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Creating Blue Oceans

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The Book and the Authors

Prof Renee Mauborgne

© JOHN ABBOTT

Prof Chan Kim

© JOHN ABBOTT

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™AccoladesOver 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

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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

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Red Oceans vs. Blue OceansRed oceans

Industry boundaries defined and acceptedCompetitive rules of game knownCompanies try to outperform rivals; cutthroat competitionAs market space gets crowded, prospects for profit and growth

reducedProducts become commoditiesRed ocean strategy is a market-competing strategy

Blue oceansUndefined market space, demand creation, opportunity for highly

profitable growthMost are created from within red oceans by expanding existing

industry boundariesRules of game waiting to be setCompetition irrelevantBlue ocean strategy is a market-creating strategy

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The Rising Imperative of Creating Blue Oceans

Supply is exceeding demand in most industriesglobal competition is intensifyingProblems:

Accelerated commodization of products and services

Increasing price warsShrinking profit margins

Red oceans becoming bloodier, need to be concerned with creating blue oceans

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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

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The Impact of Creating Blue Oceans

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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

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™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

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™Red Ocean Vs. Blue Ocean

• 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

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Formulating and Executing Blue Ocean Strategy

Six Principles of Blue Ocean StrategyReconstruct 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

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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!”

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The Six Principles of Blue Ocean Strategy

Formulation Principles Risk factor each principle attenuates

Reconstruct market boundaries

Focus on the big picture, not the numbers

Reach beyond existing demand

Get the strategic sequence right

Search risk

Planning risk

Scale risk

Business model risk

Evaluation principles Risk factor each principle attenuates

Overcome key organizational hurdles

Build execution into strategy

Organizational risk

Management risk

This figure highlights the six principles driving the successful formulation and execution of blue ocean strategy and the risks that these principles attenuate.

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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

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™Example: A highly competitive Industry

The American Wine Industry

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™What the industry offersPremium Wines Budget Wines

Massive Choice

Polarised Strategic Groups

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™American Wine Industry3rd 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 stagnant31st in the world in per capita consumption!

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™American Wine IndustryTop 8 producers had 75% of the market; 1600

had the remaining 25%

$ millions spent in marketing - Titanic battles – intense competition

Severe price pressure

The dominant growth strategy was towards premium wines – more complexity, better image, more prestigious vineyards, number of medals won at wine festivals.

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™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)

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What are people looking for in a wine?

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Segmentation of Market and Brands

Low Involvement High Involvement

Easy Going Enjoyers Aspirationals Appreciators Connoisseurs

Glass with friends

Least care choosing a wine

Not wine preferrers

Price is a strong influencer

Everyday enjoymentTo relax/unwindStick with limited list of known brandsChoose in-storeNot interested in wine language

Influenced by major brand advertising

Image importantWine preferrers (sic)Varietal knowledgeInterested in some wine languageEnjoy trying new wines

Visit wineries / read wine articles

Want to discover wineKnowledge of wine regionsFrequently buy >$10 winesJoin wine clubsDon’t stick to known brands

Ideal wine is complex & interesting

Sophisticated drinkerDiscerning wine tastes Don’t decide in storeHave a cellarLess influenced by specials/ promotions

Actively pursue wine knowledge

Brand: Lindemans Rosemount Estate Wolf Blass Penfolds

Demographic: M/F: 50/50 Age: 35-49

M/F: 30/70; Age: 30-40

M/F: 70/30; Age: 35-50

Age: 40+

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Four Steps of VisualizingFour Steps of Visualizing

1. Visual Awakening

2. Visual Exploration

3. Visual Strategy Fair

4. Visual Communication

•Compare your business with your competitors’ by drawing your “as is” canvas

•See where your strategy needs to change

•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

•Draw your “to be” canvas based on insights from field observations

•Get feedback on alternative strategy canvases from customers, competitors’ customers, and non-customers

•Use feedback to build the best “to be” future strategy

•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 gaps and actualize the new strategy

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What factors should be

eliminated that the industry has taken

for granted?

Eliminate

What factors should be reduced

well below the industry standard?

Reduce

What factors should be created that the industry has never

offered?

Create

What factors should be raised well beyond the

industry standard?

