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Blue Ocean Strategy Intro

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					 Management 377
Competitive Strategy
 Prof. Rick Smith

                       1
                Blue Ocean Strategy
How to Create Uncontested Market Space and Make the
               Competition Irrelevant
              By W Chan Kim & Renee Mauborgne

        With reference to Leading The Revolution
                       By Gary Hamel
                                                      2
          Blue Ocean Strategy
• Companies have fought for competitive
advantage, battled over market share, and
struggled for differentiation since the conception
of commerce.
• Yet in today’s overcrowded industries,
competing head-on results in nothing but a
bloody ―red ocean‖ of rivals fighting over a
dwindling profit pool.

                                                     3
      Blue Ocean Strategy

• And yet while most companies compete
within such red oceans, , this ―boiler-plate‖
strategy is increasingly unlikely to create
profitable growth in the future.




                                                4
          Blue Ocean Strategy

• Some creative thinkers and consultants argue
that tomorrow’s leading companies will
succeed not by battling competitors, but rather
by creating ―blue oceans‖ of uncontested
market space ripe for growth.




                                                  5
            Value Innovation

• Strategic moves designed to create
powerful leaps in value for both the firm and
its buyers.
• The intended result is to render rivals
obsolete as well as unleashing new demand.




                                                6
      Blue Ocean Strategy
• Blue Ocean Strategy provides a
systematic approach to making the
competition ―irrelevant.‖

Refer to Gary Hamel, strategy consultant
and London Business School.




                                           7
       Blue Ocean Strategy
• The only way to beat the competition is
to stop trying to beat the competition.
• Red oceans represent all the industries in
existence today. This is the known market
space.
• Blue oceans denote all the industries not
in existence today. This is the unknown
market space.

                                               8
          Blue Ocean Strategy
• It will always be critical to swim successfully
in the red ocean by outperforming rivals.
• Red oceans will always matter and will
continue to be a fact of business life.
• Blue oceans denote all the industries not in
existence today. This is the unknown market
space.


                                                    9
         Blue Ocean Strategy
• BUT with supply exceeding demand in most
industries, competing for a share of dwindling
markets, while necessary, will not be sufficient
to sustain high performance.
• Firms need to go beyond competing.
• To seize new profit and growth opportunities,
they also need to create blue oceans.
• Unfortunately, blue oceans are largely
uncharted.
                                               10
         Blue Ocean Strategy
• The dominant focus of strategy work over the
past 25 years has been on competition-based red
ocean strategies.
• The result has been a good understanding of
how to compete skillfully in red water from
analyzing the underlying structure of an existing
industry, to choosing a strategic position of low
cost or differentiation or focus, to benchmarking
the competition.
                                                11
         Blue Ocean Strategy
• There have been some discussions about blue
ocean strategies; however, there is little
practical guidance on how to create them.
• Without the usual analytic framework to
create blue oceans and effective principles to
manage risk, creating blue oceans remains
wishful thinking that is viewed as too risky for
managers to pursue as strategy.

                                               12
The Continuing Creation of Blue Oceans
 • Although the term blue oceans is relatively
 new, their existence is not. They are a feature of
 business life.
 • How many of today’s industries were
 unknown 100 years ago?
 • Now turn the clock back only 30 years….how
 many?


                                                  13
The Continuing Creation of Blue Oceans
 • Now put the clock forward twenty years and
 ask yourself how many now unknown industries
 will have appeared by then. If history can be
 used as a predictor of the future, again the
 answer is many of them.
 • The reality is that industries never stand still.
 They continuously evolve. Operations improve,
 markets expand, and players come and go.

                                                   14
The Continuing Creation of Blue Oceans


• History teaches us that we have hugely
underestimated capacity to create new industries
and recreate existing ones.




                                                   15
The Continuing Creation of Blue Oceans

 • Strategy can be described in military terms;
 e.g., ―officers, headquarters, front lines, tactics.
 • Described this way, strategy is about
 confronting an opponent and fighting over a
 given piece of territory that is both limited and
 constant.



                                                        16
The Continuing Creation of Blue Oceans

• Unlike war, however, the history of industry
shows us that the market universe has never
been constant; rather, blue oceans have
continuously been created over time.
• This is the ―theme‖ of blue ocean strategy.




                                                 17
The Continuing Creation of Blue Oceans

• The number of new industries is ever expanding,
  -- and the pace is accelerating.




                                              18
The Continuing Creation of Blue Oceans

 • Let’s adopt a working definition of an
 industry as ―the group of firms producing
 products that are close substitutes for each
 other.‖
                                   Michael Porter




                                                    19
The Impact of Creating Blue Oceans

• If we examine company growth in both revenue
and profit in a study of business launches for 108
firms, we find that 86 % of the launches were
line extensions; i.e., incremental improvements
within the red ocean of existing market space.




