Blue Ocean Strategy (2)

Presented By Amit Misra(Roll No. 8) Abhishek Choudhary(Roll No. 2)

Summary Blue ocean strategy challenges companies to break out of

red ocean of bloody competition. Instead of dividing up existing or even shrinking demand and benchmarking competitors, its about growing demand and breaking away from competition. The book focuses on methods of creating uncontested market space and make the competition irrelevant. The book focuses on systematic understanding of creating and capturing blue oceans. This helps in maximizing opportunity and minimizing risk.

Red Oceans Vs Blue Oceans Red Oceans represent all the Blue Oceans denote all the industries

industries in existence today. This is known market space. Exploit existing demand Industries boundaries are defined and accepted As market space is crowded, prospects for profit and growth are reduced. Align the whole system of the firms activities with its strategic choice of differentiation or low cost

not in existence today. This is the unknown market space. Create and capture new demand Untapped Market space Opportunity for highly profitable growth Align the whole system of a firms activities in pursuit of differentiation and low cost.

New Market Space Blue oceans are largely uncharted Most blue oceans are created within red oceans by

expanding existing industry boundaries. There are no established frameworks to create blue oceans and principles to effectively manage risk. Creating blue oceans are seen to be too risky a proposition for managers to pursue as a strategy. Overriding focus of strategic thinking has been on competition based red ocean strategies. E.g. Low cost, differentiation, benchmarking Blue oceans though have been continuously created over time

Impact of creating Blue Oceans

Cornerstone of Blue Ocean Strategy Value Innovation is the basic concept behind Blue Ocean strategy. Value innovation is a new way of thinking about and executing

strategy that results in the creation of blue ocean and a break from competition. Value innovation occurs only when companies align innovation with utility, price and cost positions. Value without innovation tends to focus on value creation on incremental scale but doesnt make a company stand out in market place. Value innovation is different from technology innovation and market pioneering. Approach to strategy was the major factor in creating blue oceans successfully.

Value InnovationValue Innovation is created in the region where companys actions favorably affect both its cost structure and its value proposition to buyers. Cost savings are made by eliminating & reducing the factors an industry competes on. Buyer value is lifted by raising and creating elements the industry has never offered.

Principles of Blue Ocean Strategy

Difference in LogicConventional Logic lue Ocean Logic Blue BIndustry Industry conditions are Assumption given Strategic Focus Customers Build competitive advantages to beat the competition. Retain and expand the customer base through further segmentation and customization. Think in terms of embracing customer differences. Industry condition can be shaped. Create a quantum leap in buyer value to dominate the market. Go for the mass of buyers and willingly let some existing customers go. Think in terms of embracing key customer value commonalities.

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Conventional Logic Blue Ocean LogicAssets & Think in terms of a Capabilities companys existing assets and capabilities. Build on what it has. Product/ Service offerings Think in terms of products/services offered by the industry. Seek to maximize the value of these offerings. Think free from a companys existing assets and capabilities.

Think in terms of buyers solution even if that transcends the industry. Seek to solve buyers major bottlenecks/chief compromises in using the products/services of the industry.

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Basic Tools and Frameworks of Blue Ocean Strategy

The Strategy Canvas Diagnostic and Action Framework Captures the current state of play in the known market

space, which allows to understand where the competition exists Information is captured in graphic form Horizontal axis consists of range of factors the industry competes on and invests in. The value curve, the basic component of the strategy canvas, is a graphic depiction of a companys relative performance Strategy canvas not only visualizes a companys current strategic position in its market place but also helps it chart its future strategy.

Four Action FrameworkRaiseWhat factors should be raised well beyond the industry standard?

EliminateWhat factors should be eliminated that the industry has taken for granted?

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

ReduceWhat factors should be reduced well below the industry standard?

Example: A highly competitive Industry

The American Wine Industry

Industry offeringsPremium WinesPolarized Strategic Groups

Budget Wines

Massive Choice15

American Wine Industry 3rd largest in world: worth $20 billion Californian makes 66% - the rest is from Italy, France, Spain, Chile,

Argentina, Australia Exploding number of new wines new vineyards in Oregon, Washington, New York Customer base stagnant 31st in the world in per capita consumption Top 8 producers had 75% of the market; 1600 had the remaining 25% $ millions spent in marketing - Titanic battles intense competition Sever price pressure The dominant growth strategy was towards premium wines more complexity, better image, more prestigious vineyards, number of medals won at wine festivals.