Raise

Four Actions to create a Blue Ocean

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Four Actions Framework + Eliminate/Reduce/Raise/Create Grid

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.

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.

Eliminate

Enological terminology and distinctions

Aging qualities

Above-the-line marketing

Raise

Price versus budget wines

Retail Store involvement

Reduce

Wine complexity

Wine range

Vineyard prestige

Create

Easy drinking

Ease of selection

Fun and adventure

A New

Value Curve

Reduce

Eliminate Create

Raise

Which factors should be reduced well below industry standards?

Which factors should be created that the industry has never offered?

Which factors should be raised well above the industry’s standard?

Which of the factors that the industry takes for granted should be eliminated?

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ERRC Grid yellow tailThe Case of yellow tail

Eliminate

Enological terminology & distractionsAging qualities

Above-the-line marketing

Raise

Price versus budget winesRetain store involvement

Reduce

Wine complexityWine Range

Vineyard prestige

Create

Easy drinkingEase of selectionFun & adventure

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To Be Canvas

• Eliminate

• Reduce

• Raise

• Create

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™Yellow TailOnly 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.

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Value Innovation of [yellow tail]

Utility proposition(customers, distributors and retailers)

•Creating of a social drink that is accessible to anyone

•Easy drinking, ease of selection, sense of fun and adventure

•Limit number of SKUs

•Price to move at volume

Price proposition •Targeted at the mass of customers

•Priced against the alternative (6-pack)

Cost structure•Elimination of working capital tied up in aging wines

•Fast product turnover

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™ResultsNo 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.

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The Case of Cirque du SoleilThe Case of Cirque du Soleil

Cirque du Soleil achieved rapid growth in a Cirque du Soleil achieved rapid growth in a declining industry with low profit potentialdeclining industry with low profit potential

Cirque du Soleil created uncontested new Cirque du Soleil created uncontested new market space that made the competition market space that made the competition irrelevant irrelevant

If you don’t know them you can see some atIf you don’t know them you can see some athttp://www.youtube.com/watch?v=M4lAPI5BAukhttp://www.youtube.com/watch?v=M4lAPI5BAuk

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Example: Cirque du SoleilExample: Cirque du Soleil

Instead of simply trying to outpace the Instead of simply trying to outpace the competition, Cirque du Soleil offered people competition, Cirque du Soleil offered people both the fun and thrill of the circus and the both the fun and thrill of the circus and the intellectual sophistication of the theaterintellectual sophistication of the theater

Because of this, Cirque du Soleil appealed to Because of this, Cirque du Soleil appealed to both circus customers and noncustomersboth circus customers and noncustomers

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Example: Cirque du SoleilExample: Cirque du Soleil

Each show, like a theater production, had its Each show, like a theater production, had its own unique theme and storylineown unique theme and storyline

This allowed customers to return to the show This allowed customers to return to the show more frequentlymore frequently

They also did away with the traditional high-They also did away with the traditional high-priced concessions and vendors thereby priced concessions and vendors thereby cutting costscutting costs

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Example: Cirque du SoleilExample: Cirque du Soleil

Cirque du Soleil effectively combined the best Cirque du Soleil effectively combined the best of both the circus and the theater while of both the circus and the theater while eliminating everything elseeliminating everything else

This allowed them to achieve both This allowed them to achieve both differentiation and low costdifferentiation and low cost

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Eliminate-Reduce-Raise-CreateEliminate-Reduce-Raise-Create

EliminateEliminate

Star Performers

Animal shows

Aisle concession sales

Multiple show arenas

RaiseRaise

Unique venues

ReduceReduce

Fun and humor

Thrill and danger

CreateCreate

Theme

Refined environment

Multiple productions

Artistic music and dance

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The Strategy Canvas The Strategy Canvas of Cirque du Soleilof Cirque du Soleil

hi

offe

ring

leve

l

loPrice

Fun & Humor Unique VenueAisle Concessions

Multiple Show Arenas Thrills & DangerAnimal Shows

Star Performers

Theme

Refined Viewing Environment

MultipleProductions

Artistic Music & Dance

Cirque du Soleil

ReduceEliminate Raise Create

© Kim & Mauborgne 2006

Ringling Brothers

Smaller Regional Circus

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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)