                                               20
The Impact of Creating Blue Oceans

• And yet these line extensions accounted for only
62% of total incremental revenues and a mere 39%
of total incremental profits.
• The remaining 14% of the launches were aimed
at creating blue oceans.
• They generated 38% of the total revenues and
61% of the total profits.

                                               21
 The Impact of Creating Blue Oceans

                  The Profit and Growth Consequences of
                           Creating Blue Oceans


Business Launch                        0.86                           0.14

Revenue Impact                 0.62                            0.38

Profit Impact           0.39                            0.61

                  0     0.2           0.4         0.6          0.8           1

           Launches within red oceans         Launches for creating blue oceans




                                                                                  22
The Impact of Creating Blue Oceans
• Given that business launches included the total
investments made for creating red and blue
oceans (regardless of their subsequent revenue
and profit consequences, including failures), the
performance benefits for creating blue waters are
evident.
• Introduce Pareto Principle (80-20 rule)
80% of the effects are a result of 20% of the
causes. Introduce general concept only.
                                               23
The Rising Imperative of Creating Blue Oceans

im per a tive “not to be avoided or evaded”

There are several driving forces behind a rising
need ―to not avoid‖ the creation of blue oceans.




                                                   24
The Rising Imperative of Creating Blue Oceans

• Accelerated technological advances have
substantially improved industrial productivity
and have allowed suppliers to produce an
unprecedented array of products and services.
• This translates into an increasing number of
industries in which supply exceeds demand.




                                                 25
The Rising Imperative of Creating Blue Oceans

• The trend toward globalization compounds this
situation.
• As trade barriers between nations are dismantled
and as information on products and prices become
instantly and globally available, niche markets
and havens for monopoly continue to disappear.
• And while supply is increasing globally, there
is no clear evidence that global demand is
increasing.
                                               26
 The Rising Imperative of Creating Blue Oceans

• The result of this shift has been accelerated
commoditization of products and services,
increasing price wars, and shrinking profit margins.
• Recent studies on major American brands
confirm this trend. They indicate that major brands
are becoming more similar, and as they become
more similar, buyers make their selections based
on price.

                                                 27
 The Rising Imperative of Creating Blue Oceans

• People no longer insist that their laundry
detergent be Tide. Nor will they necessarily stick
with Crest when Colgate is on sale and vice versa.
• In overcrowded industries, differentiation of
brands becomes more difficult in both economic
upturns and downturns.




                                                 28
 The Rising Imperative of Creating Blue Oceans

• All of this suggests that the business environment
in which most strategy and management approaches
of recent history evolved is increasingly
disappearing.
• As red oceans become increasingly bloody,
management will need to become more sensitive
to blue oceans than the current corps of managers
is accustom.

                                                 29
 From Company and Industry to Strategic Move

• So just how can a company break out of the red
ocean of bloody competition?
• How can it create blue ocean?
• Is there a systematic approach to achieve this
and thereby sustain high performance?




                                               30
 From Company and Industry to Strategic Move

• To understand the roots of high performance,
business literature typically uses the company as
the basic unit of analysis.
• Authors continually marvel at how companies
attain strong, profitable growth with a set of
strategic, operational, and organizational
characteristics.
• Our question….Are there lasting ―excellent‖ or
―visionary‖ firms that continuously outperform the
market and repeatedly create blue oceans?       31
 From Company and Industry to Strategic Move

• Best selling books such as Good To Great,
In Search of Excellence, and Built To Last are
now ―old‖ books. But in their glory days, each
book made the best-seller list.
• So what has happened to the companies identified
as ―visionary‖ firms by Tom Peters and
Jim Collins?
• Sears Roebuck, Atari, Chesebrough-Ponds,
Data General, National Semiconductor, and Fluor?
                                               32
 From Company and Industry to Strategic Move

• Two-thirds of the firms identified by the authors
as being ―visionary‖ fell from their perch within
five years of book publication.
• One possible explanation for this highly visible
downward spiral was that much of the success
attributed to the strategic management of these
referenced firms was really the result of the
―industry sector performance rather than the
companies themselves.‖
                                                  33
 From Company and Industry to Strategic Move

• An example of the previously referenced
industry sector performance that illustrates how a
firm allegedly outperforms its competition in
Hewlett-Packard (HP).
• Jim Collins praises HP for outperforming the
market in the long-term.




                                                     34
 From Company and Industry to Strategic Move

• In reality, HP outperformed the market, BUT so
did the entire computer-hardware industry.
• What’s more, HP did not even outperform the
competition within the industry.
• And we have all seen the stagnation or declining
performance of Japanese companies that were
once deemed to be revolutionaries.
• So what is your interpretation of being brilliant
at one moment but running completely amuck
the next?                                        35
 From Company and Industry to Strategic Move

• The ―company‖ is not the appropriate unit of
analysis to explore the roots of high performance
and blue oceans.
• In addition, industries are constantly being created
and expanded over time and that industry conditions
and boundaries are not given; individual actors can
shape them.
• So it appears that neither the company nor the
industry is the best unit of analysis in studying the
roots of profitable growth.                       36
 From Company and Industry to Strategic Move

• So what is the best unit of analysis as we
determine and dissect the roots of profitable
growth?




