Published on October 28, 2008
Slide 1: Blue Ocean Strategy How to Create Uncontested Market Space and Make the Competition Irrelevant By W. Chan Kim & Renee Mauborgne Mary Joy Arendayen Cynthia H. Narzoles Philippine School of Business Administration September 26, 2008 About the Authors : About the Authors W. Chan Kim is a professor of strategy and international management at INSEAD in Fontainebleau, France. Previously, he taught at the University of Michigan Business School. He has written for numerous business journals, the Financial Times, The Wall Street Journal and The New York Times, and is a founder of the Value Innovation Network. Slide 3: 2. Renée Mauborgne is a Distinguished Fellow at INSEAD, where she is a professor of strategy and management. She is also a Fellow of the World Economic Forum and published numerous articles on strategy and managing multinational corporations. CREATING BLUE OCEANS : CREATING BLUE OCEANS a one time accordion player, stilt – walker, and fire – eater, Guy Laliberte is now CEO of CIRQUE DU SOLEIL, one of Canada’s largest cultural exports. Created in 1984 by a group of street performers in less than 20 years. CIRQUE DU SOLEIL has achieved a level of revenues that took RINGLING BROS. and BARNUN & BAILEY – the Global Champion of the circus industry – more than 100 years to attain. What makes this rapid growthall the more remarkable? : What makes this rapid growthall the more remarkable? It was not achieved in an attractive industry but rather in declining industry in which traditional strategic analysis pointed to limited potential for growth. Alternative forms of entertainment- ranging from various kinds of urban live entertainment to sporting events to home entertainment-cast an increasingly long shadow. Slide 6: As a result, industry was suffering from steadily decreasing audiences and in turn, declining revenue and profits. There was also increasing sentiment against the use of animal in circuses by animal rights groups. From the perspective of computation-based strategy, then, the circus industry appeared unattractive. Slide 7: Another compelling aspect of CIRQUE DU SOLEIL’s success is did not win by taking customers from the already shrinking circus industry. Instead it created uncontested new market space or they called BLUE OCEANS that made the competition irrelevant. One of the 1st CIRQUE Productions was titled “We reinvent the circus”. “The only way to beat the competition is to stop trying to beat the competition.” Market Universe composed of two sorts of ocean: : Market Universe composed of two sorts of ocean: 1. Red Oceans all the industries in existence today. known market space. industry boundaries are defined and accepted. companies try to outperform their rivals to grab a greater share of existing demand. market space gets crowded, prospects for profits and growth are reduced. products become a commodities and cutthroat competition turns the red oceans bloody. Slide 9: 2. Blue Oceans untapped market space demand creation and opportunity for highly profitable growth competition is irrelevant uncharted Blue Oceans are a feature of business life, past and present : Blue Oceans are a feature of business life, past and present 100 years ago Automobiles Music recording Aviation Petrochemicals Health care Management consulting 30 years ago Plethora of multibillion- dollar industries Mutual funds Cell phones Gas-fired electricity plants Biotechnology Discount retail Express package delivery Minivans Snowboards Coffee bars Home videos Slide 11: The reality is that industries never stand still. They continuously evolve. Operations improve, market expand and players come and go. History teaches us that we have a hugely underestimated capacity to create new industries and re-create existing ones. Yet the overriding focus of strategic thinking has been on competition-based red ocean strategies. Part of the explanation for this is that corporate strategy is heavily influenced by its roots in military strategy. Strategy is about confronting an opponent and fighting over a given piece of land that is both limited and constant. Slide 12: There are several driving forces behind a rising imperative to create blue oceans. Accelerated technological advances have substantially improved industrial productivity and have allowed suppliers to produce an unprecedented array of products and services. The result is that in increasing numbers of industries, supply exceeds demand. The trend toward globalization compounds the situation. As trade barriers between nations and regions are dismantled and as information on products and prices becomes instantly and globally available, niche markets and havens for monopoly continue to disappear. Slide 13: They reveal that for major product and service categories, brands are generally becoming more similar, and as they are becoming more similar people increasingly select based on price. People no longer insist, as in the past that their laundry detergent be tide. Nor will they necessarily stick to Colgate when close – up