Blue Ocean Strategy By: W. Chan Kim & Renee Mauborgne Summary by: Jesse Starmer COM 459

Value Innovation 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. Costs Buyer Value Value Innovation

Value Innovation

Red Ocean Versus Blue Ocean Startegy In the red ocean, differentiation costs because firms compete with the same best-practice principle. Here, the strategic choices for firms are to pursue either differentiation or low cost. In the reconstructionist world, however, the strategic aim is to create new best-practice rules by breaking the existing value-cost trade-off and thereby creating blue ocean. Align the whole system of a firm’s activities in pursuit of differentiation and low cost. Align the whole system of a firm’s activities with its strategic choice of differentiation or low cost. Break the value-cost trade-off. Make the value-cost trade-off. Create and capture new demand. Exploit existing demand. Make the competition irrelevant. Beat the competition. Create uncontested market space. Compete in existing market space. Blue Ocean Strategy Red Ocean Strategy

Red Ocean Versus Blue Ocean Strategy Blue Ocean Strategy Red Ocean Strategy

The Six Principles of Blue Ocean Strategy Risk factor each principle attenuates Evaluation principles Risk factor each principle attenuates Formulation Principles

Strategy Canvas The strategy canvas is both a diagnostic and an action framework for building a compelling blue ocean strategy. It captures the current state of play in the known market space. This allows you to understand where the competition is currently investing, the factors the industry currently competes on in products, service, and delivery, and what customers receive from the existing competitive offerings on the market. The horizontal axis captures the range of factors the industry competes on an invests in. The vertical axis captures the offering level that buyers receive across all these key competing factors. The value curve then provides a graphic depiction of a company’s relative performance across its industry’s factors of competition. High Low Price Use of enological terminology Above-the-line marketing Aging quality Vineyard prestige and legacy Wine complexity Wine range

Strategy Canvas High Low

Four Actions Framework + Eliminate/Reduce/Raise/Create Grid The four actions framework offers an technique that breaks the trade-off between differentiation and low cost and to create a new value curve. It answers the four key questions of what industry takes for granted and needs to be eliminated; what factors need to be reduced below industry standards; what factors need to be raised above industry standards; and what should be created that the industry has never offered. The eliminate-reduce-raise-create grid pushes companies not only to ask all four questions in the four actions framework but also to act on all four to create a new value curve. By driving companies to fill in the grid with the actions of eliminating, reducing, raising, and creating, the grid provides four immediate benefits: it pushes them to simultaneously pursue differentiation and low costs; identifies companies who are only raising and creating thereby raising costs; makes it easier for managers to understand and comply; and it drives companies to scrutinize every factor the industry competes on. A New Value Curve Reduce Eliminate Create Raise Which factors should be reduced well below industry standards? Which factors should be created that the industry has never offered? Which factors should be raised well above the industry’s standard? Which of the factors that the industry takes for granted should be eliminated ? Create Easy drinking Ease of selection Fun and adventure Reduce Wine complexity Wine range Vineyard prestige Raise Price versus budget wines Retail Store involvement Eliminate Enological terminology and distinctions Aging qualities Above-the-line marketing

Four Actions Framework + Eliminate/Reduce/Raise/Create Grid Four Actions Framework A New Value Curve Reduce Eliminate Create Raise The Eliminate-Reduce-Raise-Create Grid Create Reduce Raise Eliminate

Pioneer, Settler, Migrator Map A corporate management team pursuing profitable growth can plot the company’s current and planned portfolios on a pioneer-migrator-settler (PMS) map. This strategy can help a company determine which businesses experience the highest and lowest growth and cash flow. These are classified accordingly with the highest growth potential being pioneers, then to migrators, then to the lowest rung, settlers. Pioneers Migrators Settlers Today Tomorrow

Pioneer, Settler, Migrator Map Pioneers Migrators Settlers Today Tomorrow

Three Tiers of Noncustomers There are three tiers of noncustomers that can be transformed into customers. They differ in their relative distance from your market. The first tier of customers minimally buy an industry’s offering out of necessity. The second tier of noncustomers refuse to use your industries offerings. The third tier are noncustomers who have never thought of your market’s offerings as an option. Your Market First Tier Second Tier Third Tier

Three Tiers of Noncustomers

Sequence of Blue Ocean Strategy An important part of blue ocean strategy is to “get the strategic sequence right.” This sequence fleshes out and validates blue ocean ideas to ensure their commercial viability. This can then reduce business model risk. In this model, potential blue ocean ideas must pass through a sequence of buyer utility, price, cost, and adoption. At each step there are only two options: a “yes” answer, in which case the idea may pass to the next step, or “no”. If an idea receives a no at any point, the company can either park the idea or rethink it until you get a yes. A Commercially Viable Blue Ocean Idea No-- Rethink Yes Yes Yes Yes No-- Rethink No-- Rethink No-- Rethink Is there exceptional buyer utility in your business idea? Buyer utility Is your price easily accessible to the mass of buyers? Price Can you attain your cost target to profit at your strategic price? Cost What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? Adoption

Sequence of Blue Ocean Strategy A Commercially Viable Blue Ocean Idea No-- Rethink Yes Yes Yes Yes No-- Rethink No-- Rethink No-- Rethink Buyer utility Price Cost Adoption