                                                37
 From Company and Industry to Strategic Move

• Studies indicate that the strategic move and not
the company or the industry is the correct unit of
analysis for explaining the creation of blue oceans
and sustained high performance.
• A strategic move is a set of managerial actions
and decisions involved in making a major
market-creating offering.


                                                  38
 From Company and Industry to Strategic Move

• Research has been conducted to determine
convergence within a given strategic move as well
as across strategic moves. Both blue ocean and
red ocean competitors were included in the
research.
• In doing so, researchers tried to discover common
factors leading to the creation of blue oceans and
the key differences separating those winners from
the mere survivors and the losers adrift in the red
ocean.                                          39
  From Company and Industry to Strategic Move

• Analysis of more than 30 industries, confirms
that neither industry nor organizational characteristics
explain the distinction between the two
groups.




                                                    40
 From Company and Industry to Strategic Move

• In assessing industry, organizational, and strategic
variables, researchers found that the creation and
capturing of blue oceans were achieved by small
and large companies, by young and old managers,
by firms in both attractive and unattractive
industries, by new entrants as well as established
encumbants, by private and public companies, by
companies in low- and high-tech industries, and by
companies of diverse national origins.
                                                   41
 From Company and Industry to Strategic Move

• So analysis failed to find any perpetually
excellent company or industry.
• But what it did find lurking behind the seemingly
idiosyncratic success stories, however, was a
consistent and common pattern across strategic
moves for creating and capturing blue oceans.




                                                42
Value Innovation: The Cornerstone of Blue Ocean Strategy

• What consistently separated winners from losers
in creating blue oceans was their approach to
strategy.
• The firms caught in the red ocean followed a
conventional approach of racing to beat the
competition by building a defensible position
within the existing industry order.
•

                                                     43
  Value Innovation: The Cornerstone of Blue Ocean Strategy

• The creators of blue oceans, surprisingly, didn’t
use the competition as their benchmark.
• Instead, they followed a different strategic logic that we
will call value innovation.
• Value innovation is the cornerstone of blue ocean
strategy.
• It is called value innovation because we focus on making
our competition irrelevant as opposed to focusing on
beating our competition. We can make the competition
irrelevant by creating a leap in value for buyers and your
firm thereby opening up new and uncontested market
space.                                                       44
 Value Innovation: The Cornerstone of Blue Ocean Strategy

• Importantly, value innovation defies one of the most
commonly accepted dogmas of competition-based strategy:
the value-cost trade-off.
• It is conventionally believed that firms can either create
greater value to customers at a higher cost or create
reasonable value at a lower cost.
• At this point, strategy is seen as making a choice between
differentiation and low cost.
• In contrast, those who seek to create blue oceans pursue
differentiation and low cost simultaneously.

                                                           45
Value Innovation: The Cornerstone of Blue Ocean Strategy


                             Costs




                              Value
                            Innovation




                           Buyer Value



      The Simultaneous Pursuit of Distribution and Low Cost

                                                              46
 Value Innovation: The Cornerstone of Blue Ocean Strategy

• 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.



                                                            47
         Minimizing Risk and Maximizing Opportunity

• As shown in the previous figure, the creation of blue oceans is about
driving costs down while simultaneously driving value up for buyers.
• This is how a leap in value for both the company and its buyers is
achieved.
• Because buyer value comes from the utility and price that the company
offers to buyers and because the value to the company is generated from
price and its cost structure, value innovation is achieved only when the
whole system of the company’s utility, price and cost activities is
properly aligned.
• It is this whole-system approach that makes the creation of blue oceans
a sustainable strategy. Blue ocean strategy integrates the range of the
firm’s functional and operational activities.

                                                                    48
 Minimizing Risk and Maximizing Opportunity

• So is blue ocean strategy inherently more risky?
• Any strategy, whether red or blue, involves risk.
• But when it comes to venturing beyond the red ocean to
create and capture blue oceans, there are six key risks companies
face:

       Search risk
       Planning risk
       Scope risk
       Business model risk
       Organizational risk
       Management risk
                                                                49
 Minimizing Risk and Maximizing Opportunity

• The first four risks revolve around strategy formulation
and the latter two around strategy execution

Each of the six principles in Blue Ocean Strategy expressly
addresses how to mitigate each of these risks.




                                                              50
 Minimizing Risk and Maximizing Opportunity

1. The first blue ocean principle – reconstruct market
   boundaries – addresses the search risk of how to successfully,
   out of the haystack of possibilities that exist, commercially
   compelling blue ocean opportunities.

2. The second principle – focus on the big picture; not the
   numbers – tackles how to mitigate the planning risk of
   investing lots of effort and lots of time but generating only
   red ocean type moves.




                                                                   51
 Minimizing Risk and Maximizing Opportunity

3. The third principle – reach beyond existing demand –
   addresses the scope risk of aggregating the greatest demand
   for the new offering.