is on sale and vise – versa. Slide 14: If there is no perpetually company and if the same company can be brilliant at one moment and wrongheaded at another, it appears that the company is not the appropriate unit of analysis in exploring the roots of high performance and blue oceans. Slide 15: It shows that the strategic move and not the company of the industry, is the right unit of analysis for explaining the creation of blue oceans and sustained high performance. Strategic move is the set of managerial actions and decisions involved in making a major market – creating business offering. Compaq, for example was acquired by Hewlett – Packard in 2001 and ceased to be an independent company. As a result, many people might judge the company as unsuccessful. This does not, however, invalidate the blue ocean strategic moves that Compaq made in creating the server industry. Slide 16: Industry ranged from hotels, cinema, retail, airlines, energy, computers, broadcasting and construction to automobiles and steel. We analyzed not only winning business players who created blue oceans but also their less successful competitors. The creators of blue oceans, surprisingly didn’t use the competition as their benchmark. Instead they followed a different strategic logic that we all value innovation. Value innovation is the cornerstone of blue ocean strategy. We all it value innovation because instead of focusing on beating the competition, you focus on marking the competition irrelevant by creating a leap in value for buyers and yours company. Slide 17: Value without innovation tends to focus on value creation on an incremental scale innovation without value tends to be technology – driven, market pioneering of futuristic. Value innovation: The Cornerstone of Blue Ocean Strategy : 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. Overtime, costs are reduced further as scale economies kick in due to the high sales volumes that superior value generates. Slide 19: It is the whole system approach that makes the creation of blue oceans a sustainable strategy. In contrast, innovations such as production innovation can be achieved at the subsystem level without impacting the company’s overall strategy. VALUE INNOVATORS : VALUE INNOVATORS Monitor competitors but do not use them as benchmarks Do not focus on competing Do not offer certain product and services features just because that is what their rivals are doing Must not be constrained by what it already has. It must ask, what would we do if we were starting anew? Think in terms of the total solution customer’s sought, even if that is beyond industry’s traditional offerings. Slide 21: Red Ocean Strategy Blue Ocean Strategy RED OCEAN STRATEGY : RED OCEAN STRATEGY Assumes that an industry’s structural conditions are given and that the firm are forced to compete within them, an assumption based on what the academics all the STRUCTURALIST VIEW or ENVIRONMENTAL DETERMINISM. Slide 23: Value innovation based on the view that market boundaries and industry structure are not given and can be reconstructed by the actions and beliefs of industry players, we call this RECONSTRUCTIONIST VIEW STRATEGY will always involve both opportunity and risk, be it a red ocean or a blue ocean initiative. But at present the playing field is dramatically imbalanced in favor of tools and analytical frameworks to succeed in red oceans. Red Oceans will continue to dominate company’s strategic agenda even as the business imperative for creating blue oceans takes on new urgency. Slide 24: Impact of Creating Blue Oceans ANALYTICAL TOOLS & FRAMEWORKS : ANALYTICAL TOOLS & FRAMEWORKS Effective blue ocean strategy should be about risk minimization and not risk taking. The value curve is the basic component of the strategy canvas, is a graphic depiction of a company’s relative performance across its industry’s factors of competition. To reconstruct buyer value elements in crafting a new value curve, they developed the four actions framework. Creating Blue Ocean Tools : Creating Blue Ocean Tools Four Action Framework Eliminate, Reduce,Raise and Create CIRQUE DU SOLEIL, provides another snapshots of this tool in action and shows what it reveals. : CIRQUE DU SOLEIL, provides another snapshots of this tool in action and shows what it reveals. ELIMINATE - star performers - animal shows - aisle concession sales - multiple show arenas REDUCE - fun & humor - thrill & danger RAISE - unique venue CREATE - theme - refined environment - multiple productions - artistic music & dance Slide 28: An effective blue oceans strategy has three complementary qualities: 1. FOCUS – every great strategy has focus, and a company’s strategic profile of value curve, should clearly show it. 2. DIVERGENCE – when a company’s strategy is formed reactively as it tries to keep up with the competition, it loses its uniqueness. 