Offering Level versus Wine Drinkers ExpectationsNormalVery high Low Very low High

Us te e o di rmi f en wi stin nol olo co ne ctio ogy gic m ns an al m in d un ic Ab ati m ov on ar eke t h tin eg line Ag in g qu Vi al ity pr ney es ar le ga ti g d c e an W y d in e co m pl ex ity W in e ra ng eNonexistent

Premium and Budget Wines

Pr e ic

Observations Confusing and complex

Wine descriptions and terminology The shopping experience The lack of clear guidance on what to buy and drink Thus, massively intimidating for noncustomers (the large majority of the US population who were not wine drinkers) Budget wines and premium wines had the same strategic profile It was required to reorient the strategic focus from competitors to alternatives and from customers to non customers of the industry. Yellow tail created a social drink with fruit flavours. Yellow tail brought non wine drinkers, beer and ready to drink cocktail drinkers into wine market.

Yellow Tail created a Blue OceanCreating a Blue Ocean

Premium

Budget

19

Normal

Very high

Low

Very low High

Us te e o di rmi f en st no o in inc log log tio y ic e m ns an al m in d un ic Ab ati m ov on ar eke t h tin eg line Ag in g qu Vi al ity pr ney es ar le ga ti g d c e an W y d in e co m pl ex ity W in e ra ng e Ea sy dr in ki Ea ng se of se le ct io n Fu ad n a ve nd nt ur ou sNonexistent

Yellow Tail Value Curve

Pr e ic

Yellow Tail StrategyThe Grid

A new Value Curve originates by combining all the 4 actions

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Results No 1 imported wine (outsells France and Italy) Fastest growing imported wine in the history of the USA

industry New consumers of wine Jug drinkers trade up Premium wine drinkers trade down

Characteristics of a good strategy

Reading the Value curveValue Curve Value Curve converges with competitors Higher level across all factors Curve is in bowl shape Deviations in dependent factors Uncommon strategic jargons Meaning Company is caught in competition Over delivery without payback Incoherent strategy Strategic contradictions Internally driven

Reconstruct Market Boundaries Six Paths Framework

Head to head competition to Blue ocean creationHead to head competitionIndustry Strategic group Focuses on rivals within industry

Blue Ocean creationLooks across alternative industries

Focuses on competitive Looks across strategic groups position within strategic group within industry Focuses on better serving the Redefines the industry buyer buyer group group Focuses on maximizing the Looks across to value of product & service complementary product and offerings within the bounds of service offerings its industry Focuses on improving price performance within the functional-emotional orientation of its industry Rethinks the functionalemotional orientation of its industry

Buyer group Scope of product or public offering

Functional-emotional orientation

Time

Focuses on adapting external Participates in shaping trend as they occur external trends over time

The four steps of visualizing strategyVisual Awakening Compare your business with your

Visual Exploration Go into the field to explore 6 paths

competitors by drawing your as in strategy canvas See where your strategy needs to change

to create blue oceans Observe the distinct advantages of alternative product and services See which factors are to be eliminated, created or changed

Visual Strategy Fair Draw your to be strategy canvas based on

Visual Communication Distribute your before and after

insights from field observations Get feedback on alternative strategy canvases from customers, competitors customers and non customers Use the feedback to build the best to be future strategy

strategic profiles on one page for easy comparison Support only those projects and operational moves that allow your company to close the gaps to actualize the new strategy

Increasing the target segment Challenge the existing conventional strategy practices

1) Focus on existing customers 2) Drive for finer segmentation or customization which creates too . small target segments Instead of focusing on customers, companies need to look at non customers E.g. Big Bertha golf club Instead of focusing on customer differences, they need to build on powerful commonalities in what buyers value E.g. Navy, Marines and Air force of US highest cost components of software & engines of different fighter planes

The three tiers of non customers 1st Tier Non customers on

the edge of the market 2nd Tier Refusing non customers who consciously choose against your market 3rd Tier Unexplored non customers who are in distant markets Focus on tier that represents the biggest catchment at that time.

The Sequence of Blue Ocean Strategy

Testing for Exceptional UtilityPhillips CD-I Imagination Machine Buyer Utility Map

6 Utility LeversPurchase, delivery, use, supplements,

maintenance, and disposal. Ford model T

Strategic PricingTwo reasons for change: Volume generates higher returns than in past To a buyer, value of a product/service may be closely tied to the total number of people using it. Nonrival good Excludability

Price corridor of the mass: 2 Step Process

Target CostingThree principle

levers IBM Slice-share Pricing innovation Article: Target Cost Management by Louise Ross

Pricing Innovation? Taking a cue from

Hellman's Mayonnaise, who recently redefined the quart as 30 ounces instead of 32, the approach is simple. Hours are now 54 minutes long instead of 60. Goal: corporate profits

during economic downturn

iPhone Pricing Strategy The early adopters of Apple's iPhone paid $599 for the

privilege of being the first to have the hot new consumer product when it was launched in June of 2007. But by September, Apple announced that it was slashing prices on its most expensive iPhone by a third. As the early adopters complained about the $200 price cut, Apple shares fell 8.6 percent, losing almost $11 billion in market value in the three days following the announcement. The iPhone illustrates both the challenges of getting pricing right for new products and the dynamic changes in pricing that are needed as the market is developed. "When you have something new about the product, such as the sleeker design and touch-screen technology for the iPhone, it is a little harder to price it... Apple may have mispriced the product in the first place and then had to make painful, costly adjustments.