4. The fourth principle – get the strategic sequence right –
   addresses how to build a robust business model to ensure that
   you make a healthy profit on your blue ocean idea thereby
   mitigating business model risk.




                                                                 52
 Minimizing Risk and Maximizing Opportunity

5. The fifth principle – overcome key organizational hurdles –
   addresses how to knock over organizational hurdles in
   executing a blue ocean strategy addressing organizational
   risk.

6. The sixth principle – build execution into strategy – tackles
   how to motivate people to execute blue ocean strategy to the
   best of their abilities, overcoming management risk.




                                                                   53
 Minimizing Risk and Maximizing Opportunity

These six principles aim to make the formulation and execution
of blue ocean strategy as systematic and actionable as competing
in the red ocean of existing market space.

In summary, in creating blue oceans, they guide companies in a
way that is both opportunity maximizing yet risk minimizing.




                                                                 54
Blue Ocean Strategy is a Dynamic Process
• Blue ocean strategy should not be thought of as a static process.
In order to be truly effective, blue ocean strategy must by
dynamic.

• Reference to The Body Shop
       Was highly successful in cosmetics field
       Rather than go head-to-head with large competitors, it invented a whole new market
                   space for natural beauty products.
       The Body Shop has recently struggled, but that doesn’t diminish the brilliance of its
                   original strategic move. But there was a problem. The Body Shop didn’t
                   realize that it had made a brilliant strategic move.
       Its genius lay in creating a new market space in an intensely competitive industry that
                   historically competed on glamour.
       Once it created a blue ocean, the firm focused on mining that new market space.
       That was okay while few players imitated it, but as more and more competitors
                   jumped into its blue ocean, the water became red, and The Body Shop
                   became involved in a bruising battle for market share..
                                                                                             55
Blue Ocean Strategy is a Dynamic Process
• Once a company has created a blue ocean, it should prolong its
profit and growth sanctuary by swimming as far as possible in
the blue ocean making itself a moving target, distancing itself
from potential innovators and discouraging them in the process.

•The aim here is to dominate the blue ocean over imitators for as
long as possible. But as other companies’ strategies began to
converge on your market, the blue ocean begins to turn red with
intense competition. This is when companies need to reach out
to create a new blue ocean to break away from the competition
again.

•This is where The Body Shop stumbled.
                                                                    56
Blue Ocean Strategy is a Dynamic Process
• Blue ocean strategy is not only a unique strategic methodology
intended to create and to capture blue oceans but also how to
monitor when it is time to search out and develop a new blue
ocean.

• In this way, blue ocean strategy presents a dynamic iterative
process to create uncontested market space across time.




                                                                   57
Blue Ocean Strategy is a Dynamic Process

• So who needs a sustainable competitive advantage?




                                                      58
Blue Ocean Strategy is a Dynamic Process
• Blue ocean strategy is not only a unique strategic methodology
intended to create and to capture blue oceans but also how to
monitor when it is time to search out and develop a new blue
ocean.

• In this way, blue ocean strategy presents a dynamic iterative
process to create uncontested market space across time.




                                                                   59
Blue Ocean Strategy is Cirque du Soleil




                                          60
Blue Ocean Strategy is Cirque du Soleil
         Critical issues with CdS:

               Recombination
               Reconstruction




                                          61
Blue Ocean Strategy is Cirque du Soleil
CdS generated revenues in less than 20 years that it took
Ringling Bros. and Barnum & Baily over 100 years to
generate.

CdS’s success has resulted from focusing on the demand ; not
recombination existing technologies or productive means (often
thought of as the supply side.

The basic building blocks for reconstruction are buyer value
elements that reside across existing industry boundaries.


                                                                 62
Blue Ocean Strategy is Cirque du Soleil
They are not technologies nor methods of production.

By focusing on the supply side, recombination tends to seek an
innovative solution to the existing problem.

BUT, in contrast, when looking at the demand side,
reconstruction breaks away from the cognitive bounds set by the
existing rules of competition.

In fact, we’re focusing on redefining the problem itself.


                                                                  63
Blue Ocean Strategy is Cirque du Soleil
CdS is not about offering a better circus by recombining existing
knowledge or technologies about acts and performances.

Rather it is about reconstructing existing buyer value elements to
create a new form of entertainment that offers the fun and thrill of
the circus with the intellectual sophistication of the theater.




                                                                    64
Blue Ocean Strategy is Cirque du Soleil
To reconstruct buyer value elements in crafting a new value
curve, the four actions framework has been developed

There are four key questions intended to challenge an industry’s
strategic logic and business model.




                                                                   65
    The Four Actions Framework

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

Which factor should be reduced well below the industry’s
standard?

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

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

                                                           66
   Blue Ocean Strategy is Cirque du Soleil
• The value curve, the basic component of the strategy canvas, is
a graphic depiction of a company’s relative performance across
its industries factors of competition.