3. COMPELLING TAGLINE – a good strategy has a clear – cut and compelling tagline. A good tagline must not only deliver a clear message but also advertise an offering. RECONSTRUCT : RECONSTRUCT The 1st principle is to RECONSTRUCT MARKET BOUNDARIES There is a six basic approaches to remaking market boundaries this is called THE SIX PATHS FRAMEWORK. PATH 1: LOOK ACROSS ALTERNATIVE INDUSTRIES Alternatives – products or services that have different functions and forms but the same purpose. Ex: the HOME DEPOT offers the expertise of professional home contractors at lower prices than hardware store. Slide 30: PATH 2: LOOK ACROSS STRATEGIC GROUPS WITHIN INDUSTRIES Strategic groups are a group of companies within an industry that pursue a similar strategy. Ex: Ralph Lauren created the blue ocean of “high fashion with no fashion”. PATH 3:LOOK ACROSS THE CHAIN OF BUYERS Purchasers who pay for the product or service may differ from the actual users, and in some cases there are important influences. Bloomberg became one of the largest and most profitable business information providers in the world. Slide 31: PATH 4: LOOK ACROSS COMPLEMENTARY PRODUCTS AND SERVICE OFFERINGS A simple way to do so is to think about what happens before, during and after the product is used. Ex: Borders and Barnes& Noble (B&N) superstores required the scope of the services they offer. PATH 5: LOOK ACROSS FUNCTIONAL OR EMOTIONAL APPEAL TO BUYERS Two possible bases if appeal: 1. Rational 2. Emotional Slide 32: Two Common Patterns: 1. Emotionally oriented industries – add price Ex: Swatch 2. Functionally oriented industries – add a dose of emotion Ex: The Body Shop PATH 6: LOOK ACROSS TIME Managers can actively shape their future and lay claim to a new Blue Ocean Slide 33: THREE PRINCIPLES ARE CRITICAL TO ASSESSING TRENDS: Must be decisive to your business They must be irreversible They must have a clear trajectory Ex: The Apple FOCUS ON THE BIG PICTURE, NOT THE NUMBERS : FOCUS ON THE BIG PICTURE, NOT THE NUMBERS Focus on the big picture, not the numbers is a principle that key to mitigating the planning risk of investing lots of time but delivering only tactical red ocean moves. They develop alternative approach to the existing strategic planning process that is based not on preparing a document but on drawing a strategic canvas. FOUR STEPS OF VISUALIZING STRATEGY : FOUR STEPS OF VISUALIZING STRATEGY REACH BEYOND EXISTING DEMAND : REACH BEYOND EXISTING DEMAND Two Conventional Strategy Practices: Focus on existing customers Drive for fines segmentation to accommodate buyer differences THREE TIERS OF NONCUSTOMERS Slide 37: 1st tier – “soon-to-be” noncustomers who are on the edge of your market, waiting to jump ship. 2nd tier – “refusing” noncustomers who consciously choose against your market. 3rd tier – “unexplored” noncustomers who are in the markets distant from yours. GET THE STRATEGIC SEQUENCE RIGHT : GET THE STRATEGIC SEQUENCE RIGHT Buyer utility Is there exceptional buyer utility in your business idea? Price Is your price easily accessible to the mass of buyers? Cost Can you attain your cost target to profit at your strategic price? Adoption What are the adoption hurdles in actualizing your business idea? Are you addressing them up front? YES YES YES YES No Rethink No Rethink No Rethink No Rethink These 1st two steps address the revenue side of a company’s business model A commercially viable BOS idea Slide 39: Execution Principles Overcome key organizational hurdles Cognitive, limited resources, motivation and political hurdles - Hot spots, cold spots and horse trading Build execution into strategy Fair process is a key variable that distinguishes successful blue ocean strategic moves from those that failed Examples: 1. Yellow Tail 3. Southwest 2. Cirque du Soleil 4. Home Depot BUILD EXECUTION INTO STRATEGY The 3 E Principles of Fair Process : The 3 E Principles of Fair Process Engagement – means involving individual in the strategic decisions that affect them by asking for their input and allowing them to refute the merits of one another’s ideas and assumptions. Explanation – means that everyone involved and affected should understand why final strategic decisions are made as they are. Expectation clarity – requires that after a strategy is set, managers state clearly the new rules of the game. THE SUSTAINABILITY AND RENEWAL OF BOS : THE SUSTAINABILITY AND RENEWAL OF BOS Value innovation does not make sense to a company’s conventional logic. Blue Ocean Strategy may conflict with other company’s brand image Natural Monopoly: The market often cannot support a second player Patents or legal permits block imitation High volume leads to rapid cost advantage for the value innovator, discouraging followers from entering the market. Network externalities discourage imitation Imitation often requires significant political, operational, and cultural changes. Companies that value – innovate earn brand buzz and a loyal customer following that lends to shun imitators. COMPANY WHO CREATE UNCONTEST MARKET : COMPANY WHO CREATE UNCONTEST MARKET Three American Industries: The Automobile Industry General Motors The Computer Industry Personal Computer The Movie Theater Industry The Megaplex Slide 43: thank you for listening!!!