Blue Ocean Strategy Synopsis of Kim and Mauborgne’s Book
Mário Luís Tavares Ferreira 2009 – Rev.1
Table of Contents 1.
Why it is so interesting the Blue Ocean Strategy?
3
1.1.
Comparative of Red Ocean and Blue Ocean
3
1.2.
The Case Cirque du Soleil.
4
2.
Principles of Blue Ocean Strategy
4
3.
Strategy Canvas and Action Frameworks
5
3.1.
Strategy Canvas
5
3.2.
The Four Action Framework
6
3.2.1.
Which of the factors that industry takes for granted should be eliminated? 6
3.2.2.
Which factors should be reduced well bellow the industry’s standard?
6
3.2.3.
Which factors should be raised well above the industry’s standard?
6
3.2.4.
Which factors should be created that industry has never offered?
6
3.3.
The Eliminate-Reduce-Raise-Create Grid, to create a new value curve.
7
3.4.
Three Characteristics of a Good Strategy
8
3.4.1.
Focus
8
3.4.2.
Divergence
8
3.4.3.
Compelling Tagline
8
4.
Reconstructing Market Boundaries, the First Principle
8
5.
Focus on the Big Picture, not Numbers, the Second Principle
9
6.
5.1.
The Pioneer-Migrator-Settler (PMS) Map
5.2.
Testing the Growth Potential
Reach Beyond the Existing Demand, the Third Principle 6.1.
7.
The Three Tiers of Noncustomers
Get the Strategic Sequence Right, The Fourth Principle.
9 10 10 10 11
7.1.
The Buyers Utility
12
7.2.
The Price
13
7.3.
The Cost
14
7.3.1.
The Profit Model of Blue Ocean Strategy
14
7.4.
Adoption
14
7.5.
The Blue Ocean Idea Index
15
8.
Surpass the Organizational Barriers, the Fifth Principle
15
9.
Building Execution into Strategy, the Sixth Principle
16
10. Final Conclusions
17
Appendix – Core Points to Remember about Blue Ocean Strategy
18
Blue Ocean Strategy – a Synopsis of Kim and Mauborgne’s book
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1. Why it is so interesting the Blue Ocean Strategy?
With the current technological stage, productivity is at high levels, the supply exceeds the demand and the prices are falling. The globalization adds a component that facilitates new entrants and low production cost, and to make it worst, the rich countries (with more consuming power/demand) have their population decreasing. So, the creation of new markets with focus on non-customers to create demand using blue ocean strategy will be an interesting approach, besides other aspects and methodologies. One key point of Blue Ocean Strategy is how to create value and how to make customer comfortable and willing to pay for it. Innovation has a key role on this matter, but not only. It must be aligned with utility, price and cost. The cornerstone of blue ocean strategy, which is called by the authors as Value Innovation, is to focus on making competition irrelevant by creating a leap in value for consumers and the organization. The consequence is the creation of a new market place.
1.1.
Comparative of Red Ocean and Blue Ocean
Red Ocean Compete in existing market Concern with competition Focus on existing customers Work with existent demand/ market share Deal with value and cost trade-off (creating value at higher cost OR creating reasonable value at low cost) Whole company is aligned with the strategy of differentiation OR low cost
Blue Ocean Create a new market Make competition irrelevant Focus on non-customers Create a new demand and market share Don’t use value/cost trade-off (create both, greater values and low cost) Company is aligned with the strategy of differentiation AND low cost.
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1.2.
The Case Cirque du Soleil. •
They created a new market. One of the first shows was titled “We Reinvent the Circus”.
•
They didn’t compete in the same market from the conventional circus.
•
They didn’t use animals or Hollywood stars.
•
They focused on other customers: adults and corporation clients, and, by consequence, caused a different perspective about prices and motivation/capacity to pay for a different experience.
2. Principles of Blue Ocean Strategy Formulation Reconstruct market boundaries Focus on big picture, not numbers Reach beyond existing demand Get the strategy sequence right Execution Surpass organizational barriers Build execution into strategy
Risk Factor Attenuated Search risk Planning risk Scale risk Business model risk Organizational risk Management risk
IF followed correctly those principles the mentioned risks are attenuated. Effective blue ocean strategies should be about risk minimization and not risk taking. About Strategy, to shift the strategy of an industry, you must reorient the focus from competitors to alternatives and from customers to noncustomers. To use value and cost approach, it must not be used benchmarking competitors, because, it will return to differentiation or to cost approach, in the conventional way. Moving the focus from competitors and customers, it will be possible to develop insights to create new solutions, better buyer value elements and to create market across industry boundaries.