                          Reduce



                           A New
            Eliminate      Value        Create
                           Curve




                           Raise



                                                                    67
Blue Ocean Strategy is Cirque du Soleil
CdS broke the best practice rule for the circus industry, achieving
both differentiation and low cost by reconstructing elements
across existing industry boundaries.

So is CdS then really a circus considering all that has been
eliminated, reduced, raised, and created? Or is it theater? And if
it is theater, then what genre – a Broadway show, an opera, a
ballet? It is not clear.

CdS reconstructed elements across these alternatives, and in the
end, it is simultaneously a little of all of them yet none of any of
them in their entirety.

                                                                       68
Blue Ocean Strategy is Cirque du Soleil

        Eliminate-Reduce-Raise-Create Grid

      Eliminate:                 Raise:
         Star performers           Unique venue
        Animal shows
        Aisle concession sales
         Multiple show arenas


      Reduce:                    Create:
         Fun and humor             Theme
         Thrill and danger         Refined environment
                                   Multiple productions
                                   Artistic music/dance




                                                          69
Blue Ocean Strategy is Cirque du Soleil




                                          70
Blue Ocean Strategy is Cirque du Soleil
Redefining the problem usually leads to changes in the entire
system and hence, a shift in strategy, whereas recombination of
existing elements may end up finding new solutions to sub-
system activities that serve to reinforce an existing strategic
position.

Reconstruction reshapes the boundary and the structure of an
industry and creates a blue ocean of new market space.

Recombination, on the other hand, tends to maximize
technological possibilities to discover innovative solutions.


                                                                  71
Blue Ocean Strategy is Yellowtail




                                    72
Blue Ocean Strategy is Yellowtail

     Eliminate-Reduce-Raise-Create Grid

   Eliminate:          Raise:




   Reduce:             Create:




                                          73
Blue Ocean Strategy is Yellowtail

     Eliminate-Reduce-Raise-Create Grid

   Eliminate:               Raise:
   Enological terminology    Price versus budget
   and distinctions          wines
   Aging qualities           Retail store
                             involvement
   Above-the-line
   marketing


   Reduce:                  Create:

   Wine complexity           Easy drinking
                             Ease of selection
   Wine range
                             Fun and adventure
   Vineyard prestige




                                                   74
Blue Ocean Strategy is Yellowtail




                                    75
Blue Ocean Strategy is Southwest




                                   76
Blue Ocean Strategy is Southwest

     Eliminate-Reduce-Raise-Create Grid

   Eliminate:          Raise:




   Reduce:             Create:




                                          77
Blue Ocean Strategy is Southwest




                                   78
     Three Characteristics of a Blue Ocean Strategy

        1. Focus
        2. Divergence
        3. Compelling tagline

These three characteristics serve as an initial litmus test of the
commercial viability of the blue ocean ideas.




                                                                     79
    Three Characteristics of a Blue Ocean Strategy

Southwest Airlines’ strategic profile illustrates how
these three qualities underlie the company’s effective
strategy in reinventing the short-haul airline industry via
value innovation.

Southwest created a blue ocean by breaking the trade-
offs customers had to make between the speed of
airplanes and the economy and flexibility of auto
transportation.


                                                          80
     Three Characteristics of a Blue Ocean Strategy

To achieve this, SWA offered high-speed transport with frequent
and flexible departures at prices that were attractive to the mass
of buyers.

By eliminating and reducing certain factors of competition and
raising others in the traditional airline industry, as well as by
creating new factors drawn from the alternative industry of auto
transport, SWA was able to offer unprecedented utility for air
travelers and achieve a leap in value with a low-cost business
model.



                                                                     81
           Blue Ocean Strategy is Southwest

As you have seen, the value curve of SWA differs distinctively
from those of its competitors in the strategy canvas. Its strategic
profile is a typical example of a compelling blue ocean strategy.

Focus….
Every great strategy has focus, and a company’s strategic profile,
or value curve, should clearly reflect focus. If we look at SWA’s
profile, we can see at once that the company emphasizes only
three factors:

       Friendly service
       Speed
       Frequent point-to-point departures
                                                                      82
           Blue Ocean Strategy is Southwest
                  (Focus continued)
These foci have allowed SWA to price against car transportation;
it doesn’t incur the costs of in-flight meals, lounges, and assigned
seating.

By contrast, SWA’s traditional competitors invest in all the airline
industry’s competitive factors, making it much more difficult for
them to match SWA’s pricing leadership.

Investing across the board, these companies let their competitors’
moves determine their own agendas. A rather pricy business
model.


                                                                   83
           Blue Ocean Strategy is Southwest
Divergence…

When a company’s strategy is planned reactively as it tries to
keep up with its competition, it loses its uniqueness. Consider the
similarities in most airline meals and business-class lounges. On
the strategy canvas, therefore, reactive strategists tend to share
the same strategic profile.

