factors should be reduced well below the industry standard?
    • sometimes we overserve customers
    • which factors should be well above the industry standard?
    • what are the compromises that we are forcing people to make? what if they didn’t need to make these compromises?
    • which factors should be created that the industry has never offered?
    • find entirely new sources of value
  • eliminating and creating are the most important steps, as they are the most revolutionary

The eliminate-reduce-raise-create grid

  • fill in the grid, easy for managers to see
  • value curve will change quite a bit from what current market competitors use
  • allows you to create a value curve

Three characteristics of a good strategy

  • focus
  • divergence
  • compelling tagline
  • don’t let your competitors’ moves set your agenda

Reading the value curves

  • pretty curves are nothing without the correct interpretation – is it a hit or a dud?
  • three characteristics are a good litmus test
  • watch out for
    • a company caught in a red ocean
    • overdelivery without payback
    • an incoherent strategy
    • strategic contradictions
    • an internally driven company

Part 2: Formulating Blue Ocean Strategy

Reconstruct Market Boundaries

Essentially, need to pick something that is truly a blue ocean strategy, cannot afford to gamble recklessly

Six paths to create blue oceans (across industries)

  • look across alternative industries
    • substitutes versus alternatives
    • understand why customers go for alternatives to win
  • look across strategic groups within industries
    • group of companies within an industry that pursue a similar strategy
    • understand why customers go between groups to win
  • look across the chain of buyers
    • “purchasers” may be different from “users” (“influencers”, as well)
    • shift the focus of who you are targeting to win
  • look across complementary product and service offerings
    • the key is to define the total solution buyers seek when they choose a product or service
    • think about the context of your product
  • look across functional or emotional appeal to buyers
    • don’t become entrenched in only functional or only emotional
  • look across time
    • look for decisive and irreversible trends to make predictions on how things will change

Focus On The Big Picture, Not The Numbers

Investing a lot of effort and time on numbers will only yield red ocean strategies

Drawing your strategy canvas

  • must look outside of individual managers, who have their own biases, and see things instead from the customer’s perspective
  • important to visualize strategy to unlock people’s creative side
  • steps
    • visual awakening
    • write down your perceived current strategy and state of business
    • visual exploration
    • now you need to see whether your thoughts are correct by actually getting empirical evidence (talking to users/customers)
    • make new value curves using this information
    • visual strategy fair
    • present ideas to company stakeholders and have them vote on the ideas
    • visual communication
    • create one page illustration of differences in strategy

Visualizing strategy at the corporate level

  • sharing proposed value curves between business units encourages understanding

Using the pioneer-migrator-settler map

  • pioneers offer unprecedented value
  • settlers offer no innovation
  • migrators are somewhere in between
    • company with many of these risks being marginalized by another company
  • make a chart of the PMS in your corporation to see the growth potential
  • need to balance growth with cash flow (pioneers versus migrators/settlers)

This process allows us to overcome the limitations of traditional strategic planning

The numbers will fall in place later, but make sure that your strategy is sound first

Reach Beyond Existing Demand

  • you don’t want to reach beyond red oceans and find a puddle
  • challenge conventional strategy practices
    • NO: focus on existing customers
    • instead, look to noncustomers
    • NO: drive for finer segmentation to accommodate buyer differences
    • instead, look for commonalities in what buyers value

The three tiers of noncustomers

  • those who minimally purchase an industry’s offerings out of necessity
    • if offered increased value, would multiply purchases
    • focus on commonalities of responses of people who want to or have left your industry
  • those who have consciously rejected industry’s offerings
  • those who have never thought of your market’s offerings as an option

Get The Strategic Sequence Right

  • now you need to build a robust business model to ensure profit
  • by getting the sequence right, we can minimize risk

The right strategic sequence

  • buyer utility
    • without, makes no sense
  • price (accessible to buyers)
    • should be set by utility
  • cost (can you profit)
    • you should not let costs drive prices
  • adoption (any adoption hurdles?)
    • key to address these up front

Testing for exceptional utility

  • bleeding-edge technology != bleeding-edge utility

  • buyer utility map:

    purchase delivery use supplements maintenance disposal
    customer productivity
    simplicity
    convenience
    risk
    fun and image
    environmental friendliness

  • the map shows utility levers: ways companies can unlock exceptional utility for buyers

From exceptional utility to strategic pricing

  • must set the strategic price
  • volume generates higher profits in knowledge work than it used to
  • volume also important for network effects
  • free riding is a big problem in coming up with new ideas
  • so you need to set a price to compel people to switch and prevent free riders

Step 1: Identify the price corridor of the mass

  • hard to price when you are creating a new product
  • list products and services that fall into two categories
    • different form, same function
    • different form and function, same objective

