Creating Blue Oceans

Hilary Becker, Ph.D.Carleton University

* These slides are based on the work of Kim and Mauborgne in their book Blue Ocean Strategy, Harvard Business Press 2005.

Cirque du Soleil

• Why do blue oceans exist?– Business and markets never stands still

• Achieved rapid growth in declining market• Found new market space• Customer focus

– Eliminated animal acts– Introduced Theater ideas and storyline

• Offer fun and thrill of circus with sophistication of theater.

Cirque du Soleil

Circus

Cirque du Soleil

Theater

Markets

BLUEOCEANS

REDOCEANS

Established markets. All known markets in existence

-Industry boundaries are defined

-Competitive rules known and companies compete on traditional methods

All unknown markets or markets not in existence today

-Industry boundaries are undefined

-Competitive rules unknown and companies look for demand creation

Blue Oceans

• Created (generally) from expansion of red oceans.– Management ideas, opportunities, SWOT,

Environmental scan, R&D, Technology

• No Competition – No competitors• Traditional focus of strategic management based

on red ocean strategies – analyze underlying economic structure,– determining strategic position/strategy– Benchmarking industry– Convergence to target market

Examples in past 30 years

• Mutual funds • Cell phones• Biotechnology• Coffee bars (Starbucks)• Home video, VCD, DVD• CD, MP3, IPOD• Minivans• Snowboards/In-line

skates• Internet

• Bacardi Rum• CNN• Microsoft• Southwest Airlines• Cirque du Soleil• Bacardi Rum• Big Screen

TV/LCD/Plasma• Celebrity

Clothing/Perfume Lines

New Business Launches

Business launch

Revenue Impact

Profit Impact

86% 14%

62% 38%

39% 61%

Launches from Red Oceans

Launches from Blue Oceans

Driving Forces of Blue Ocean• Globalization

– Firms looking to expand beyond local borders to gain efficiencies and increase profitability

– Decline of trade barriers, niche markets and monopolies– Development of economic free trade zones and clustering (European Union,

Caribbean Common Market).– Increasing supply without increasing demand is forcing companies to look

for new markets/opportunities• Technology & Telecommunications

– Decreased cost, increased efficiency, greater flexibility– Increased communications

• Allows foreign companies to effectively manage international operations (Favors creation of IJV)

– Improved industrial productivity– Limited competitive advantage for technological advances (shorter time

horizon)• Organizational Structure

– Flatter, flexible and mobile– Strategic Alliances and JV– Bureaucracy: Persists but at a different level

• Focus on Environment– Sustainable Development (Balanced Scorecard)

Driving Forces of Blue Ocean• Accounting & Finance

– Harmonization of Accounting Principles– Importance of International Monetary Management

• Managing Foreign Exchange

• Human Resources– Work Teams (multiculturalism)

• Flexibility• Increased training and cross-training• Communication• Coordination of Activity

• Management– Geocentric: view entire world as one organization– Polycentric: view host country cultures are different and

allow operations to be managed more autonomously– Ethnocentric: view home-country standards to be superior.

Results

• Accelerated commoditization of products and services– As products become standardized, selection

is based more on prices

• Increasing price wars

• Shrinking profit margins

Strategic Moves to succeed• Research has shown that a move to Blue Ocean has

identified commonalities in strategic moves.• Strategic move: The set of managerial actions and

decisions involved in making a major market-creating business offering.

• Commonality seems to exist in strategic moves by all firms finding blue oceans.

• However, there was not commonality in types of firms: – small/large - attractive/unattractive industries– Young/mature - private/public– Low/hi tech - diverse national origins

• The basis of Blue Ocean Strategy is in developing Value Innovation.

Value Innovation

• Instead of focusing on competition, focus on making the competition irrelevant by creating a leap in value for buyers, and opening uncontested market space.

• Value without innovation – red ocean strategy of value creation on incremental scale (new bells or whistles)

• Innovation without value – red ocean technology innovation (often beyond what consumers are ready to accept or pay for).

• Value innovation occurs when companies align innovation with utility, price and cost positions thereby defying the traditional Cost-Value Tradeoff.

• Focus on differentiation and low cost simultaneously

Value Innovation

Costs

Buyer value

*****

Value Innovation

Simultaneous pursuit ofDifferentiation and LowCosts.

Blue Ocean vs. Red Ocean

Formulating and Executing Blue Ocean Strategy

• General belief (red ocean) that going beyond existing industry space is low odds of success.

• Most business strategy is red ocean focused.– Based on 6 principles

• Decreasing search risk, planning risk, scale risk, business model risk, organizational risk and management risk.