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3. Strategy Canvas and Action Frameworks 3.1.
Strategy Canvas
The strategy canvas has two purposes. The first one is to analyze the current market place and understand where competition is investing and which factors are the more saturated. The second point is to facilitate the focus reorientation from competitors to alternatives and from customers to noncustomers. The value curve (blue from the Blue Ocean strategy and red from competition) is the basic component of the strategy canvas.
Note about the graphic: Usually we see the X and Y axis as and with incremental values. The Y axis on the graphic is, as usual, an incremental axis from Low to High Offering. On the X axis we have the Factors of Competition, where each point is a factor, and where industry is competing, so, it is not an incremental axis.
The objective is to have a value curve that diverges from competition offering a higher value and using factors where there is no competition or where they have a lower offering. The last factors couple with a high level of offering, (above graphic), where we have only the blue value curve, are a good value curve for blue ocean strategy.
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3.2.
The Four Action Framework
To create a new value curve and break the trade-off between differentiation and low cost, four questions shell be answered.
3.2.1. Which of the factors that industry takes for granted should be eliminated? Objective: • Eliminate factors that have long competed on. • Move the focus from benchmarking competitors. • Find out if it had a change in what buyers value.
3.2.2. Which factors should be reduced well bellow the industry’s standard? Objective: • Determine if products are overdesigned. • Find out, if it has occurred increase in cost structure for no gain.
3.2.3. Which factors should be raised well above the industry’s standard? Objective: • Eliminate the compromise that customers have with the industry.
3.2.4. Which factors should be created that industry has never offered? Objective: • The discovery of new sources of value for buyers and the creation of a new demand and to shift the strategic pricing of industry.
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The first two questions (eliminate and reduce) will develop an insight into how to drop cost structures. The second two questions (raise and create) will help to lift customer value and create new demand.
3.3. The Eliminate-Reduce-Raise-Create Grid, to create a new value curve. It is an analytic tool, which is complementary to the four action framework and gives the opportunity to: • • • •
Pursue differentiations and low cost to break value-cost trade-off. Flag organizations that are lifting their cost structure and maybe overengineering their products. Have an easy understanding. Develop a consistent vision of every factor where the industry competes on.
Eliminate Which of the factors that industry takes for granted should be eliminated? Reduce Which factors should be reduced well bellow the industry’s standard?
Raise Which factors should be raised well above the industry’s standards? Create Which factors should be created that the industry has never offered?
The Cirque du Soleil example:
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Eliminate Star performers, animals shows, aisle concession sales, multiple show arenas Reduce Fun and humor, thrill and danger
3.4.
Raise Unique venue Create Theme, refinement environment, multiple productions, artistic music and dance
Three Characteristics of a Good Strategy
A good strategy should have focus demonstrated on a clear company’s strategic profile and value curve. Also, must diverge from competition. And, it should have a compelling tagline.
3.4.1.
Focus
Every strategy must have a focus and the organization profile and/or the value curve must clearly show it.
3.4.2.
Divergence
When the strategy is reactive to keep up with competition, it loses its uniqueness. Applying the four actions, the organizations differentiate their profiles and the value curve will stand apart from competitors.
3.4.3.
Compelling Tagline
A good tagline delivers a clear message and advertises an offering truthfully.
4. Reconstructing Market Boundaries, the First Principle To move from red oceans, companies must not accept boundaries that define how they compete. They must look across: • • • • •
Alternative industries; Strategic groups within industries; The chain of buyers; Complementary product and services; Functional and emotional appeal, and look across time.
This will give some insights to reconstruct market and to open up blue oceans.
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5. Focus on the Big Picture, not Numbers, the Second Principle The conventional strategic planning tends to drive companies to red oceans. A typical strategic planning starts with current industry conditions and competitors analysis. Then goes to how increase market share, new segments or cut costs, followed by goals and actions. It goes through SWOT, PEST, BCG, McKinsey, and so on, analysis coupled with some spreadsheets, and graphics. The perspective must change, must think outside the box and develop a clear picture of how to break from competition. To see the Big Picture, it needs a visual awakening, a visual exploration, a visual strategy fair and a visual communication. •
Visual awakening: compare your business with your competitors and see where your strategy needs to change.
•
Visual exploration: go to the field to explore the six paths to creating blue oceans; observe the distinctive advantages of alternative products; see which factors should be eliminated, created or changed.