Profit Model of Blue Ocean Strategy

Blue Ocean Idea (BOI) IndexPhillips Motorola DoCoMo iCD-i Mode Japan Utility Is there exceptional utility? Are there compelling reasons to buy your offering? Is your price easily accessible to the mass of buyers? Does your cost structure meet the target cost? +

Price Cost

-

+/-

+ + +

Adoption Have you addressed adoption hurdles up front?

The Four Organizational Hurdles to Strategy Execution

Cognitive Hurdle

Political Hurdle

Resource Hurdle Motivational Hurdle

The Pivotal Lever: Disproportionate Influence FactorsFundamental changes can happen quickly when the

beliefs and energies of a critical mass of people create an epidemic movement toward an idea. The 20:80 concept.

In turnaround, and corporate transformations, the hardest part is making people aware of the need for a strategic change. Tipping point leadership does not rely on numbers to break through the organizations cognitive

Breaking Through the Cognitive Hurdle

Ride the Electric SewerTo break the status quo, employees must face the

worst operational problems. Coming face to face with poor performance is shocking and inescapable. i.e. NYC Subway in 1990s

Meet with Disgruntled Customers To tip cognitive hurdle, you can not simply just get managers out of the office to witness the operational horror. Managers must also listen to disgruntled customers firsthand.

Jump the Resource HurdleMultiply vale of resources already have factors that can

leverage to free up resources: Hot Spots Cold Spots Horse TradingHot Spots- low resources but high potential

performance gainsCold Spots- high resource input but low performance

impactHorse Trading- Trading units excess resources in one

area to anothers to fill remaining resources gaps.

Jump the Resource HurdleRedistribute Resources to Your Hot Spot

NY Transit police Increase profits, increase costs Target hot spots and force remained constant Redirect Resources from Your Cold Spots NY Transit police Freeing up resources for use in Hot Spots Engage in Horse Trading Skillfully trade resources not needed for those of others do needed. NY Transit police: Traded not needed excess patrol cars for much needed office space the other department did not need.

Jump the Motivational Hurdle How to motivate

quickly and cheaply? Three factors of disproportionate influence:1. 2. 3.

Kingpins Fishbowl Management Atomization

KINGPINSHone in on your natural leaders, those who are

well respected and persuasive, those who have ability to use or unlock key resources. Example: NYPD motivating 76 precinct heads that have a ripple effect on their departments.

Kingpins in a Fishbowl Make these kingpinss actions and non-actions visible to others. Question them in front of their peers and superiors. Gives an opportunity for achievers to gain the recognition. Use the fair process

Unless the goal is seen as attainable, it usually is not likely to

ATOMIZATION

work. Make the actions in the vision framed by sections, or sectors. By Department By Precinct By Division

Knock Over the Political Hurdle

Politics are everywhere in business related activities Influencing factors Leverage Angels Silencing Devils Getting the consigliore on the top management. Keep a Consigliere in your management team A politically adept but highly respected insider,

Leverage Your Angels and Silence your DevilsWho is an angel and who is a devil? Dont fight alone. Discourage the war before it begins. Know the

angles of attack Anticipate the reaction

Challenge Conventional Wisdom Transforming the masses uses time and resources. Execution by using tipping point leaders to use disproportionate influencers.

People of the Company A company is not only top management, nor is it only middle

management. It is everyone from the top to the front lines.

Only when all the members of the organization are aligned

around a strategy and support it does a company stand apart as a great and consistent executor.

You must create a culture of trust and commitment that

motivates people to execute the agreed strategy, and willingly go beyond the compulsory execution to the voluntary cooperation in carrying it out. start. It allows company to minimize management risk of distrust, noncooperation and even sabotage.

Companies need to build the execution into strategy from the

Poor Process Fair Process

Processes

Poor process can ruin strategy execution. People care as much about the process through which the

outcome is produced as they do about the outcome itself. Fair process builds execution into strategy by creating peoples buy-in up front.

