Blue Ocean Strategy© JOHN ABBOTT
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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Red oceans: all industries in existence
= known market space
= unknown market space
Red oceans
Companies try to outperform rivals; cutthroat competition
As market space gets crowded, prospects for profit and growth reduced
Products become commodities
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
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global competition is intensifying
Increasing price wars
Shrinking 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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Chart1
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14
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Sheet1
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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Creators of blue oceans follow value innovation
Value Innovation
Successful value innovation:
Uses a whole-system approach
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
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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Reconstruct market boundaries
Reach beyond existing demand
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
This figure highlights the six principles driving the successful formulation and execution of blue ocean strategy and the risks that these principles attenuate.
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
Overcome key organizational hurdles Build execution into strategy
Organizational risk Management risk
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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High
Low
V1
C1
Cost
Quality
High
High
High
Low
Low
Low
Quality
Cost
The 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
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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.
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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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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 enjoyment To relax/unwind Stick with limited list of known brands Choose in-store Not interested in wine language Influenced by major brand advertising
Image important Wine preferrers (sic) Varietal knowledge Interested in some wine language Enjoy trying new wines Visit wineries / read wine articles
Want to discover wine Knowledge of wine regions Frequently buy >$10 wines Join wine clubs Don’t stick to known brands Ideal wine is complex & interesting
Sophisticated drinker Discerning wine tastes Don’t decide in store Have a cellar Less influenced by specials/ promotions Actively pursue wine knowledge
Brand:
Lindemans
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
Price
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
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Four Actions to create a Blue Ocean
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
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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.
A New Value Curve
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?
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
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Eliminate
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.
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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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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
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 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
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
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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
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Example: Cirque du Soleil
Cirque du Soleil effectively combined the best of both the circus and the theater while eliminating everything else
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Eliminate Star Performers Animal shows Aisle concession sales Multiple show arenas
Raise Unique venues
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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)
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2. Top 2 or 3 in ERRC Grid Quadrants
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Draw “As Is”
Draw “To Be”