In contrast, the value curves of blue ocean strategists always
stand apart. By applying the four actions of eliminating,
reducing, raising, and creating, they differentiate their profiles
from the industry’s average profile. E.G., SWA pioneered point-
to-point travel between mid-size cities; previously the industry
operated through hub-and-spoke systems.

                                                                     84
           Blue Ocean Strategy is Southwest
Compelling Tagline…

A good strategy has a clear-cut and compelling tagline. ―The
speed of a plane at the price of a car – whenever you need it.‖

What could SWA’s competitors say?

A good tagline must not only deliver a clear message but also
advertise an offering truthfully, or else customers will lose trust
and interest.

A good way to test the effectiveness and strength of a strategy is
to look at whether it contains a strong and authentic tagline.

                                                                      85
             Reconstruct Market Boundaries
The first principle of blue ocean strategy is to reconstruct market boundaries in
order to break from the competition and create blue oceans.

This principle addresses the ―search risk‖ with which many companies
struggle.

The real challenge is to successfully identify, out of the haystack of
possibilities that exist, commercially compelling blue ocean opportunities.

This challenge is key because managers cannot afford to be riverboat gamblers
betting their strategy on intuition or on a lottery-type drawing.




                                                                               86
               Reconstruct Market Boundaries
There are six fundamental assumptions underlying many companies’
strategies. Specifically, companies tend to do the following:

  Define their industry similarly and focus on being the best within it.

   Look at their industries through the lens of generally accepted strategic
groups (such as luxury autos, economy cars, family vehicles), and strive to
standout in the strategic group they play in.

  Focus on the same buyer group, be it the purchaser, the user, etc.

  Define the scope of the products and services offered by their industry
similarity.

  Accept their industry’s functional or emotional orientation

   Focus on the same point in time—and often on current competitive
threats—in formulating strategy
                                                                               87
                 Reconstruct Market Boundaries
The more that companies share this conventional wisdom about how they compete, the
greater the competitive convergence among them.

To break out of red oceans, companies must break out of the accepted boundaries that
define how they compete.

Instead of looking within these boundaries, managers need to look systematically
across them to create blue oceans. They need to look across alternative industries,
across strategic groups, across buyer groups, across complimentary product and
service offerings, across the functional-emotional orientation of the industry, and even
across time.

This gives companies keen insight into how to reconstruct market realities to open up
blue oceans.


                                                                                        88
          Reconstruct Market Boundaries
            aka Six Paths Framework

There are six basic approaches to remaking market boundaries:




                                                                89
Path 1. Look Across Alternative Industries
In a broad sense, a company competes not only with the other
firms in its own industry but also with firms in other industries
that produce alternative products or services. Note that
―alternatives‖ are broader than ―substitutes.‖




                                                                    90
Path 1. Look Across Alternative Industries (continued)

Products/services can take different forms and perform different
functions but serve the same objective. Consider restaurants
versus cinemas. Restaurants provide social and gastronomical
pleasure. This is a very different experience from the visual
entertainment offered by cinemas. Despite the differences in
form and function, however, people go to a restaurant for the
same objective that hey go to the movies: to enjoy a night out.

These are not substitutes but alternatives to choose from.



                                                                   91
Path 1. Look Across Alternative Industries (continued)

In making purchase decisions, buyers implicitly weigh
alternatives, often unconsciously. Do you need a self-indulgent
two hours? What should you do to achieve it? Do you go to the
cinema, have a massage, or enjoy reading a favorite book at a
local café? The thought process is intuitive for individual
consumers and industrial buyers alike.




                                                              92
Path 1. Look Across Alternative Industries (continued)

But for some reason, we abandon this intuitive thinking when we
become sellers. Rarely do sellers think consciously about how
their customers make trade-offs across alternative industries. A
shift in price, a model change, even a new ad campaign can elicit
a tremendous response from rivals within an industry, but the
same actions in an alternative industry usually go unnoticed.

There are vertical walls between industies such as trade journals,
trade shows, and consumer rating reports. Often, however, the
space between alternative industries provides opportunities for
value innovation.


                                                                 93
Path 1. Look Across Alternative Industries (continued)

Lecture notes only….
NetJets; fractional jet ownership; Berkshire Hathaway; revenue growth
of 30-35%
Success due to its flexibility, shortened travel time, hassle-free travel,
high reliability, and strategic pricing. NetJets reconstructed market
boundaries to create this blue ocean by looking across alternative
industries.

http://www.netjets.com/




                                                                        94
Path 1. Look Across Alternative Industries (continued)




                                                         95
Path 2. Look Across Strategic Groups Within Industries

Just as blue oceans can often be created by looking across
alternative industries, so can they be unlocked by looking across
strategic groups. This term refers to a group of companies
within an industry that pursue a similar strategy.

In most industries, the fundamental strategic differences among
industry players are captured by a small number of strategic
groups.