•
Visual strategy fair: draw your strategy based on field observations; get feedback on alternatives from customers, competitors’ customers and noncustomers; use feedback to design the best future strategy.
•
Visual communication: distribute your “best future strategies” on one page for ease comparison; choose only those that allow the company to close the gaps to actualize the new strategy.
5.1.
The Pioneer-Migrator-Settler (PMS) Map
According to the authors of the Blue Ocean Strategy book, all companies in their studies, that created blue oceans, have been pioneers in their industries. Pioneers are businesses that offer unprecedented values, they are blue ocean strategists. Their value curve diverges from competition. Settlers are the other extreme, they are the me-too business. Their value curve is similar to the basic one of the industry. Migrators lie between both and they extend the industry’s curve by giving more for less, but they have the same basic curve shape. They improve value but not an innovative value.
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5.2.
Testing the Growth Potential
Pioneers
Migrators Settlers
Today
Tomorrow
6. Reach Beyond the Existing Demand, the Third Principle The conventional strategic initiatives are with the focus on existing customers to retain and expand the market share, which usually takes to greater tailoring and offerings, and finer segmentation, with the risk of creating small target markets. To maximize blue oceans, companies need to focus on noncustomers. Instead of focusing on customer differences, the seeking must be on same interests that they value, which will allow companies to reach beyond existing demand and will aggregate a new mass of customers.
6.1.
The Three Tiers of Noncustomers
First, the companies need to understand the universe of noncustomers. The three tiers are related with the distance, that they are from the current market.
Third Tier Second Tier First Tier Your Market
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First Tier: “Soon-to-be” noncustomers who are on the edge of the market. Second Tier: “Refusing” noncustomers who consciously choose against your market. Third Tier: “Unexplored” noncustomers who are in markets distant from yours. These soon-to-be customers almost don’t use your market offerings because they search better offers. If they find a better alternative they will go after it and leave this market. A market stops growing when there are many soon-to-be customers. The insight is to figure out what they are searching. The refusing noncustomers are people that can’t afford or don’t use the market offerings. Their necessities are attended by other means or are ignored. It is a vast ocean to pursue. The unexplored noncustomers have not been explored or thought by industry players. They are seen as participants of other markets. It is an unexplored ocean, where results could be outstanding. As the authors mentioned, there is no magic formula to suggest which tier should be focused. The blue ocean opportunities, in a specific tier, may be different, across time and industries. The ideal would be to unlock the potential across tiers, discover the commonalities across all three tiers. A fundamental aspect to maximize the scale of Blue Ocean, is to reach beyond existing demand to noncustomers and desegmentation opportunities, as you develop futures strategies.
7. Get the Strategic Sequence Right, Principle.
The
Fourth
The sequence starts with buyer utility, followed by price, cost and adoption. •
Does it have exceptional buyer utility, your business idea? If yes, continue. If not, rethink.
•
Is your price affordable to the mass of buyers? If yes, continue. If not, rethink.
•
Can you limit your cost to profit at your strategic price? If yes, continue. If not, rethink.
•
What are the adoption barriers in actualizing your business idea? Are you addressing them up front? If yes, continue. If not, rethink.
After accomplish this sequence you will have a commercially viable blue ocean idea.
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7.1.
The Buyers Utility
The Buyer Utility Map helps to identify the levers to deliver exceptional utility to buyers.
Each stage of buyers’ experience cycle has its specific experiences and for each stage a set of questions should be answered to gauge the quality of buyers’ experiences. In each stage the analysis of levers helps to develop the perspective and find the right questions. For example: stage of purchase with the customer productivity lever, could have the question: Is it easy and fast to find the product? To get the exceptional utility in each stage, each lever must be analyzed and identified the hurdles, and removed, to achieve the expected results. It is common that the greatest hurdles represent pressing opportunities to unlock exceptional value. Using the same example described above. The greatest block, in the purchase process, could be the manner of how to buy it, if removed, the exceptional experience aimed, at the lever of customer productivity, may be achieved.
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7.2.
The Price
To have strong revenue flowing, the strategic price must be set. This procedure will ensure that consumers will want to buy and will have the compelling ability to achieve it. It is fundamental, from the start, to know the price that will bring masses of target consumers. The strategic price defined must not only attract customers but also retain them. The reputation must be earned since day one and rapidly spread by networked society. That is important to avoid imitations and avoid turning the blue ocean in red ocean. When exceptional utility is combined with strategic pricing, imitation is discouraged. The price corridor of the mass is a tool to facilitate the discovery of the right price to attract mass of buyers. It has two steps. Step one identifies the price corridor of the mass and the second step specifies the price level within the corridor.