Six Principles of Blue Ocean Strategy - Summary

• Formulation Principles– Reconstruct market

boundaries– Focus on big picture, not

numbers– Reach beyond existing

demand– Get the strategic sequence

straight

• Execution Principles– Overcome key

organizational hurdles– Build execution into

strategy

• Risk Factors– Decrease search risk

– Decrease planning risk

– Decrease scale risk

– Decrease business model risk

• Risk Factor – Organizational risk

– Management risk

Four Guiding Formulation Principles

• Identify paths to systematically create uncontested market space and make the competition irrelevant (search risk)

• Design strategic planning to go beyond incremental improvements to create value innovations (planning risk)

• Maximize the blue ocean to create the greatest market of new demand. (scale risk)

• Design strategy to allow companies to provide a leap in value to buyers and build viable business model to produce and maintain profitable growth for itself. (business model risk).

Two Guiding Execution Principles

• Mobilize the organization to overcome key organizational hurdles that block implementation of a blue ocean. (Organizational risk)

• Motivating people to act on and execute a blue ocean strategy (management risk).

The Blue Ocean

Analytical Tools and Framework

Red Ocean

• Governed by existing framework of strategic management – Porter 5 Forces model– Three Generic Strategies– Value Chain management– Offer better solutions than rivals to existing problems

defined by industry• Effective Blue Ocean seeks to minimize risk not

maximize risk• Take notes from Entrepreneurs, learn and apply

to new situations– Create entrepreneurial framework within

organizational structure (Ex. 3M – Post-it Notes)

Wine Industry

• Intense competition (8 main competitors)– Leverage distribution, shelf space and

marketing driven• Downward pressure on prices• Increasing bargaining power of distribution channel

and flat demand

• What to do?– Develop a strategy canvas

• Analytical framework that is central to value innovation and creating a blue ocean.

Strategy Canvas

• Purpose:– Capture current state of play in market space– Develop an action Framework

• Wine industry– 7 principle factors

Price per bottle Refined Image

Marketing Aging of wine

Legacy of vineyard Complexity and sophistication

Range of wines

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Strategy Canvas - Analysis

• Convergence in values, but at different levels between premium (differentiation) and (low cost)

• Look for uncontested market space.

• Re-orient strategic focus from competitors to alternatives, from customers to non-customers.

• Casella Wines – Yellow Label

Four Actions Framework

• Reconstruct buyer value• 4 Key Questions:

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

• Environmental Scan – factors companies have long competed on.– Which factors should be reduced well below the industry’s

standards?• Which products or services have been overdesigned?

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

• Uncover and eliminate the compromises the industry has forced on customers.

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

• Helps to discover new sources of value for buyers and to create demand.

Four Actions Framework

A New ValueCurve

EliminateWhich factors to

Eliminate?

RaiseWhich factors to

Raise?

CreateWhich factors to

Create?

ReduceWhich factors to

Reduce?

Eliminate-Reduce-Raise-Create Grid

• Key to creating Blue Oceans.

• Four immediate benefits– Simultaneously pursue differentiation and low-cost

strategies to break Value-Cost Tradeoff.– Flags companies that are focused on raising and

creating (thus increasing cost structure and over-engineering products and services)

– Easily understood and communicated– Drives company to scrutinize every factor the industry

competes upon.

Yellow Tail

• Developed a fun new drink not pretentious– Reduced aging (less capital cost)– Ease of selection by reducing wine offerings

(Chardonnay and Shiraz)– Removed technical jargon from bottles– Simple, eye catching non-traditional label– Wine boxes were simple and used for display– Advertising in stores with clerk outfits

• Offered a LEAP IN VALUE to customers.

ERRC Grid – Yellow Tail

Eliminate

- Terminology and distinction

-Aging quality- Above the line marketing

Raise-Price vs. budget wine-Retail store environment

Reduce-Wine complexity-Wine range-Vineyard Prestige

Create-Easy drinking-Ease of selection-Fun and adventure

Yellow Tail – Strategic Canvas

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Characteristics of a Good Strategy

• Focus– The company does not diffuse efforts across all key

factors of competition

• Divergence– The shape of the value curve diverges from that of its

competition– Company does not act reactively

• Compelling Tagline– Strategic profile is clear and concise to customers.– Used to develop marketing campaign

Reading the Value Curves(6 Ways)

• Blue Ocean Strategy– Whether 3 criteria for good blue ocean strategy are

met (focus, divergence, tagline), this is a litmus test for commercial viability of blue ocean.

• Company caught in Red Ocean– Companies value curve converges with competitors– Company is attempting to compete head to head with

competitors (slower growth and potential)

• Overdelivery without Payback– If value curve is higher across all factors, Does

Market share and profitability reflect investment?

Reading the Value Curves(6 Ways)

• An Incoherent Strategy– All over the map, it signals it does not have a

cohesive and coherent strategy, likely based upon independent sub-strategies (divisional or functional silos).

• Strategic Contradictions– Offering high level on one competing factor while

ignoring others that support that factor. (ex. Self serve gasoline at higher prices)

• Internally Driven Companies– How does it label its factors (If highly technical, built

on internal perspective rather than external perspective).