Step 2: Specify a level within the price corridor

  • depends on how hard your product/service is to replicate
    • factor in patents, etc.
  • you want to price toward the middle/bottom when your p/s
    • has high fixed costs and marginal variable costs
    • depends heavily on network externalities
    • cost structure benefits from steep economies of scale

From strategic pricing to target costing

  • now, instead of going from cost + profit = price, you take price - cost = profit
    • profitable and hard for potential followers to match
  • your focus should help to eliminate unnecessary costs
  • if companies give in by raising prices or cutting back utility, there is no blue ocean
  • three principal levers to meet the cost target
    • streamlining operations and introducing cost innovations
    • partnering
    • changing the pricing model of the industry (renting, timeshare, equity)

From utility, price, and cost to adoption

  • new idea likely breaks from status quo, so must overcome fears
    • employees
    • business partners
    • general public

So you need to get these factors right for your blue ocean idea index

Part 3: Executing Blue Ocean Strategy

Overcome Key Organizational Hurdles

Few different hurdles

  • cognitive (realizing the need for a strategic shift)
  • limited resources
  • motivation
  • politics

Tipping point leadership in action

The pivotal lever: disproportionate influence factors

  • fundamental changes can happen quickly when the beliefs and energies of a critical mass of people create an epidemic movement toward an idea
    • ask: what factors or acts exercise a disproportionately positive influence on :
    • breaking the status quo?
    • getting the maximum bang out of each buck of resources?
    • on motivating key players to aggressively move forward with change?
    • on knocking down political roadblocks that often trip up even the best strategies?

Break through the cognitive hurdle

  • don’t use numbers with employees – it feels too abstract
  • should allow employees to internalize this change
  • ride the “electric sewer”
    • show, don’t tell
  • meet with disgruntled customers
    • can’t outsource this part to a market research firm

Jump the resource hurdle

  • trimming vision will demoralize employees
  • getting more resources will take too much time and is politically charged
  • points of influence are hot spots, cold spots, and lever is horse trading

Jump the motivational hurdle

  • people must not only recognize what needs to be done, but act on that insight in a sustained and meaningful way
  • instead of massive top-down strategies, focus on:
    • kingpins
    • put your influence on the key influencers in the organization
    • fishbowl management
    • make the kingpins’ behavior transparent with regular meetings
    • encourage high producers and make low producers accountable
    • must clearly be tied to advancement or demotion
    • for this to work, everyone must simultaneously do this
    • AJP - would this work for software? kind of like standups in a way
    • in other words, the process must seem fair for people to be motivated
    • AJP - this seems to be really important, you aren’t waiting for numbers to come in, you are dynamically evaluating
    • atomization
    • break down into something attainable so people don’t get overwhelmed

Knock over the political hurdle

  • leverage angels (those with the most to gain from a strategic shift)
  • silence devils (those with the most to lose from a strategic shift)
  • get a consigliere on your top management team (politically adept but respected insider)

Challenging conventional wisdom

  • focus on acts of disproportionate influence

Build Execution Into Strategy

  • people throughout the organization need to internalize the strategy in spirit
  • trepidation increases with blue ocean strategies
    • people wonder, are they trying to remove our jobs, is management honest?
  • mitigating risk of employee disaffection is critical
  • fair process is the key differentiator in success

Poor process can ruin strategy execution

The power of fair process

  • fairness has been contemplated since the beginning of time
  • Thibaut and Walker worked on this in the 70s
    • established that people care as much about the justice of the process as they do about the income itself
  • items
    • strategy formulation process
    • engagements
    • evaluation
    • expectation clarity
    • attitudes
    • “I feel like my opinion counts”
    • behavior
    • “I’ll go beyond the call of duty”
    • strategy execution
    • self-initiated

Why does fair process matter?

  • emotionally, individuals seek recognition of their value as human beings
  • intellectually, individuals seek recognition that their ideas are sought after and given thoughtful reflection

Intellectual and emotional recognition theory

Fair process and blue ocean strategy

  • critical for people to understand, otherwise they will not be engaged

Conclusion: The Sustainability And Renewal Of Blue Ocean Strategy

Asks when companies should branch out again and what to do with competitors when they invariably come

Barriers to imitation

  • there are typically barriers to people imitating your blue ocean
    • value innovation does not make sense based on conventional strategic logic
    • brand image conflict
    • natural monopoly
    • patents
    • volume leads to rapid cost advantages (Wal-Mart)
    • network externalities (eBay)
    • in short term, takes companies time to adjust (SWA)
    • brand value you create with buzz

When to value-innovate again

  • get as much distance between yourself and would-be competitors
  • look at value curves to see when your competition is in the same ballpark
  • red oceans are still important to a firm’s success

Appendices

  • blue ocean strategy a win-win for producer and consumer (not monopolistic)