How Fair Process Affects Peoples Attitudes and Behaviors Strategy Formulation StrategyProcess AttitudesTrust and CommitmentI feel my opinion counts.

Behavior

Execution

Fair ProcessEngagement Explanation Expectation Clarity

Voluntary CooperationIll go beyond the call of duty.

Exceeds ExpectationsSelf-initiated

The Three E Principles of Fair Process Engagement Explanation Clarity of Expectation

Taken together, these three criteria collectively lead to judgments of fair process. Any subset of the three does not create judgments of fair process.

Example - Tale of Two Plants Elco, a elevator systems manufacturer, set out to create and execute

a blue ocean strategy. The

company

realized

that

it

needed

to

replace

its

batch-

manufacturing system with a cellular approach. Company had two plants at Chester and High Park. Elco had very good employee relationship at Chester, with employee,

themselves decertifying there union, whereas at High Park, there was a strong union. Elco decide to implement its strategy in phased manner 1st at Chester

and next at High Park.

Results1.) Chester Plant The introduction of the new process quickly led to disorder and rebellion. Cost and quality performance were in a free fall. 2.) High Park plant People felt as if they had been treated fairly, and so they willingly participated in the rapid execution of the new manufacturing process.

Intellectual and Emotional Recognition Intellectually, individuals seek recognition that their ideas are sought

after and given thoughtful reflection. When people are emotionally recognized, they feel emotionally tied to

the strategy and inspired to give it their all.

Violation of Recognition Intellectual If individuals are not treated as if their knowledge is valued, they

will feel indignation and will not share their ideas and expertise. They will hoard their best thinking and creative ideas. They will also reject others intellectual worth.

Emotional If emotional worth is not recognized, they will feel angry and will

not invest their energy in their actions. They will apply counter-efforts, including sabotage.

The Execution Consequences of the Presence and Absence of Fair Process in Strategy MakingFair Process Intellectual and Emotional Recognition Trust and Commitment Voluntary Cooperation in Strategy Execution

Violation of Fair Process

Intellectual and Emotional Indignation

Distrust and Resentment

Refusal to Execute Strategy

Fair Process and Blue Ocean Strategy When people have trust, they have a heightened confidence

in one anothers intentions and actions. When they have commitment, they are willing to override

personal self-interest in the interests of the company. Commitment, trust, and voluntary cooperation allow

companies to stand apart in the speed, quality, and consistency of their execution and to implement strategic shifts fast at low cost. People realize that compromises and sacrifices are

necessary in building a strong company and they accept the need for short-term personal sacrifices in order to advance the long-term interests of the corporation.

Barriers to ImitationA blue ocean strategy brings with it considerable

barriers to imitation A blue ocean strategy can go without credible challenges for ten to fifteen yearsThis was the case with CNN, The Body Shop,

Kinepolis.

Barriers to Imitation Value innovation move doesnt make sense to a conventional logic.

(CNN) Brand image conflict prevents, imitation of strategy.(The Body

Shop) Natural monopoly: The market cannot often support a 2nd Player.

(Kinepolis) High volume generated by a value innovation leads to rapid cost

advantages, placing potential imitators to entering the market. (Wal-Mart) Network externalities, discourages initiations. Imitation

often requires significant operational, political and

cultural changes.(SouthWest Airlines)

When to Value-Innovate Again Eventually, almost every blue ocean strategy will be imitated Result: you may fall into the trap of competition

Overtime, you may focus on the competition and not the buyer If you stay on this course, the basic shape of your value curve will

begin to converge with those of the competition To avoid the trap of competing you need to monitor value curves on the

strategy canvas Monitoring value curves signals when and when not to value innovate Also, it keeps you from pursuing another blue ocean when there is still a profit stream to be collected from your current offering

When to Value-Innovate AgainWhen the companys value curve still has focus you should resist the

temptation to value innovate again However, you should focus on operational improvements and geographical expansion to achieve the maximum economies of scale and market coverage As rivalry intensifies and total supply exceeds demand, bloody competition commences and the ocean will turn red Plot your own and your competitors value curves on a strategy canvas to determine when you should create a new blue ocean This allows you to see the extent to which your blue ocean is turning red

The Six PrinciplesThe 6 principles of blue ocean strategy proposed should serve as essential pointers for every company thinking of its future strategy

Conclusion To obtain high performance in this overcrowded market, companies

should go beyond competing for share to creating blue oceans. Because red and blue oceans have always coexisted, reality suggests

that companies succeed in both oceans and master strategies for both. Companies need to learn how to make competitors irrelevant This book aims to help balance the scales so that formulating and

executing blue ocean strategy can become as systematic and actionable as competing in the red oceans of known market space.