                                                                  96
Path 2. Look Across Strategic Groups Within Industries (cont)

Strategic groups can generally be ranked in a rough hierarchical
order built on two dimensions: price and performance. Each
jump in price tends to bring a corresponding jump in some
dimensions of performance. Most companies focus on
improving their competitive position within a strategic group.
Mercedes, BMW, and Jaguar, for example, focus on
outcompeting one another in the luxury car segment just as
economy car makers focus on excelling over one another in their
strategic group. But neither strategic group pays any attention to
what the other is doing because from a supply vantage point they
do not seem to be competing.


                                                                 97
Path 2. Look Across Strategic Groups Within Industries (cont)

The key to creating blue ocean across existing strategic groups is
to break out of this narrow tunnel vision by understanding which
factors determine customers’ decisions to trade up or down from
one group to another.




                                                                 98
Path 2. Look Across Strategic Groups Within Industries (cont)




                                                                99
Path 3. Look Across the Chain of Buyers

In most industries, competitors converge around a common definition
of who the target buyer is. In reality though, there is a ―chain‖ of
buyers who are directly or indirectly involved in the buying decision.
The purchasers may differ from the actual users, and in some cases
there are important influencers as well.

Although these three groups may overlap, they often differ. They often
differ because they hold different definitions of value. A purchasing
agent may be far more concerned with cost than the corporate user
who is likely to be more concerned with ease of use. Similarly, a
retailer may value a manufacturer’s JIT stock replenishment and
innovative financing.

But consumer purchasers, although strongly influenced by the channel,
do not value these things.

                                                                     100
Path 3. Look Across the Chain of Buyers

Individual companies in an industry often target different customer
segments – for example, large versus small customers. But an industry
typically converges on a single buyer group. For example:

    Industry                       Focuses on
 Pharmaceuticals                Influencers (Physicians)
 Office Equipment               Purchasers (Corp Purchasing Dept)
 Clothing                       Users

Sometimes there is a strong economic rationale for this focus, but often
it is the result of industry practices that have never been questioned.



                                                                      101
Path 3. Look Across the Chain of Buyers

Challenging an industry’s conventional wisdom about which buyer
group to target can lead to the discovery of new blue ocean. By
looking across different buyer groups, companies can gain new
insights into how to redesign their value curves to focus on the
previously overlooked set of buyers.




                                                                   102
Path 4. Look Across Complementary Product/Service Offerings

Few products/services are applied in a vacuum. In most cases, other
products and services affect their value. But in most industries, rivals
converge within the bounds of their industry’s product and services
offerings.

Let’s look at movie theaters. The ease and cost of getting as babysitter
and parking your car affect the perceived value of going to the movies.
Yet these complementary services are beyond the bounds of the movie
theater industry as it has been traditionally defined.

Few cinema operators worry about how hard or costly it is for parents
to get babysitters. But they should because it affects the demand for
their business.


                                                                       103
Path 4. Look Across Complementary Product/Service Offerings

Untapped value is often hidden in complementary products and
services. The key is to define the total solution buyers seek when they
choose a product/service. A simple way to do so is to think about what
happens before, during, and after your product is used. E.G.;
Babysitting and parking are needed before people can go to the
movies. In the airline industry, ground transportation is used after the
flight but is obviously part of what the customer needs to travel from
one place to another.




                                                                      104
Path 4. Look Across Complementary Product/Service Offerings




                                                              105
Path 5. Look Across Functional or Emotional Appeal to Buyers

Competition in an industry tends to converge not only on an accepted
notion of the scope of its products/services but also on one of two
possible bases of appeal. Some industries compete principally on price
and function largely on calculations of utility; their appeal is rational.
Other industries compete largely on feelings; their appeal is emotional.




                                                                        106
Path 5. Look Across Functional or Emotional Appeal to Buyers
(cont)

And yet the appeal of most products or services is rarely intrinsically
one or the other. Rather it is usually a result of the way companies
have competed in the past, which has unconsciously educated
consumers on what to expect. Companies’ behaviors affect buyers’
expectations in a reinforcing cycle. Over time, functionally oriented
industries become more functionally oriented; emotionally oriented
industries become more emotionally oriented. No wonder market
research rarely reveals new insights into what attracts customers.
Industries have trained customers on what to expect. When surveyed,
they echo back: more of the same for less.



                                                                      107
Path 5. Look Across Functional or Emotional Appeal to Buyers
(cont)

When firms are willing to challenge the functional-emotional
orientation of their industry, they often find new market space. Two
common patterns have been observed. Emotionally oriented industries
offer many extras that add price without bolstering functionality.
Stripping away those extras may create a fundamentally simpler,
lower-priced, lower-cost business model that consumers would
welcome. Conversely, functionally oriented industries can often infuse
commodity products with new life by adding a dose of emotion, and in
so doing, can stimulate new demand.



                                                                    108
Path 5. Look Across Functional or Emotional Appeal to Buyers (cont)




                                                                      109
Path 6. Look Across Time

All industries are subject to external trends that affect their business
over time. Think of the rapid rise of the Internet or the global
movement toward protecting the environment. Looking at these trends
with the right perspective can show you how to create blue ocean
opportunities.