Buyer Utility Map The buyer utility map helps managers look at this issue from the right perspective. It outlines all the levers companies can pull to deliver exceptional utility to buyers as well as the various experiences buyers can have with a product or service. 1. Purchase 2. Delivery 3. Use 4. Supplements 5. Maintenance 6. Disposal Customer Productivity Simplicity Convenience Risk Fun and Image Environmental friendliness The Six Stages of the Buyer Experience Cycle The Six Utility Levers

Buyer Utility Map 1. Purchase 2. Delivery 3. Use 4. Supplements 5. Maintenance 6. Disposal Customer Productivity Simplicity Convenience Risk Fun and Image Environmental friendliness The Six Stages of the Buyer Experience Cycle The Six Utility Levers

Buyer Experience Cycle A buyer’s experience can usually be broken into a cycle of six stages, running more or less sequentially from purchase to disposal. Each stage encompasses a wide variety of specific experiences. At each stage, managers can ask a set of questions to gauge the quality of buyer’s experience. Purchase Delivery Use Supplements Maintenance Disposal How long does it take to find the product you need? Is the place of purchase attractive and accessible? How secure is the transaction environment? How rapidly can you make a purchase? How long does it take to get the product delivered? How difficult is it to unpack and install the new product? Do buyers have to arrange delivery themselves? If yes, how costly and difficult is this? Does the product require training or expert assistance? Is the product easy to store when not in use? How effective are the product’s features and functions? Does the product or service deliver far more power or options than required by the average user? Is in overcharged with bells and whistles? Do you need other products and services to make this product work? If so, how costly are they? How much time do they take? How easy are they to obtain? Does the product require external maintenance? How easy is it to maintain and upgrade the product? How costly is maintenance? Does use of the product create waste items? How easy is it to dispose of the product? Are there legal or environmental issues in disposing of the product safely? How costly is disposal?

Buyer Experience Cycle Purchase Delivery Use Supplements Maintenance Disposal

Uncovering Blocks to Buyer Utility Uncovering blocks to buyer utility can identify the most compelling hot spots to unlock exceptional utility. By locating your proposed offering on the thirty-six space of the buyer utility map, you can clearly see how, and whether the new idea not only creates a different utility proposition from existing offerings but also removes the biggest blocks to utility that stand in the way of converting noncustomers into customers. Disposal Maintenance Supplements Use Delivery Purchase In which stage are the biggest blocks to environmental friendliness? In which stage are the biggest blocks to fun and image? In which stage are the biggest blocks to reducing risks? In which stage are the biggest blocks to convenience? In which stages are the biggest blocks to simplicity? In which stage are the biggest blocks to customer productivity? Environmental Friendliness: Fun and Image: Risk: Convenience: Simplicity: Customer Productivity:

Uncovering Blocks to Buyer Utility Disposal Maintenance Supplements Use Delivery Purchase Environmental Friendliness: Fun and Image: Risk: Convenience: Simplicity: Customer Productivity:

Price Corridor of the Mass This tool helps managers find the right price for an irresistible offer, which, by the way, isn’t necessarily the lower price. The tool involves two distinct buy interrelated steps. The first step involves identifying the price corridor of the mass which deals with customer price sensitivity and pricing strategies of products offered outside the group of traditional competitors. The second step deals with specifying a level within the price corridor which factors in legal protection and exclusive assets. Step 1: Identify the price corridor of the mass. Step 2: Specify a price level within the price corridor. Three alternative product/service types: Same form Different form, same function Different form and function, same objective Price Corridor of the Mass High degree of legal and resource protection Difficult to imitate Some degree of legal and resource protection Low degree of legal and resource protection Easy to imitate Upper-level pricing Mid-level pricing Lower-level pricing

Price Corridor of the Mass Step 1: Identify the price corridor of the mass. Step 2: Specify a price level within the price corridor. Three alternative product/service types: Same form Different form, same function Different form and function, same objective Price Corridor of the Mass High degree of legal and resource protection Difficult to imitate Some degree of legal and resource protection Low degree of legal and resource protection Easy to imitate Upper-level pricing Mid-level pricing Lower-level pricing

Profit Model of Blue Ocean Strategy The profit model of blue ocean strategy shows how value innovation typically maximizes profit by using the three levers of strategic price, target cost, and pricing innovation. The Strategic Price The Target Profit The Target Cost Streamlining and Cost Innovations Partnering Pricing Innovation

Profit Model of Blue Ocean Strategy

Blue Ocean Idea Index The blue ocean idea index is a simple but robust test demonstrating how the sequence of utility, price, cost, and adoption form an integral whole to ensure commercial success through blue ocean strategy. Philips CD-i Motorola Iridium DoCoMo I-mode Japan - - - - - - - + + + + +/- Have you addressed adoption hurdles up front? Adoption Does your cost structure meet the target cost? Cost Is your price easily accessible to the mass of buyers? Price Is there exceptional utility? Are there compelling reasons to buy your offering? Utility

Blue Ocean Idea Index Have you addressed adoption hurdles up front? Adoption Does your cost structure meet the target cost? Cost Is your price easily accessible to the mass of buyers? Price Is there exceptional utility? Are there compelling reasons to buy your offering? Utility