Usually companies look first at products that are most similar in term of form and also look inside their industries. To define the strategic price, the great challenge, is to understand the price sensibility of those people (buyers) when comparing completely different products/services offered outside the group of traditional competitors.
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So, it is important to compare others products outside industry boundaries that offer different forms and also different forms and different functions but attend the same initial proposition (need). The second step helps companies to define the highest price that they can afford to set within corridor without inviting competition from imitation. The assessment depends on the degree of legal protection of products/services and the degree of assets and core capabilities that the company owns.
7.3.
The Cost
Now moving from strategic pricing to target costing. It addresses the profit side of the business model. Following the blue ocean strategy, first was defined the strategic price and then deducted the desired profit margin to arrive at the target cost. It is strategic to reach to a cost structure that allows profitability and it is hard to competitors to imitate. To be successful with target costing, the strategy profile must be divergent, but must also have focus.
7.3.1.
7.4.
The Profit Model of Blue Ocean Strategy
Adoption
A so large change threatens the status quo, and for that reason it may provoke insecurity and resistance among company’s stakeholders.
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Concerns of employees, business partners and general public must be addressed to avoid resistance and fears, when changing the current status quo. Awareness should be developed to communicate the advantages that everyone will have with the success of the actions.
7.5.
The Blue Ocean Idea Index
Despite following the sequence: utility, price, cost and adoption, the vision of the whole must not be lost. The blue ocean idea index helps to keep that systemic vision. Basically, that vision is formed by the answer of the following questions: Is there exceptional utility? Are there compelling reasons to buy the offering? Is the price easily accessible to the mass of buyers? Does the cost structure meet the target cost? Were addressed adoption hurdles up front? Answering with plus or minus signal to each question, an overview of accomplishment to the blue ocean idea will be achieved.
8. Surpass the Principle
Organizational
Barriers,
the
Fifth
After the definition of the blue ocean strategy and checked the accomplishment of the idea, now it needs to be implemented. Its execution is also a challenge and some issues need to be addressed. There are some barriers, which must be overcome. One is the cognitive factor, which is the resistance to changes. People like to keep the status quo, it is an environment that they know and control. Any changes that move them from the comfort zone will generate a natural resistance. They need to be aware of the importance and necessity of the strategic change. The second point is the limited resources. Usually, the greater is the change, the greater are the resources needed. But it is not the reality. Actually, it is exactly the contrary.
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The third issue is the motivation. It is important to have the key players motivated to go faster and change the status quo, quickly. Last point is politics. Paraphrasing the authors of the Blue Ocean Strategy book, making a reference to a sentence from a manager that they heard, they quote: “In our organization you get shot down before you stand up.” It says everything about this point.
9. Building Execution into Strategy, the Sixth Principle The organization is everyone from top management to front lines. This means that organization is made by people and everyone is important. So, they all need to be aligned around the strategy and support it. It is fundamental to create a culture of trust and commitment, to implement the agreed strategy. This it is not done by a written document but with an alignment of spirit and mind of people, with the new strategy. The objective of this principle is to mitigate management risk of distrust, noncooperation and even sabotage. A key aspect, to achieve success, is that processes need to be fair and transparent. A fair process and implications related with attitudes and behavior: •
The strategy formulation process: need to have engagement, explanation and expectation clarity.
• •
About attitudes: need to have trust and commitment, like “I feel that my opinion counts.” About behavior: the cooperation is voluntary, like “I will go beyond the call of duty.”
•
About strategy execution: need to exceed expectations, it is self-initiated.
An important point to highlight is the three E principles of a fair process. •
Engagement: involve individuals in strategic decisions that affect them.
•
Explanation: everyone involved and affected should understand the final strategic decisions.
•
Expectation clarity: leaders must state clearly the new rules of the game. It must be clear the targets and milestones, the responsibilities, the key process indicators, the standards and also the penalties for failure.
An interesting comparative about the execution of a fair process and an unfair process:
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•
Fair process – intellectual and emotional recognition – trust/commitment – voluntary cooperation;
•
Unfair process – intellectual and emotional indignation – distrust/resentment – refusal to execute.
A last comment about commitment, trust and voluntary cooperation, they are difficult to measure and monitor, they are intangible capital.