Most companies adapt incrementally and somewhat passively as events
unfold. Whether it’s the emergence of new technologies or major
regulatory changes, managers tend to focus on projecting the trend
itself, i.e.; they ask in which direction a technology will evolve, how it
will be adopted, whether it will become scalable. They pace their own
actions to keep up with the development of the trends they’re tracking.


                                                                       110
Path 6. Look Across Time (continued)

But key insights into blue ocean strategy rarely come from projecting
the trend itself. Instead they arise from business insights into how the
trend will change value to customers and impact the firm’s business
model. By looking across time – from the value a market delivers
today to the value it might deliver tomorrow – managers can actively
shape their future and lay claim to a new blue ocean. Looking across
time is perhaps more difficult than the previous five approaches I’ve
presented, but it can be made subject to the same disciplined approach.
We’re not talking about predicting the future, something that is
inherently impossible. Rather, we’re into finding insight in trends that
are observable today.



                                                                      111
Path 6. Look Across Time (continued)

Three principles are critical to assessing trends across time. To form
the basis for a blue ocean strategy, these trends must be decisive in a
business, they must be irreversible, and they must have a clear
trajectory. But beware, it may be possible to see a trend or major event
without being able to predict a direction.




                                                                      112
Path 6. Look Across Time (continued)

In 1998, for example, the mounting Asian crisis was an important trend
certain to have a big impact on financial services. But it was
impossible to predict the direction that trend would take, and therefore
it would have been a risky enterprise to envision a blue ocean strategy
that might result from it. In contrast, the euro has been evolving along
a constant trajectory as it has been replacing Europe’s multiple
currencies. It is a decisive, irreversible, and clearly developing trend
in financial services upon which blue oceans can be created as the
European Union continues to enlarge.




                                                                      113
Path 6. Look Across Time (continued)

Having identified a trend of this nature, we can then look across time
and ask ourselves what the market would be like if the trend were
taken to its logical conclusion. Working back from that vision of a
blue ocean strategy, we can begin to identify what must be changed
today to unlock a new blue ocean.




                                                                         114
Focus on the Big Picture; Not the Numbers


• You are now familiar with the paths to creating blue oceans.

• So how do we align the strategic planning process to focus on the
big picture and apply these ideas in drawing a company’s strategy
canvas to arrive at a blue ocean strategy?

• This can be a major challenge. Why? Research indicates that most
companies’ strategic planning processes perpetuate red oceans.

• In other words, the process tends to drive companies to compete
Within existing market space.


                                                                 115
Focus on the Big Picture; Not the Numbers


• Think of a typical strategic plan.

• It starts with a lengthy description of current industry conditions
and the competitive situation.

• Next is a discussion of how to increase market share, capture new
segments, cut costs, followed by an outline of numerous goals and
Initiatives.

• A full budget is attached as are lavish graphs and spreadsheets.



                                                                     116
Focus on the Big Picture; Not the Numbers


• The process usually culminates in the preparation of a bulky document
culled from a mishmash of data provided by people from various parts of
the organization who have conflicting agendas and poor communications.

• In this process, managers spend the majority of strategic thinking time
filling in boxes and running numbers instead of thinking blue ocean and
developing a clear picture on how to break from the competition.

• Students can see why very few strategic plans lead to the creation of
blue oceans or are translated into actions. Executives are paralyzed by
this muddle.

• Few employees even know what the strategy is.

                                                                          117
Focus on the Big Picture; Not the Numbers


• A closer look reveals that most plans don’t include a strategy at all but
rather a smorgasbord of tactics that individually make sense but collectively
don’t add up to a unified clear direction that sets the company apart – let
alone makes the competition irrelevant.

• Researchers and consultants have found that drawing a strategy canvas
not only visualizes a company’s current strategic position in the marketplace
but also helps to chart its future strategy.

• By building a firm’s strategic planning process around a strategy canvas,
a company and its managers focus their main attentions on the big picture
rather than becoming immersed in numbers and jargon and getting caught
up in operational details.

                                                                        118
Focus on the Big Picture; Not the Numbers


• As previously pointed out, drawing a strategy canvas does three things:

• First, it shows the strategic profile of an industry by depicting very clearly
the factors (and the possible future factors) that affect competition among
industry players.

• Second, it shows the strategic profile of current and potential competitors,
identifying which factors they invest in strategically.

• Finally, it shows the company’s strategic profile – or value curve –
depicting how it invests in the factors of competition and how it might
invest in them in the future.


                                                                          119
Focus on the Big Picture; Not the Numbers


• As also pointed out, the strategic profile with high blue ocean potential
has three complementary qualities: focus, divergence, and a compelling
tagline.

• If a firm’s strategic profile does not clearly reveal those qualities, its
strategy is likely to be muddled, undifferentiated, and hard to communicate.

• It is also likely to be costly to execute.




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