10. Final Conclusions Creating blue oceans is a dynamic process. Sooner or later, competitors will appear. Final thoughts will address the sustainability and renewal of blue ocean strategy. Some points to consider that are related with imitation barriers: • • • • • • • •
A value innovation move does not make sense based on conventional strategic logic. Brand image conflict prevents competitors from imitating. Natural monopoly blocks imitation, when size of market cannot support another competitor. Patents or legal permits block imitation. High volume generated by innovation leads to cost advantages and places competitors in costs disadvantages. Network externalities also block companies from easily and credibly imitating blue ocean strategy. Imitation requires substantial changes and investment which may take years. The offer of a leap in values rapidly earns brand buzz and loyal following.
Something that must be also, and always, clear: There is no permanently excellent industry. There are no permanently excellent companies.
At the end of the Blue Ocean Strategy book, it can be found various study cases of three American industries - automobiles, computers and movie theaters.
Reference: Kim, W.Chan. Mauborgne, Renée. Blue Ocean Strategy.
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Appendix – Core Points to Remember about Blue Ocean Strategy The Red Ocean and the Blue Ocean Red Ocean Compete in existing market Concern with competition Focus on existing customers Work with existent demand/ market share Deal with value and cost trade-off (creating value at higher cost OR creating reasonable value at low cost) Whole company is aligned with the strategy of differentiation OR low cost
Blue Ocean Create a new market Make competition irrelevant Focus on non-customers Create a new demand and market share Don’t use value/cost trade-off (create both, greater values and low cost) Company is aligned with the strategy of differentiation AND low cost.
Blue Ocean Principles Formulation Reconstruct market boundaries Focus on big picture, not numbers Reach beyond existing demand Get the strategy sequence right Execution Surpass organizational barriers Build execution into strategy
Risk Factor Attenuated Search risk Planning risk Scale risk Business model risk Organizational risk Management risk
Strategy Canvas and Action Framework
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The Four Action Framework
The Grid of the Four Actions Eliminate Which of the factors that industry takes for granted should be eliminated? Reduce Which factors should be reduced well bellow the industry’s standard?
Raise Which factors should be raised well above the industry’s standards? Create Which factors should be created that the industry has never offered?
1 – Principle - Reconstruct Market Boundaries Look across: • Alternative industries; • Strategic groups within industries; • The chain of buyers; • Complementary product and services; • Functional and emotional appeal, and look across time. 2 – Principle - Focus on the Big Picture • • • •
Visual awakening: compare your business with your competitors and see where your strategy needs to change. Visual exploration: go to the field to explore the six paths to creating blue oceans; observe the distinctive advantages of alternative products; see which factors should be eliminated, created or changed. Visual strategy fair: draw your strategy based on field observations; get feedback on alternatives from customers, competitors’ customers and noncustomers; use feedback to design the best future strategy. Visual communication: distribute your “best future strategies” on one page for ease comparison; choose only those that allow the company to close the gaps to actualize the new strategy.
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Growth Potential Pioneers
Migrators Settlers
Today
Tomorrow
3 – Principle - Reach Beyond existing Demand
Third Tier Second Tier First Tier Your Market
4 – Principle - Get the Strategic Sequence Right
Buyer Utility
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Price
Cost
Adoption Concerns of employees, business partners and general public must be addressed to avoid resistance and fears, when changing the current status quo. Awareness should be developed to communicate the advantages that everyone will have with the success of the actions.
Blue Ocean Idea • • • •
Is there exceptional utility? Are there compelling reasons to buy the offering? Is the price easily accessible to the mass of buyers? Does the cost structure meet the target cost? Were addressed adoption hurdles up front?
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5 – Principle – Surpass Organizational Barriers • • • •
One is the cognitive factor, which is the resistance to changes. The second point is the limited resources. The third issue is the motivation. Last point is politics.
6 – Principle – Build Execution into Strategy • •
Fair process >>intellectual and emotional recognition – trust/commitment – voluntary cooperation; Unfair process >> intellectual and emotional indignation – distrust/resentment – refusal to execute.
Three E principles of a fair process: • Engagement: involve individuals in strategic decisions that affect them. • Explanation: everyone involved and affected should understand the final strategic decisions. • Expectation clarity: leaders must state clearly the new rules of the game. It must be clear the targets and milestones, the responsibilities, the key process indicators, the standards and also the penalties for failure. Implications of a Fair Process: • The strategy formulation process: need to have engagement, explanation and expectation clarity. • About attitudes: need to have trust and commitment, like “I feel that my opinion counts.” • About behavior: the cooperation is voluntary, like “I will go beyond the call of duty.” • About strategy execution: need to exceed expectations, it is self-initiated.
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